No disallowance for cash payments u/s 40A(3) if genuineness of transactions and identity of the payee is established. ITAT deleted addition
ABCAUS Case Law Citation:
ABCAUS 3107 (2019) (08) ITAT
Important case law relied upon by the parties:
Girdharilal Soni vs. CIT reported in [1989] 179 ITR 111 (Cal).
Attar Singh Gurmukh Singh v. I.T.O. 191 ITR 667 (SC)
CIT v. CPL Tannery (2009) 318 ITR 179 (Cal)
The instant appeal was filed by the assessee against the order passed by the Commissioner of Income Tax (Appeal) in confirming the addition made by Assessing Officer (AO) for cash payments invoking section 40A(3) of the Income Tax Act, 1961 (the Act).
During the assessment proceedings, the Assessing Officer noticed that the assessee had made cash payment to a traders. The AO called information u/s 133(6) of the Act from the creditors who confirmed the cash payment.
Since the assessee had carried out expenditure in contravention of provision of section 40A(3) of the Act, therefore, the entire payment had been disallowed by the Assessing Officer and added back it to the total income of the assessee.
The aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who confirmed the addition made by the Assessing Officer.
Before the Tribunal, the assessee pointed out that section 40A(3) of the Act must not to be read in isolation or to the exclusion of Rule 6DD of the Rules. The section must be read along with Rule. If read together, it may be clear that the provisions are not intended to restrict the business activity of the assessee. There is no restriction on the assessee in his trading activity.
It was submitted that section 40(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque, crossed bank draft. However, in genuine business circumstances, payment in cash may be made and the same should not be disallowed.
It was also submitted that the main intention of provisions of section 40A(3) was to check the black money and not to restrict the business activity of the assessee. The payment by crossed cheque or crossed bank draft is insisted to enable assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Thus the genuine and bona fide transactions are not taken out of the sweep of the section.
The assessee submitted that in order to run the business, the assessee did not have any other option but to make cash payment. At the first instance, the assessee made demand draft to make the payment through banking channel only, however, when the creditor refused to take the bank draft, the assessee cancelled the demand draft and made the cash payment. Hence it was a genuine business payment and should be allowed.
The Tribunal noted that there was evidence that the payee had insisted the assessee to make payments in cash. At the first instance, the assessee made demand draft of the bank to make the payment, however, on refusal of the trader the assessee did not have any option but to make payment in cash. This fact was evident from ledger account and Bank statement that assessee had cancelled the demand draft and made the cash payment due to business circumstances prevailing at that point of time, hence it was a genuine business payment. The identity of the payee was not in doubt and AO had not disputed the genuineness of the transaction.
The Tribunal opined that since the genuinity of the payments made to the party was not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case.
The Tribunal observed that the assessee had taken enough precautions from his side to ensure that the payee also don’t escape from the ambit of taxation on these receipts by paying cash. This fact was also not disputed by the revenue.
The Tribunal pointed out that the intention behind introduction of provisions of section 40A(3) of the Act was two fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration.
In the instant case, since the assessee made bank draft but in order to run the business the assessee did not have any option but to make payment in cash. The Tribunal opined that had the assessee not been paid cash, his business would have been stopped or restricted to that extent. The purpose of section 40A (3) is not to restrict the assessee`s genuine business activity.
The Tribunal also referred to CBDT Circular explaining the purpose behind introduction of section 40A(3) stated that the provision is designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and the reasonableness of the payment.
The Department argued that assessee had not proved the commercial expediency for making payments in cash. In response to this, the assessee argued that the test of commercial expediency should be judged from the view point of the businessman and not from the view point of the revenue.
The Tribunal opined that the genuinity of the payee was not disputed by the revenue. The assessee acted with bona fide intention, as he made demand draft of the bank, but later on it was cancelled on the request of the payee therefore, intention of the assessee was to make payment through banking channel only.
No disallowance for cash payments where genuineness of transactions and identity of the payee established
The Tribunal stated that the genuineness of the transactions and identity of the payee was established. Assessee had proved the pressing circumstances and there were exceptional circumstances where the assessee made payment in cash. The assessee had taken enough precautions from his side. Hence, in the facts and circumstances, the payment should not be disallowed as held by the Hon’ble High Court
Accordingly, the Tribunal delete the addition.
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