2022 (7) TMI 339 - HC - Income Tax

Addition u/s 40A(3) - payment in cash - purchase of stock in trade - Decision of the Third Member of ITAT - The decision of HC, relied upon the revenue distinguished - HELD THAT - As Court had rendered a decision holding that cash payment exceeding prescribed limit would attract Section 40A(3) of the Act. Therefore, the said decision is distinguishable on facts. Learned Advocate appearing for the respondent/assessee placed reliance on the decision of the High Court of Gujarat in the case of CIT-III vs. Dinesh Kumar Chandmal Jain 2013 (12) TMI 1731 - GUJARAT HIGH COURT - In the said case, the assessing officer found that the assessee had paid an amount of Rs.18.22 crores in cash to six parties and disallowed 20% of such payment under Section 40A(3). However, the assessing officer was not in a position to actually prove that payment was made in cash, and, therefore, the said disallowance was set aside by the tribunal and the order passed by the tribunal was confirmed by the Hon ble Division Bench in the case of Dinesh Kumar Chandmal Jain (supra). In fact, on facts, the case on hand is in a better footing as the revenue does not state that any cash transaction took place. Considering the facts and circumstances, we find that there is no perversity in the order passed the learned third member of the tribunal agreeing with the learned administrative member of the tribunal. - Decided against revenue.

Summary

Issues: Interpretation of Section 40A(3) of the Income Tax Act, 1961 regarding cash transactions exceeding a specified limit.

Analysis:
1. Interpretation of Section 40A(3): The primary issue in this case revolved around the application of Section 40A(3) of the Income Tax Act, 1961 to a transaction carried out by the assessee. The assessing officer contended that the provision was attracted as the assessee had purchased stock using account payee cheques or bank drafts. However, the Commissioner of Income Tax (Appeals) held that Section 40A(3) was not applicable. The tribunal, comprising an administrative member and a judicial member, had conflicting views on the matter, leading to the reference of the case to a third member. The third member analyzed the nature of the transaction and the legislative intent behind Section 40A(3). It was concluded that the provision does not apply when payment is not made in cash or monetary terms, thereby supporting the assessee's position.

2. Interpretation of "Payment" in Section 40A(3): The third member delved into the interpretation of the term "payment" in conjunction with the specified sum exceeding Rs. 20,000 mentioned in Section 40A(3). It was noted that the judicial member advocated for a broad interpretation of the term, while the administrative member aligned with the CIT(A)'s decision. The third member emphasized that the term "payment" should be understood in light of the prescribed limit, and since there was no disputed cash transaction exceeding Rs. 20,000 by the assessee, Section 40A(3) was deemed inapplicable.

3. Case Precedents and Distinguishing Factors: The judgment also considered relevant case precedents to support the interpretation of Section 40A(3). Distinctions were drawn between cases where cash payments exceeding the limit were involved, leading to the application of the provision, and instances where no such cash transactions were proven. The court highlighted a case from the High Court of Gujarat where a similar disallowance under Section 40A(3) was set aside due to the lack of evidence regarding cash payments. In the present case, as the revenue did not assert any cash transactions, the judgment favored the assessee.

4. Conclusion: After a thorough analysis of the facts and legal provisions, the High Court upheld the decision of the third member of the tribunal, concurring with the administrative member's view. The appeal by the revenue was dismissed, and the substantial questions of law were answered against the revenue. The connected application for stay was also closed as a result of the judgment. The case exemplifies the importance of precise interpretation and application of tax provisions in determining the tax liability of assesses.