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2021 (9) TMI 16 - AT - Income TaxDisallowance u/s 40A(3) for making cash payments - proof of business expediency - CIT-A deleted addition - HELD THAT - The assessee was bound to make payments on daily basis since no credit sales were allowed by the sole supply agency M/s. Verka Milk Agency of the M/s. Hoshiarpur Distt. Co-operative Milk Producer Union Ltd. The product was released only upon making full payment for the purchase. AO has not disbelieved the business expediency, practical difficulty in making payment in cash to the said Milk Agency. A certificate has also been produced from the General Manager, Verka, Hoshiarpur that the assessee was a cash carry dealer for supplying Verka Milk and fresh milk products in Palampur and adjoining areas. Assessee has also explained that the milk was to be lifted daily and the payments were to be collected in the evening which were to be made to the Verka Agency in the morning itself and further the Verka Milk Agency did not provide milk on credit basis and further the payment was made to the Union of Producers of milk. Considering the above practical aspects, factors and circumstances and business expediency, in our view, the ld. CIT(A) was justified in deleting the disallowance made by the AO. No merit in the appeal of the Revenue and the same is, accordingly, dismissed.
Issues Involved:
1. Deletion of addition made by the AO on account of disallowance under Section 40A(3) of the IT Act for making cash payments. 2. Applicability of Rule 6DD exceptions to the assessee's case. 3. Business expediency and practicality in making cash payments. Detailed Analysis: 1. Deletion of Addition Made by the AO on Account of Disallowance under Section 40A(3): The primary issue in this appeal is whether the CIT(A) erred in deleting the addition of ?1,72,80,862/- made by the AO due to cash payments made by the assessee, which were in contravention of Section 40A(3) of the IT Act. The AO noted that the assessee made significant cash purchases from M/s. Hoshiarpur Distt. Co-operative Milk Producer Ltd., which were not covered under the exceptions provided in Rule 6DD. Consequently, the AO disallowed the expenditure and added the amount to the assessee's income. 2. Applicability of Rule 6DD Exceptions: The AO held that the assessee's case did not fall within the exceptions provided under Rule 6DD, specifically Clause 'e', which pertains to payments made to the producer of agricultural or animal husbandry products. The AO argued that M/s. Hoshiarpur Distt. Co-operative Milk Producer Union Ltd. was not the producer of the milk but a purchaser from the producers/farmers, and thus, the payments did not qualify for the exception. The AO relied on the decision of the Himachal Pradesh High Court in the case of Smt. Chanchal Dogra Vs ITO (2012) 247 CTR (HP) 616 to support this view. 3. Business Expediency and Practicality in Making Cash Payments: The assessee contended that the cash payments were made out of business necessity and practical difficulties. The assessee, a dealer of Verka Milk Agency, explained that milk, being a perishable item, required daily purchases and immediate payments as the supplier did not allow credit sales. The assessee provided a detailed explanation of the daily operations and the impracticality of making payments through banking channels due to the timing of collections and bank working hours. The CIT(A) accepted the assessee's explanation and held that the payments were made out of business expediency. The CIT(A) also noted that the AO did not doubt the genuineness of the purchases or payments. Tribunal's Findings: The Tribunal reviewed the provisions of Section 40A(3) and Rule 6DD, noting that the purpose of these provisions is to regulate business transactions and prevent the use of unaccounted money. The Tribunal emphasized that the list of exceptions in Rule 6DD is not exhaustive and that business expediency and practical difficulties should be considered. The Tribunal cited the Supreme Court's decision in Attar Singh Gurmukh Singh Vs ITO, which held that genuine and bona fide transactions should not be disallowed under Section 40A(3) if the assessee can demonstrate practical difficulties or business necessity. The Tribunal agreed with the CIT(A) that the assessee's case involved genuine business expediency and practical difficulties in making cash payments. The Tribunal found that the AO did not dispute the business necessity or the genuineness of the transactions. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the disallowance made by the AO. Conclusion: The Tribunal dismissed the Revenue's appeal, concluding that the CIT(A) was justified in deleting the disallowance of ?1,72,80,862/- made by the AO under Section 40A(3) of the IT Act. The Tribunal recognized the practical difficulties and business expediency faced by the assessee, which warranted the cash payments. The Tribunal's decision underscores the importance of considering business realities and practical challenges in the application of tax provisions.
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