2023 (11) TMI 989 - AT - Income Tax

Addition u/s 40A - cash purchases for purchase of movie satellite rights, which the assessee had paid to the producers of movies - AR submitted that as the movie industry is volatile, assessee has to purchase / sell satellite rights only in cash and that the same is evident from the agreements entered into by the assessee with various vendors and further contended that the sellers insist the assessee to make payment in cash - HELD THAT - Assessee has to deal with the agreements with the purchases of Film Rights which were not disputed by the Assessing Officer and rather the additions were sought to be made on the basis of said agreements. The agreement with the purchaser and the cash payment made by the assessee after receiving it from the purchaser to the seller are not disputed by the revenue authorities. Thus, the genuineness of the transactions has not been doubted by the revenue authorities. Once the genuineness of the cash payment for purchasing the movie rights have been considered by the revenue authority with respect to the other transaction namely, for the other part of the amount which was paid through the banking channel , then the transaction cannot be doubted by the revenue authorities. In our view, once the transaction has not been doubted by the revenue authority, then for the purposes of violation of provision of section 40A(3), we may fruitfully rely upon on the decisions of Basu Distributor (P) Ltd 2012 (2) TMI 307 - DELHI HIGH COURT , HONEY ENTERPRISES 2015 (12) TMI 519 - DELHI HIGH COURT and CPL TANNERY 2008 (8) TMI 356 - CALCUTTA HIGH COURT we hereby allow the appeal of assessee and direct the Assessing Officer to delete the addition - Assessee appeal allowed.

Summary

Issues Involved:
1. Jurisdiction under Section 40A(3) of the Income Tax Act, 1961.
2. Interpretation of Section 40A(3) and Rule 6DD(k) of the Income Tax Rules, 1962.
3. Legitimacy of cash payments for business transactions.
4. Application of Section 40A(3) in the context of genuine business transactions.

Summary:

1. Jurisdiction under Section 40A(3) of the Income Tax Act, 1961:
The assessee contested the jurisdiction of the Assistant Commissioner of Income Tax, Circle 4(1), Hyderabad, arguing that the conditions precedent for invoking Section 40A(3) were not met. The addition of Rs. 3,14,00,000/- was claimed to be "ab initio void, ultra vires and ex-facie null in law."

2. Interpretation of Section 40A(3) and Rule 6DD(k) of the Income Tax Rules, 1962:
The assessee argued that the Commissioner of Income Tax (Appeals)-1, Hyderabad erred in upholding the addition under Section 40A(3) without considering Rule 6DD(k). The assessee contended that the addition derived from "extraneous considerations" was arbitrary and unwarranted.

3. Legitimacy of Cash Payments for Business Transactions:
The assessee, engaged in the business of purchasing and selling movie satellite rights, declared a total income of Rs. 26,32,410/- for AY 2013-14. The Assessing Officer disallowed Rs. 5,90,00,000/- for cash payments violating Section 40A(3). The assessee argued that Rs. 3,14,00,000/- was paid in cash due to the volatile nature of the movie industry, where sellers insisted on cash payments. The genuineness of these transactions was supported by agreements and other documents.

4. Application of Section 40A(3) in the Context of Genuine Business Transactions:
The Tribunal noted that the genuineness of the transactions was not disputed by the revenue authorities. The assessee provided agreements, bank statements, and TDS Certificates to substantiate the cash payments. The Tribunal referred to various judicial precedents, including decisions from the Hon'ble High Courts of Gujarat, Delhi, and Calcutta, which emphasized that Section 40A(3) should not apply to genuine business payments made in the regular course of business. The Tribunal concluded that the cash payments were made due to business exigencies and were genuine.

Conclusion:
The Tribunal allowed the appeal, directing the Assessing Officer to delete the addition of Rs. 3,14,00,000/-. The decision was based on the genuineness of the transactions and the business exigencies faced by the assessee. The appeal was allowed in favor of the assessee.