7 Section 40A(3) – Cash payments made out of business expediency allowed as expenditure.

A. Daga Royal
Arts vs. ITO

Members:  Vijay Pal Rao (J. M.) & Vikram Singh
Yadav (A. M)

ITA No.:
1065/JP/2016

A.Y.:
2013-14.  Dated : 15^th May,
2018

Counsel for
Assessee / Revenue:  Rajeev Sogani / J.
C. Kulhari

Facts

During the year
under consideration, the assessee firm, the real estate developer, had
purchased 26 pieces of plot of land from various persons for a total
consideration of Rs. 2.46 crore. Out of which, payment amounting to Rs. 1.72
crore was made in cash to various persons. 
Cash payments were justified by the assessee on the ground that the
sellers were new to the assessee and refused to accept payment by cheque. The
assessee could have lost the land deals if the assessee had insisted on cheque
payment. However, according to the AO, the case of the assessee did not fall in
any of the sub-clauses of Rule 6DD and hence, he disallowed the sum of Rs. 1.72
crore paid in cash u/s. 40A(3). On appeal, the CIT(A) confirmed the order of
the AO.

Before the
Tribunal, the revenue justified the orders of the lower authorities and
submitted that since the matter didn’t fall in any of the exceptions provided
in Rule 6DD, the disallowance had been rightly made u/s. 40A(3).

Held

The Tribunal
noted the following undisputed facts:

–   Identity of the persons from whom the
purchases had been made, genuineness of the transactions of purchase of various
plots of land and payment in cash were evidenced by the registered sale deeds
and there was no dispute raised by the Revenue either during the assessment
proceedings or before the Tribunal.

–   Only at the insistence of the specific
sellers, the assessee had made cash payment and in case of other sellers, the
payment had been made by cheque. This, according to the Tribunal, established
that the assessee had business expediency under which it had to make payment in
cash and in absence of which, the transactions could not had been completed.

–   The source of cash payments was clearly
identifiable in form of the withdrawals from the assessee’s bank accounts and
the said details were submitted before the lower authorities and have not been
disputed by them.

Further, the Tribunal referred to the following observations of the Apex
court in the case of Attar Singh Gurmukh Singh vs. ITO (59 taxmann.com 11):

“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. 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 40A(3) was not practicable or would have caused genuine
difficulty to the payee.”

Thus, according to the Tribunal, so far as consideration of business
expediency and other relevant factors were concerned, the same continue to be
relevant factors, which need to be considered and taken into account while
determining the exceptions to the disallowance as contemplated u/s. 40A(3), so
long as the intention of the legislature was not violated.

According to the Tribunal, the amendment to Rule 6DD(j) by notification
dated 10.10.2008, providing for an exception only in a scenario where the
payment was required to be made on a day on which banks were closed on account
of holiday or strike – also do not change the above legal proposition laid down
by the Supreme Court regarding consideration of business expediency and other
relevant factors. 

According to the Tribunal, the above view finds resonance in decisions
of various authorities discussed below:

–   In the case of Harshila Chordia vs. ITO
(298 ITR 349) the Rajasthan High Court observed that as per the Board
circular dated 31.05.1977 [108 ITR (St.) 8], rule 6DD(j) has to be liberally
construed and ordinarily where the genuineness of the transaction and the
payment and the identity of the receiver is established, the requirement of
rule 6DD(j) must be deemed to have been satisfied and the rigors of section
40A(3) cannot be invoked. 

–   In Anupam Tele Services (362 ITR 92),
the Gujarat High Court overruled the decision of the Tribunal disallowing cash
payments u/s. 40A(3) since according to it, the Tribunal erred in not
considering ‘business expediencies’ when the assessee was compelled to make
cash payments.

–   In Ajmer Food Products Pvt. Ltd. vs.JCIT
[ITA No. 625/JP/14] where the genuineness of the transaction as well as the
identity of the payee were not disputed and the assessee was able to establish
business expediency, the co-ordinate bench of the Tribunal, following the above
decisions of the Gujarat High Court and of the Rajasthan High Court deleted the
addition made by the lower authorities u/s. 40A(3).

–   In the case of Gurdas Garg vs. CIT(A) (63
taxmann.com 289) where the facts of the case were pari materia to the
assessee’s case, the Punjab and Haryana high court allowed the assessee’s
appeal.

Further, the decisions in the following cases were also relied on by the
Tribunal:

–  M/s. Dhuri Wine vs. DCIT (ITA No. 1155
/ Chd / 2013 & others dated 09.10.2015);

–  Rakesh Kumar vs. ACIT (ITA No. 102 /
Asr / 2014 dated 09.03.2016);

–  ACE India Abodes Limited (Appeal No. 45/2012
dated 11.09.2017);

Taking into
account the facts and circumstances of the case and following the legal proposition
laid down by the various Courts and Coordinate Benches discussed above, the
Tribunal held that the intent and the purpose for which section 40A(3) has been
brought on the statute books has been clearly satisfied in the instant case.
Therefore, being a case of genuine business transaction, no disallowance is
called for.