ITAT deleted disallowance u/s 40A(3) as assessee never operated any bank account

ITAT quashed disallowance u/s 40A(3) as assessee never operated any bank account 

In a recent judgment, ITAT Delhi quashed disallowance u/s 40A(3) where assessee never operated any bank account for running the business, it was held that invoking provisions of section 40A(3) overlooking the business expediency and also impossibility of performance was not just and proper.

ABCAUS Case Law Citation:
4249 (2024) (09) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the disallowance made under section 40A(3) of the Income Tax Act, 1961 (the Act)  towards cash payments in excess of Rs. 20000/-

The appellant assessee was running a wine shop wherein purchasing wine/liquor by cash and selling the same by cash. While framing assessment, the Assessing Officer (AO) observed that the assessee had made cash payments against purchase of goods. The AO invoking the provisions of section 40A(3) of the Act made addition to the returned income of the assessee. The CIT(A) dismissed the appeal of the assessee. However, the ITAT restored the issue to the file of the Assessing Officer to make the assessment de novo and consider the applicability of Rule 6DD.

After considering the observations/directions of the ITAT the AO gave relief for cash payments made on holidays. He further held that balance transactions of cash payments made on bank working days had been made in contravention to the provisions of section 40A(3) of the Act and made the impugned addition.

In the second round of litigation also the CIT(A) being not satisfied with the submissions of the assessee confirmed the addition and dismissed the appeal filed by the assessee.

Before the Tribunal the assessee submitted that she never operated bank account and all the transactions in the business were carried through cash only. That she habitually pays for the purchases after closing of business every day or as the case may be.

It was contended that since the assessee did not operate any bank and made the cash payment on the basis of collection which is below the limit of Rs.20,000/-, assessee had not violated section 40A(3) of the Act. The assessee relied upon the decision of Hon’ble Punjab & Haryana High Court and the decision of coordinate Bench.

The Tribunal observed that the Revenue authorities had not disputed the genuineness of the payments and they also acknowledged that the method of business carried on by the assessee was only through cash. Therefore, on the one hand, the Revenue authorities were acknowledging the fact that payments are genuine and then only, they were invoking the provisions of section 40A(3) of the Act to disallow the same.

The Tribunal further observed that that as held by Hon’ble Punjab & Haryana High Court by relying on the decision of Hon’ble Supreme Court that The Tribunal observed that on a similar issue, Hon’ble Punjab & Haryana High Court had held that if section 40A(3) and Rule 6DD are read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40-A(3) was not practicable or would have caused genuine difficulty to the payee.

The Tribunal opined that from the above decision, it is clear that the business expediency cannot be overlooked and also in the given case, it was a fact on record that assessee had carried on the business only on the basis of cash. Therefore, by now insisting upon the provisions of section 40A(3) overlooking the business expediency and also impossibility of performance at this stage was not just and proper. The intention of the legislature is not to do so.

In the result, the grounds and appeal filed by the assessee was allowed.

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