2022 (5) TMI 829 - AT - Income Tax

Disallowances u/s.40A(3) - payment of expenses was made in cash exceeding the stipulated amount - HELD THAT - Disallowance on the basis of the genuineness of the transactions while others sustaining the disallowance - what matters for the Tribunal is to follow the binding precedent, being, the judgment of Hon ble jurisdictional High Court. That being the position, the Pune Tribunal is bound by the judgment of the Hon ble jurisdictional High Court in Madhav Govind Dulshete 2018 (10) TMI 869 - BOMBAY HIGH COURT sustaining the disallowance in case of cash payments exceeding the stipulated limit notwithstanding the fact that the transactions were genuine and the parties were identifiable. Respectfully following the judgment, we uphold the disallowance sustained in the first appeal. This ground fails. Addition u/s 40A(3) - assessee contended that the payment was covered under Rule 6DD(k) being payment made to an agent. The AO rejected this contention, which got affirmed in the first appeal - HELD THAT - Instant case, it is seen that the assessee made payment to contractors and such payments were as such recorded as expenditure in the books of account of the assessee. In such circumstances, it cannot be said that the contractors were agents of the assessee for the provision of labour. Had the payments been made by the assessee to contractor and then, in turn, to the labourers and the transaction of payments to labourers had been considered as expenditure of the assessee, then the case would have been covered by clause (k) of Rule 6DD. Here is a case in which the assessee paid to the contractors on principal-to-principal basis and no agency of any sort was involved in this transaction. We, therefore, hold that the authorities below were justified in coming to the conclusion that clause (k) of Rule 6DD was not attracted. If Rule 6DD is taken out of purview, then the payment is otherwise in violation of section 40A(3) of the Act. As such payments were made in violation of the provision, we hold that the disallowance u/s.40A(3) has been rightly confirmed in the first appeal.

Summary

Issues:
- Disallowance under section 40A(3) of the Income-tax Act, 1961 for payments made through bearer cheques.
- Interpretation of Rule 6DD(k) in relation to payments to contractors.

Analysis:
1. Issue 1: Disallowance under section 40A(3) for payments made through bearer cheques:
- The appeal arose from an order by the CIT(A)-2, Nashik for the assessment year 2010-11, confirming disallowances made by the Assessing Officer under section 40A(3).
- The assessee, a Builder and Developer, made payments through bearer cheques to Kharjul family members, claiming commercial expediency. The AO disallowed Rs.24,65,500 under section 40A(3), which was upheld by the CIT(A).
- The Tribunal noted that payments were made through bearer cheques, not falling under any exemption clause of Rule 6DD. Various High Court decisions were cited, some deleting disallowances based on genuine business transactions, while others upheld disallowances for cash payments exceeding limits.
- Upholding the disallowance, the Tribunal followed the judgment of the jurisdictional High Court, which sustained disallowances for cash payments exceeding limits, despite genuine transactions. The ground failed.

2. Issue 2: Interpretation of Rule 6DD(k) in relation to payments to contractors:
- The second disallowance of Rs.20,05,056 under section 40A(3) was for payments made through bearer cheques to labour contractors. The assessee contended that these payments were covered under Rule 6DD(k) as payments to an agent.
- The Tribunal found that the payments to contractors did not qualify under Rule 6DD(k) as the contractors were not acting as agents of the assessee. The payments were made on a principal-to-principal basis, not involving any agency.
- Since the payments did not meet the requirements of Rule 6DD(k), they were held to be in violation of section 40A(3), and the disallowance was rightly confirmed by the authorities.
- Consequently, the appeal was dismissed, and the disallowances under section 40A(3) were upheld for both sets of payments made through bearer cheques.

In conclusion, the Tribunal upheld the disallowances made under section 40A(3) for payments made through bearer cheques, citing lack of exemption under Rule 6DD and following the jurisdictional High Court's precedent. Additionally, the Tribunal interpreted Rule 6DD(k) in the context of payments to contractors, concluding that the payments did not qualify as per the rule, leading to the confirmation of the disallowance for those payments as well.