No disallowance u/s 40A(3) even if aggregate payment exceeds Rs 20000 if bills amount not exceed Rs. 20000

No disallowance u/s 40A(3) even if aggregate payment exceeds Rs 20000 if payment is made in cash against different bills none exceeding Rs. 20,000/

ABCAUS Case Law Citation:
ABCAUS 2296 (2018) (04) ITAT

Prelude:
Finance Act, 2008 made amendment to the provisions of sub-section (3) of section 40A of the Income-tax Act. Section 40A(3)(a) of the Income-tax Act, 1961 provided that any expenditure incurred in respect of which payment is made in a sum exceeding Rs. 20,000 otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction. Clause (b) of sub-section (3) of section 40A also provided for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000 otherwise than by an account payee cheque or by an account payee bank draft.

CBDT Circular No. 1/2009 dated 27^th March, 2009 explaining the provisions of the Finance Act, 2008 stated that Section 40A(3) is an anti-tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction. Thereby the risk of evasion is substantially mitigated.

As per the circular, information received from field formations show that assessees tend to circumvent the said provisions by splitting a particular high value payment to one person into several cash payments, each below Rs. 20,000. This splitting is also resorted to for payments made in the course of a single day. The courts have approved such splitting by interpreting the words ‘in a sum’ used in the section to mean a single sum thereby applying the limit to each transaction. This interpretation is against the legislative intent and has, consequently, adversely affected the efficacy of this anti-abuse provision.

Therefore, the provisions of sub-section (3) of section 40A were amended w.e.f. AY 2009-10  providing that the provisions of section 40A(3) shall also be attracted where the aggregate of payments made to a single party otherwise than by an account payee cheque, drawn on a bank or account payee bank draft exceeds twenty thousand rupees in a day.

The Case
In the instant case, the appeal filed by the assessee was directed against the order of Commissioner of Income Tax (Appeals), whereby he confirmed the addition made by the Assessing Officer (AO) by way of disallowance of purchases under section 40A(3) of the Income Tax Act, 1961 (the Act).

During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has made certain payments in cash against purchases exceeding Rs.20,000/-. He, therefore, invoked the provisions of section 40A(3) and made a disallowance on account of cash purchases.

The disallowance u/s 40A(3) was challenged by the assessee in the appeal before the CIT(Appeals) and it was submitted by the assessee that the cash purchases were made under different bills and none of such bills exceeded Rs. 20,000/-. It was also brought to the notice of the CIT(Appeals) that even the payments made in cash against the said purchases never exceeded Rs. 20,000/- in a single transaction.

However, this stand of the assessee was not found acceptable by the CIT(Appeals). According to him, such stand was not taken by the assessee during the course of assessment proceedings before the Assessing Officer and the same even otherwise was not acceptable on merit keeping in view the Amendment made in section 40A(3) by the Finance Act, 2008 w.e.f. 1s t April, 2009, whereby even the aggregate of payments against any expenditure in cash exceeding Rs. 20,000/- was covered by section 40A(3). He accordingly confirmed the addition by way of disallowance under section 40A(3) of the Act.

Aggrieved by the order of the CIT(Appeals), the assessee had preferred the instant appeal before the Tribunal.

The ITAT noted that the assessee had relied on the decision of Cochin Bench of the Tribunal wherein the amended provisions of section 40A(3) of the Act together with the purpose of the said amendment as explained in CBDT Circular was duly considered.

In the said judgment it was held that the amendment only debars making several payments of less than or equal to Rs.20,000/- in a day to a single person, but does not debar making several payments of less than or equal to Rs.20,000/- on different dates to a single person, meaning thereby, the splitting up of payments during the course of a day to a single person was only debarred.

It was also held that the CBDT circular referred to “a particular high value payment”. The necessity to make payment to a party would arise only after conclusion of a transaction, say a “purchase” and the said deal would culminate into rising of a bill/invoice. Hence the term “high value payment” apparently refers to the concerned bill/invoice in respect of which the payment is required to be made, meaning thereby, the concerned bill/invoice should also be of a higher value. However, if the value of bill/invoice itself is less than Rs.20,000/-, it cannot be considered as a high value transaction in the context of sec.40A(3) and hence the payment effected in respect of that kind of bill/invoice cannot be considered as high value payment. Accordingly, in our view, if the purchase is effected from a single person by way of several bills/invoices and if the value of each bill/invoice is less than Rs.20,000/-, then payments made to settle each bill/invoice would not be hit by the provisions of sec. 40A(3), as each bill/invoice has to be considered as a separate contract. The question of splitting up of the payment also does not arise in respect of such type of bills/invoices, as the value of each bill is less than Rs.20,000/-.

Thus in view of the decision of the Cochin Bench, the ITAT opined that as held by the coordinate bench, if an assessee makes payment of two different bills with none of them exceeding Rs. 20,000/- at the same time in cash, section 40A(3) is not applicable even if the aggregate payment is more than Rs.20,000/-. Section 40A(3) is applicable only in respect of an expenditure which is in excess of Rs. 20,000/- and for applicability of section 40A(3), both the payment and amount of bill should exceed Rs. 20,000/-.

The Tribunal noted that it was claimed that neither the amount of bill nor even the payment made against such bills in cash exceeded Rs.20,000/- in a single transaction and the decision of Cochin Bench was clearly applicable in the facts of the assessee’s case.

The Revenue could not disputed this position in principle but contended that since this claim was not specifically made by the assessee during the course of assessment proceedings before the Assessing Officer, an opportunity may be given to the Assessing Officer to verify the same.

In view of the above, the Tribunal set aside the impugned order of the CIT(Appeals) on this issue and restored the matter to the file of the Assessing Officer for deciding the same afresh in the light of the decision of Cochin Bench after verifying the relevant facts from record.