2023 (11) TMI 630 - AT - Income Tax

Disallowance u/s 40A(3) - cash payment to the farmers/land owners exceeding permissible limits - payment made by the assessee to ten parties included the electricity expenses and vehicle repair expenses - HELD THAT - By considering the judgment of Attar Singh Gurmukh Singh 1991 (8) TMI 5 - SUPREME COURT as decided in case of Anupam Tele Services 2014 (2) TMI 30 - GUJARAT HIGH COURT if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. The Hon ble High Court further observed that provision of section 40A(3) and Rule 6DD are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the changes to use black money for business transactions. Therefore, if the assessee has brought on record to establish genuineness of the transactions and payment as well as identity of the payee to the satisfaction of the AO then the benefit of Rule 6DD is available. Hon ble High Court has observed that section 40A(3) was intended to penalize the tax evader and not honest transactions and that is why after framing Rule 6DD(j) the CBDT steps in by issuing the circular dated 31st May 1977. Therefore, the disallowance u/s 40A(3) cannot be made without considering the business expediency and other relevant factors falling in the exceptions given in Rule 6DD of I.T. Rules. Decided in favour of assessee. Disallowance on account of salary/remuneration paid to the directors - AO question the justification and reasonableness of such huge amount paid two directors in view of the provisions of section 40A(2)(b) and asked the assessee to furnish the specific details supporting documentary evidences and finally made disallowance of 30% also confirmed by CIT(A) - HELD THAT - For the year under consideration both directors are paying maximum marginal rate of tax and therefore, there is no revenue loss on this account. Accordingly following the earlier order of this Tribunal in assessee s own case 2023 (7) TMI 1322 - ITAT INDORE adhoc disallowance made by the AO without determining the fair remuneration/salary paid to the directors having regard to their services rendered to the assessee company is not justified and the same is deleted. Appeal of assessee is allowed.

Summary

Issues Involved:
1. Adequate time for specific replies.
2. Disallowance of Rs. 2,75,000/- under section 40A(3) for cash payments to farmers.
3. Disallowance of Rs. 24,500/- for payment to M/s Shrini Automobiles.
4. Disallowance of 30% of directors' salary as ad hoc.

Summary:

1. Adequate Time for Specific Replies:
The assessee claimed that the Commissioner of Income Tax (Appeals) passed the order without giving adequate time for specific replies, thus violating principles of natural justice. This ground was not pressed during the hearing and required no specific adjudication.

2. Disallowance of Rs. 2,75,000/- under Section 40A(3):
The assessee argued that the cash payments were token amounts made during initial negotiations for land purchases, a common practice in the business. The payments were recorded in sale deeds, and the balance was paid via cheque. The Tribunal found merit in the assessee's explanation, citing business expediency and the genuineness of transactions. The Tribunal relied on precedents, including the Hon'ble Rajasthan High Court's decision in Smt. Harshila Chordia vs. ITO and the Hon'ble Supreme Court's judgment in Attar Singh Gurmukh Singh vs. ITO, which emphasized that genuine transactions should not be disallowed under section 40A(3). The Tribunal concluded that the disallowance was not warranted and deleted it.

3. Disallowance of Rs. 24,500/- for Payment to M/s Shrini Automobiles:
This issue was not separately detailed in the judgment, but it was implied that the Tribunal's reasoning and decision on cash payments under section 40A(3) would apply similarly.

4. Disallowance of 30% of Directors' Salary:
The AO had disallowed 30% of the directors' salary, considering it excessive. The Tribunal noted that the AO did not perform a proper exercise to determine a fair salary and relied on an earlier decision in the assessee's case. It emphasized that the directors were paying taxes at the maximum marginal rate, resulting in no revenue loss. The Tribunal found the ad hoc disallowance unjustified and deleted it.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleted the disallowances under section 40A(3), and found the ad hoc disallowance of directors' salary unjustified. The judgment emphasized the importance of considering business expediency and the genuineness of transactions in tax assessments.