2011 (3) TMI 1349 - AT - Income Tax

Cash payments disallowed under section 40A(3)

The Tribunal upheld the disallowance of Rs. 3,94,958 under section 40A(3) of the Income-tax Act, 1961, confirming the addition to the total income. The ... Section 40A(3) disallowance of cash payments - Rule 6DD exceptions - payments made by agent treated as expenditure - burden of proof to establish refusal to accept cheque - post amendment exclusion of business expediency as a general defenceSection 40A(3) disallowance of cash payments - Rule 6DD exceptions - payments made by agent treated as expenditure - burden of proof to establish refusal to accept cheque - post amendment exclusion of business expediency as a general defence - Disallowance under section 40A(3) confirmed in respect of cash payments made to M/s Bartaman Pvt. Ltd.; assessee's contentions that payments were reimbursements as agent or made for business expediency do not attract Rule 6DD exceptions. - HELD THAT: - The Tribunal accepted that payments were made in cash and recorded in the assessee's profit and loss account as expenses. The Court held that where the assessee claims payments as reimbursements but treats them as expenses in its P&L, such payments fall within the word 'expenditure' in section 40A(3) and are therefore assessable for disallowance. The assessee relied on business expediency, timing of insertions and a discount policy to justify cash payments, and produced certificates from the payee; however the certificates did not establish that the payee refused cheque/draft or that cash payment was insisted upon. In view of the 1995 amendment to section 40A(3) and the consequent narrowing of Rule 6DD, considerations of business expediency and general banking facility are not by themselves sufficient to avert disallowance unless the case squarely falls within the specified mitigating circumstances in the Rules. The assessee failed to discharge the burden of proof to bring the payments within any clause of Rule 6DD or to show unavoidable or exceptional circumstances; accordingly the Assessing Officer's 20% disallowance under section 40A(3) was held to be justified. [Paras 5, 6]Disallowance under section 40A(3) upheld; assessee's claims of agency reimbursement and business expediency rejected for lack of evidential support and inapplicability of Rule 6DD exceptions post amendment.Final Conclusion: The appeal is dismissed; the orders of the lower authorities confirming the 20% disallowance under section 40A(3) in respect of the cash payments are affirmed. Issues Involved:- Disallowance under section 40A(3) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Confirmation of Addition under Section 40A(3):The primary issue in this appeal is the confirmation of the addition of Rs. 3,94,958 to the total income by the CIT(A), which was made by the Assessing Officer (AO) under section 40A(3) of the Income-tax Act, 1961. The assessee argued that the payments made to M/s. Bartaman Pvt. Ltd. (BPL) in cash were not related to expenses for the computation of income under 'Profits and Gains of Business or Profession' and thus should not be disallowed under section 40A(3).2. Facts and Arguments:The assessee filed a return of income declaring Rs. 6,61,400 for the assessment year 2004-05. During assessment proceedings, the AO found that the assessee made cash payments to BPL amounting to Rs. 19,74,789, which violated section 40A(3). The AO issued a show cause notice to the assessee, who responded that BPL refused to accept cheques/bank drafts and offered a 5% discount for cash payments. The assessee cited the Supreme Court case of Attar Singh Gurmukh Singh v. ITO and the Punjab & Haryana High Court case of CIT v. Nikko Auto Ltd. to support the claim of business expediency. However, the AO disallowed 20% of the cash payments due to lack of evidence supporting the refusal of cheques by BPL.3. CIT(A)'s Findings:The CIT(A) reviewed the submissions and upheld the AO's decision, noting that the assessee's claims were not substantiated by evidence. The CIT(A) emphasized that the payments were routed through the Profit & Loss account as expenses, thus falling under section 40A(3). The CIT(A) found no evidence of banking facilities being unavailable or BPL refusing cheques. The CIT(A) referenced several case laws, including Girdharilal Goenka v. CIT and CIT v. Suresh Kr. Agarwal, to highlight that genuine transactions are not exempt from section 40A(3) unless exceptional circumstances are proven, which was not the case here.4. Tribunal's Analysis:The Tribunal examined the facts and arguments, agreeing with the lower authorities. The Tribunal noted that the payments were claimed as expenses and thus fell under section 40A(3). The Tribunal found no evidence supporting the claim of non-availability of banking facilities or refusal of cheques by BPL. The Tribunal highlighted that the amended provisions of section 40A(3) and Rule 6DD did not cover the assessee's case. The Tribunal reiterated that genuine and bona fide payments are not exempt from section 40A(3) unless specific exceptions under Rule 6DD are met, which the assessee failed to demonstrate.5. Conclusion:The Tribunal concluded that the assessee's case did not fall under any exceptions provided in the Rules and confirmed the disallowance under section 40A(3). The appeal was dismissed, upholding the orders of the lower authorities.Result:The appeal of the assessee was dismissed.