2012 (7) TMI 264 - AT - Income Tax

Tribunal rules cash payments to Railways exempt under Income-tax Act, Section 40A(3)

Shri Venkatesh Kabade, Hubli. Versus The Deputy Commissioner of Income Tax,

The Tribunal ruled in favor of the assessee, holding that the cash payments to South Western Railways were exempt from disallowance under Section 40A(3) ... Disallowance u/s 40A(3) - assessee contested that he is fully covered by the exceptions provided in rule 6DD of the I.T. Rules - assessee had purchased railway scrap material from South Western Railways - Held that:- Considering the exceptions are laid down in Rule 6DD(b)that payments exceeding twenty thousand rupees to be made to Government and, under the rules framed by it, such payment is required to be made in legal tender - As the meaning of legal tender has not been defined in the Income-tax Act, however, the dictionary meaning of ‘legal tender’ is “the coinage of a county in which the debts may be paid and which the creditor is bound to accept”. As the assessee made the payment in cash i.e in Indian currency because it is not the case of the department that the payment was made in foreign currency to the ‘South Western Railway’ towards purchase of scrap by the assessee, giving a confirmed view to the fact that the payment made in cash by the assessee was actually made in legal tender to the ‘South Western Railway’ which is a part of the Government was covered in the exceptions provided in clause (b) of Rule 6DD and the provisions of sec. 40A(3) as wrongly invoked - decided in favour of assessee. Issues Involved:1. Applicability of Section 40A(3) of the Income-tax Act, 1961.2. Coverage under exceptions provided in Rule 6DD of the Income-tax Rules, 1962.3. Justifiability of disallowance of Rs. 2,22,40,998 by the Assessing Officer.Issue-wise Detailed Analysis:1. Applicability of Section 40A(3) of the Income-tax Act, 1961:The primary issue in this case is whether the provisions of Section 40A(3) of the Income-tax Act, 1961, which disallows deductions for cash payments exceeding Rs. 20,000, are applicable. The assessee purchased railway scrap material worth Rs. 2,22,40,998 from South Western Railways and made the payment in cash. The Assessing Officer (AO) invoked Section 40A(3) and disallowed the expenditure, as it was not made by crossed cheque or bank draft.2. Coverage under Exceptions Provided in Rule 6DD of the Income-tax Rules, 1962:The assessee contended that the payment was covered under the exceptions provided in Rule 6DD(b) of the Income-tax Rules, 1962, which allows cash payments to the government if required to be made in legal tender. The CIT(A) rejected this argument, stating that the assessee did not furnish exceptional, unavoidable, and justifiable reasons for making cash payments. However, the Tribunal noted that similar facts and issues were adjudicated in the case of Sri Devendrappa M. Kalal v. ITO, where it was held that payments made in cash to the government (South Western Railways) were covered under Rule 6DD(b) and thus exempt from Section 40A(3).3. Justifiability of Disallowance of Rs. 2,22,40,998 by the Assessing Officer:The CIT(A) upheld the AO's decision, emphasizing that the assessee failed to provide justifiable reasons for cash payments. The Tribunal, however, referred to the decision in Sri Devendrappa M. Kalal's case, where it was concluded that payments made in legal tender to the government are not subject to Section 40A(3). The Tribunal highlighted that the payment was made in Indian currency, which qualifies as legal tender, and the South Western Railways' terms required cash payment. Consequently, the Tribunal found that the CIT(A) was not justified in confirming the disallowance and ruled in favor of the assessee, deleting the addition.Conclusion:The Tribunal allowed the appeal, holding that the cash payments made by the assessee to the South Western Railways were covered by the exceptions in Rule 6DD(b) and thus not subject to disallowance under Section 40A(3). The Tribunal's decision was based on the precedent set in the case of Sri Devendrappa M. Kalal, where similar facts and legal issues were adjudicated. The appeal was pronounced in the open court on May 30, 2012.