Disallowance u/s 40A(3) for cash payments out of Business expediency deleted by ITAT

Disallowance u/s 40A(3) for Cash Payments out of Business expediency deleted by ITAT following Supreme Court judgment

ABCAUS Case Law Citation
ABCAUS 3629 (2023) (01)

Important Case Laws relied upon:
Attar Singh Gurumukh Singh vs. ITO Ludhiana 1991 AIR 2109 (SC)

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the addition u/s 40A(3) of the Income Tax Act, 1961 (the Act) for cash payments to various parties on account of purchase of  handloom fabrics.

The assessee was taken up for scrutiny assessment and the assessment u/s 143(3) of the Act was framed. The Assessing officer while making the assessment noticed that the assessee had violated the provisions of Section 40A(3) of the Act, as  expenditure was incurred in cash in excess of the mandatory  limit. Accordingly, he disallowed the said expenditure.  

Aggrieved against this, the assessee preferred an appeal before the CIT(Appeals), who also sustained the addition to the extent as per Rule 6DD of Income Tax Rules, 1962 (the Rules). The CIT(A) held that the issue of business expediency by itself does not create any exclusion. The prescription itself is based on many factors and business expediency is one of them.

The assessee argued that the Revenue failed to appreciate the fact that the expenditure was incurred for business exigencies. It was submitted that the assessee was a proprietary firm engaged in the business of manufacture and export.

During the year under assessment the assessee made purchases handloom fabrics etc. from various parties in cash in excess of limit prescribed due to business expediency.  

Further it was submitted that there was no banking facility at the place of payment and the suppliers were not holding bank accounts. Also, certain payments during the bank holidays and finally the payments were made to the category of persons who fall under clause (f) of Rule DD of Rules, hence excluded.

On the other hand, the Revenue contended that the assessee failed to support his contention by filing the credible evidences.  It was contended that merely stating that there   was business expediency would ipso facto make the assessee entitled for exemption from applicability of the provisions of Section 40A(3). It was incumbent upon the assessee to bring positive evidence in support of his contentions.

The ITAT observed that no evidence was brought on record for supporting exclusion under clause (f) of Rule 6DD, which exempts any payment made for the purchase of the products manufactured or processed without aid of power in a cottage industry.

However, the ITAT observed that the assessee had placed reliance on the judgment of the Hon’ble Supreme Court wherein it had been held that the term of Section 40A(3) are  not absolute. Consideration of business expediency and other relevant factors are not excluded.

In view of the assessee’s clear averments regarding business expediency and not rebuttal of the same by the Revenue, the ITAT, following the ratio laid down by the Hon’ble Supreme Court directed the Assessing Officer to delete the impugned disallowance.

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