2021 (4) TMI 845 - AT - Income Tax

Disallowance u/s. 40A(3) - payments through cash payment or bearer cheque to the payer - payment withdrawal made by the staff of the assessee - The assessee s contention is that when payments were made on next day, there was holidays of continuous four days and those payments were made for the business expediencies and assessee was compel to make cash payment under peculiar circumstances as principal company to which assessee was a distributor, and recipient of the cash payment insisted assessee to make payment in cash as realization takes a longer time. And payments were effected for outstanding amount as requested keeping in mind next four coming holidays being Thursday Rath Yatra, Friday, Saturday and Sunday the clearing was not available as per the ledger account submitted by the assessee. HELD THAT - in our considered opinion, no disallowance can be made u/s. 40A(3) and benefit of rule 6DD(j) will be given to the assessee therein it is contemplated that if payment of Rs. More than ₹ 20,000/- paid in cash where the payment was required to be made on a day on which banks were closed on account of holiday or strike. It is pertinent to note here that assessee took this plea which was not accepted by the lower authorities so to our mind same is amounting to miscarriage of justice. Appeal filed by the Assessee is allowed.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income Tax Act.

Analysis:
The appeal was filed by the Assessee against the Commissioner of Income Tax (CIT) order confirming the addition of ?11,55,540 under section 40A(3) of the Income Tax Act. The Assessee argued that the cash withdrawals were duly accounted for, and there were no cash payments exceeding the limit specified under section 40A(3). The Assessee contended that payments were made for business expediencies due to holidays and the insistence of the recipient for cash payments. The Assessee claimed the benefit of rule 6DD(j) as the payments were made on days when banks were closed. The Tribunal found merit in the Assessee's arguments and allowed the appeal.

During the assessment proceedings, it was noted that the Assessee made payments exceeding ?20,000 in cash to various individuals. The Assessing Officer (AO) held that the Assessee violated section 40A(3) by not using account payee cheques for these payments. The CIT(A) upheld the AO's decision, stating that the Assessee failed to provide sufficient evidence to support the claim. However, the Tribunal, after reviewing the submissions and evidence, found that a significant portion of the amount was withdrawn from the bank, and the remaining payments were made due to business exigencies during holidays. The Tribunal accepted the Assessee's explanation and granted relief under rule 6DD(j) for payments made on non-working days when banks were closed. Consequently, the Tribunal allowed the Assessee's appeal, overturning the lower authorities' decision.

In conclusion, the Tribunal ruled in favor of the Assessee, allowing the appeal against the disallowance under section 40A(3) of the Income Tax Act. The Tribunal accepted the Assessee's justifications for cash payments made during holidays and business requirements, granting relief under rule 6DD(j) for payments made on non-working days when banks were closed. The decision highlighted the importance of considering the circumstances and business realities behind transactions while interpreting tax provisions to prevent any miscarriage of justice.