2006 (10) TMI 454 - HC - Income Tax

Court Upholds Tax Disallowance for Cash Payments Over Rs. 10,000; Stresses Compliance to Prevent Evasion.

Commissioner of Income Tax Versus A.D. Jayaveerapandia Nadar & Sons

Commissioner of Income Tax Versus A.D. Jayaveerapandia Nadar & Sons - [2007] 207 CTR 428 Issues Involved:1. Applicability of Section 40A(3) of the Income Tax Act, 1961 to the reimbursement of day-to-day expenses made to associate concerns.2. Conditions under Section 40A(3) regarding payments by crossed cheque or demand draft and their applicability to payments made to associate concerns.Detailed Analysis:Issue 1: Applicability of Section 40A(3) to Reimbursement of Day-to-Day ExpensesThe core issue was whether the amounts paid to associate concerns as reimbursement of day-to-day expenses would be subject to disallowance under Section 40A(3) of the Income Tax Act, 1961. The respondent/assessee, a partnership firm engaged in the export of garments and textiles, made substantial cash payments exceeding Rs. 10,000 to an associate concern, ARJ Textiles (P) Ltd., for machining charges. The Assessing Officer (AO) disallowed 20% of the total cash payments, amounting to Rs. 5,52,220, under Section 40A(3), as these payments were not made by crossed cheque or demand draft. The CIT(A) deleted this disallowance, reasoning that the payments were reimbursements and hence Section 40A(3) was not applicable. The Tribunal upheld the CIT(A)'s decision, which led to the Revenue's appeal.Issue 2: Conditions Under Section 40A(3) Regarding Payments by Crossed Cheque or Demand DraftSection 40A(3) stipulates that any expenditure exceeding Rs. 10,000 (later increased to Rs. 20,000) should be paid by crossed cheque or demand draft to be allowed as a deduction. The rule aims to prevent tax evasion by ensuring payments are made from disclosed sources. Rule 6DD(j) provides exceptions where payment by crossed cheque or draft is not practicable due to exceptional or unavoidable circumstances, and the assessee must furnish evidence of the genuineness of the payment and the identity of the payee.Judgment Analysis:The High Court examined whether the payments made by the assessee to associate concerns in cash could be exempted under Rule 6DD(j). The court noted that the AO disallowed the payments on the grounds that they were made in cash and did not meet the conditions of Section 40A(3). The CIT(A) and the Tribunal, however, accepted the assessee's argument that the payments were reimbursements and thus outside the scope of Section 40A(3).The court referred to various judgments to emphasize that the object of Section 40A(3) is to check tax evasion and ensure payments are made from disclosed sources. Genuine and bona fide transactions could be exempted if the assessee proves that payment by crossed cheque or draft was impracticable or would cause genuine difficulty to the payee. The court found that the CIT(A)'s reason for deleting the disallowance was illogical and outside the scope of Section 40A(3), as it would pave the way for tax evasion.The court concluded that the assessee failed to satisfactorily explain the exceptional and unavoidable circumstances warranting cash payments, and the deletion of the 20% disallowance by the CIT(A) frustrated the object of Section 40A(3). Therefore, the court ruled in favor of the Revenue, allowing the appeal and reinstating the disallowance.Conclusion:The High Court held that the payments made by the assessee to associate concerns in cash were subject to disallowance under Section 40A(3), as the assessee did not satisfactorily prove exceptional circumstances or genuine difficulty in making payments by crossed cheque or draft. The appeal was allowed, and the disallowance reinstated.