1996 (12) TMI 37 - HC - Income Tax

Court rules in favor of assessee on cash payment disallowance under Income-tax Act

The High Court ruled against the Revenue and in favor of the assessee in a case concerning the disallowance made under section 40A(3) of the Income-tax ... Payments In Cash Issues Involved:1. Sustaining the disallowance made u/s 40A(3) of the Income-tax Act, 1961.Summary:Issue: Sustaining the disallowance made u/s 40A(3) of the Income-tax Act, 1961The core issue in this case was whether the Tribunal was right in law in sustaining the disallowance made u/s 40A(3) of the Income-tax Act, 1961. The assessee, a partnership firm, made cash payments exceeding Rs. 2,500 to Janambhumi Press Pvt. Ltd. for printing charges. The Assessing Officer disallowed Rs. 3,65,885 u/s 40A(3) despite acknowledging the genuineness of the payments and the identity of the payee, citing a lack of exceptional circumstances as required u/r 6DD(j).The Commissioner of Income-tax (Appeals) reduced the disallowance to Rs. 3,25,885 but upheld the principle of the addition. The Tribunal also upheld the disallowance, stating that no explanation was provided for the exceptional and unavoidable circumstances justifying the cash payments.The assessee argued that the Tribunal's findings were perverse and contrary to evidence, emphasizing that the circumstances should be viewed from a business perspective. The Revenue contended that the provisions of section 40A(3) were mandatory and that the assessee failed to demonstrate 'exceptional and unavoidable circumstances.'The High Court noted that the Tribunal and the Commissioner of Income-tax (Appeals) failed to consider the business exigencies, convenience, and security involved in making cash payments. The Court referred to Circular No. 220, dated May 31, 1977, which provided illustrative but not exhaustive circumstances under which cash payments could be justified. The Court emphasized that the object of section 40A(3) and rule 6DD is to discourage frivolous and false payments, not to complicate genuine business transactions.The Court concluded that the findings of the Tribunal were erroneous and answered the question in the negative, against the Revenue and in favor of the assessee. The judgment highlighted that practical business considerations should be taken into account when interpreting 'exceptional and unavoidable circumstances' u/r 6DD(j).