37. [2018] 66 ITR (Trib.) 371 (Delhi-Trib.) KGL
Networks (P) Ltd. vs. ACIT ITA No.:
301/Del./2018 A.Y.:
2014-2015 Dated: 2nd July, 2018
Section 40A(3) – No Disallowance u/s.
40A(3) when genuineness of the transaction is not doubted and incurring of such
cash expenses was necessary as part of business expediency.
FACTS
The assessee-company
was a clearing and forwarding agent and had made payments to various reputed
airlines. The Assessing Officer (AO) noted from the tax audit report that the
assessee-company had incurred expenditure amounting to Rs.8,17,807/- in cash.
The A.O. accordingly disallowed the same in light of section 40A(3), being in
excess of Rs. 20,000/-.
The assessee-company challenged the addition
before the Ld. CIT(A) stating that payments were made to various reputed
airlines whose PAN had been duly submitted. The genuineness of the payment was
not doubted, therefore, no disallowance could be made u/s. 40A(3) of the Act.
The CIT(A), however, did not accept the contention of assessee-company and
noted that Rule 6DD had been amended in 2008. The CIT(A) held that the Rule in
its present form does not include any such circumstances like business
expediency or exceptional circumstances, under which, such cash payments could
be made as a business expenditure u/s. 40A(3).
Aggrieved by the order, Assessee Company filed
appeal to ITAT.
HELD
The
Tribunal relied on the decision of Attar Singh Gurmukh Singh vs. ITO (1991)
191 ITR 667 (SC) wherein it was held that section 40A(3) of the Income-tax
Act, 1961, is not arbitrary and does not amount to a restriction on the fundamental
right to carry on business. Consideration of business expediency and other
relevant factors are not excluded. Genuine and bonafide transactions are
not taken out of the sweep of the section. It will be clear from the provisions
of section 40A(3) and Rule 6DD that they are intended to regulate business
transactions and to prevent the use of unaccounted money or reduce the chances
to use black money for business transactions. The contention of the assessee
that owing to business expediency, obligation and exigency, the assessee had to
make cash payment for purchase of goods so essential for carrying on of his
business, was also not disputed by the AO.
It was also held that the primary object of
enacting section 40A(3) was twofold, 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. The ITAT concluded that Even though there was an amendment
in Rule 6DD of I.T. Rules as is noted by the Ld. CIT(A), but in section 40A(3)
of the I.T. Act, 1961 itself, an exception is provided on account of nature and
extent of banking facilities available, consideration of business expediency
and other relevant factors. The nature of business of assessee-company and the
agency carried on by the assessee-company on behalf of others clearly showed
that for business expediency in the line of business of assessee-company,
sometimes cash payments were made to complete the work on behalf of Principal.
The
assessee-company, under such compelling reasons, made payments in cash. The AO
and CIT(A) had not doubted the identity of the payee and the genuineness of the
transaction in the matter. The source of payment was also not doubted by the
authorities. ITAT mainly relied on the decision of ITAT, Delhi in the case of ACIT
vs. Marigold Merchandise (P) Ltd (ITA No. 5170/Del./2014).
Thus, in the
opinion of the ITAT no disallowance u/s. 40A(3) could be made when genuineness
of the transaction was not doubted and incurring of such expenses was necessary
as part of business expediency.
