Explaining source of cash payment not a valid ground for not invoking disallowance u/s 40A(3) – ITAT
In a recent judgment the ITAT has held that explaining source of cash payment not a valid ground for not invoking disallowance u/s 40A(3) of the Income Tax Act, 1961 (the Act).
ABCAUS Case Law Citation:
ABCAUS 3874 (2024) (02) ITAT
Important Case Laws relied upon by parties:
Attar Singh Gurumukhi Singh V/s Income Tax Officer 191 /TR 667(SC)
Anupam Tele Services 43 taxmann.com 199 (Gujarat)
In the instant case, the assessee had challenged the order passed by the CIT(A), National Faceless Appeal Centre (NFAC) in confirming disallowance u/s 40A(3) towards cash payments.
The case was selected for scrutiny through CASS and assessment under Section 143(3) of the Act was completed. The case was reviewed by the Pr. Commissioner of Income Tax under Section 263 of the Act and during the course of revisionary proceedings, the PCIT observed that in the ledger A/c of business promotion expenses an amount was paid for purchase of jewellery in cash.
The PCIT was of the view that as per the provisions of Section 40A(3) of the Act, the claim of expenditure for purchase of jewellery made in cash was not allowable. The PCIT passed order under Section 263 of the Act setting aside the order passed under Section 143(3) of the Act, with a direction to “make a fresh assessment after making proper enquiries and verification about the cash payment for purchase of jewellery for the purpose of business promotion and claimed in the P&L Account.
Pursuant to the direction of the PCIT, the AO issued a notice under Section 142(1) of the Act,in compliance to which the assessee submitted that they had withdrawn cash from bank account and the said amount was paid in cash to the jeweller as the party insisted for cash payment.
The assessee further contended that the seller is a genuine one and payment and transaction is also genuine, and therefore, provisions of Section 40(3) are not attracted in its case. Accordingly, the assessee requested to consider this as an exceptional circumstances.
The Assessing Officer (AO) did not find the contention in order and disallowed the amount by invoking the provisions of Section 40(3) of the Act and added the same to the income of the assessee.
Before the Tribunal, the assessee contended that there was no doubt that the payments in question were genuine and further, the payments were made in cash only for the reason the Jewellers insisted on cash payment. Further, the source of cash payment was out of withdrawals made from the bank account.
The assessee placed reliance on the judgment where the High Court held that where principal company insisted that on payment by cheque, supply would be delayed, cash payment made by agent in bank account of principal had to be allowed. The assessee also placed reliance on several other judicial precedents in support of it’s contention.
The Tribunal opined that the issue was directly covered by the decision of Hon’ble Supreme Court wherein the Supreme Court held that the terms of section 40A(3 ) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. Further it was observed by the Hon’ble Supreme Court that it will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.
The Tribunal opined that the case of the assessee did not fall in any of the Exceptions provided Section 40A(3) of the Act. Further, the assessee had also not demonstrated any business expediency as to why the payments were made in cash. The explanation given by the assessee that the seller insisted on cash payment is a very general explanation and the same cannot be accepted, since this would defeat the very purpose of introduction of Section 40A(3) of the Act.
Further, the Tribunal held that the argument that the source of the cash payment has been explained by the assessee is not a valid ground for not invoking the provisions of Section 40A(3) of the Act.
Accordingly, the appeal of the assessee was dismissed.
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