2015 (12) TMI 1693 - AT - Income Tax

ITAT rules in favor of assessee, cancels Rs. 29,42,357 addition under Section 40A(3)

The ITAT allowed the assessee's appeal, deleting the addition of Rs. 29,42,357/- made under Section 40A(3) of the Income Tax Act, 1961. - TMI Addition u/s 40A(3) - cash payment to his permanent employees for more than ₹20,000/- in a day - Held that:- It is a relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the Circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. We hold that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions. Admittedly, this is not the case in the facts of the assessee herein. The assessee had issued bearer cheques in the name of respective labours which is evident from the additional details submitted by the assessee and placed on page 2 to 6 of the additional details. It is also pertinent to note that the Hon’ble Rajasthan High Court in the case of Smt.Harshila Chordia vs ITO reported in (2006 (11) TMI 117 - RAJASTHAN HIGH COURT) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally. Thus no hesitation in deleting the addition u/s 40A(3) - Decided in favour of assessee. Issues Involved:1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the addition of Rs. 29,42,357/- by invoking the provision of Section 40A(3) of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Confirmation of Addition Under Section 40A(3):The primary issue raised by the assessee was that the CIT(A) erred in confirming the addition of Rs. 29,42,357/- by invoking Section 40A(3) of the Income Tax Act, 1961. The assessee, engaged in civil construction and labour supply, made cash payments exceeding Rs. 20,000/- in a day to his permanent employees due to labour disputes and political pressure. The Assessing Officer (AO) disallowed these payments under Section 40A(3) and added Rs. 29,42,357/- to the assessee's income.2. CIT(A)'s Observations:The CIT(A) upheld the AO's decision, stating that the payments were made in cash and not by account payee cheques, which contravenes Section 40A(3). The CIT(A) referred to Rule 6DD, which lists exceptions to Section 40A(3), and concluded that the nature of payments made by the assessee did not fall under any exceptions. The CIT(A) cited the Hon'ble Calcutta High Court's ruling in Bagmari Tea Co Ltd. vs. Commissioner of Income-tax, which emphasized that genuine payments made in contravention of Section 40A(3) cannot be allowed unless there are unavoidable circumstances.3. Assessee's Appeal to ITAT:The assessee appealed to the ITAT, arguing that the payments were made under unavoidable circumstances. The labourers did not have bank accounts, and there was a bipartite settlement with the labour union, witnessed by the Additional Labour Commissioner, which necessitated cash payments. The assessee issued bearer cheques due to business expediency and abnormal circumstances.4. ITAT's Analysis:The ITAT examined the materials and rival contentions. It noted that the AO disallowed the expenses for cash payments of arrear wages under Section 40A(3). The ITAT found that Rule 6DD does not provide an exception for the circumstances described by the assessee. However, it observed that the genuineness of the expenses was not doubted. The ITAT emphasized that Section 40A(3) aims to curb tax evasion and ensure proper investigation of payments. The ITAT referred to several judicial precedents, including Attar Singh Gurmukh Singh vs. ITO and CIT vs. CPL Tannery, which highlighted that genuine and bona fide transactions should not be disallowed under Section 40A(3).5. Conclusion:The ITAT concluded that the assessee had taken precautions to ensure that the payees did not escape taxation by directly depositing bearer cheques in their bank accounts. The ITAT emphasized that the primary object of Section 40A(3) is to curb tax evasion and inculcate banking habits. The ITAT held that the provisions of Section 40A(3) could not be applied to the assessee's case, as the payments were genuine and made under unavoidable circumstances. The ITAT also referred to the Hon'ble Rajasthan High Court's ruling in Smt. Harshila Chordia vs. ITO, which stated that the exceptions in Rule 6DD should be interpreted liberally.Final Judgment:The ITAT allowed the assessee's appeal, deleting the addition of Rs. 29,42,357/- made under Section 40A(3) of the Income Tax Act, 1961. The order was pronounced in the open court on 11/12/2015.