Business expenditure: Disallowance u/s. 40A(3): A. Y. 2008-09: Cash payment exceeding prescribed limits [Payment to Government concern]: Assessee a scrap dealer, purchased scrap from Railway by making payment in cash in excess of Rs. 20,000: Since Railway is concern of Union of India, such payment in cash had to be considered as a legal tender, and, therefore, same could not be disallowed u/s. 40A(3):

For the A Y 2008-09 the Assessing Officer disallowed certain expenditure and added Rs. 73,91,380/- on the ground that the assessee has made payment in cash in excess of Rs. 20,000/- in respect of a single transaction which is in gross violation of section 40A(3)of the Income-tax Act 1961. Before the Tribunal the assessee contended that all the payments were made by him to purchase the scrap from the Railways, which is run by the Union of India and any payment made to the Government is required to be considered as a legal tender and the question of adding the same by way of disallowance u/s. 40A(3) is not justified. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) The revenue is not disputing that the assessee is a scrap dealer purchasing scrap from the Railways. Admittedly Railways is a concern of the Union of India. If any cash is paid towards purchase of the scrap the same cannot be disputed by the revenue since such payment has to be considered as a legal tender. If the revenue is of the opinion that no such payment has been made to the Railways, we could have considered their grievance.

 ii) In the circumstances, the appeal is dismissed.”