2012 (8) TMI 188 - AT - Income Tax

Tribunal exempts cash payments to Railway for scrap purchases under Income-tax Act

The Tribunal ruled in favor of the assessee, holding that the cash payments made to South Western Railway for scrap purchases were exempt from ... Disallowance on account of cash payments exceeding prescribed limits - provisions of sec.40A(3) – Held that:- Payments are made to the Government of India (South Western Railway) towards purchase - payment made by the assessee in cash to the south western railway, who insisted for cash payment were covered by the exception laid down in Rule 6DD(b) of the Income-tax Rules 1962, as such, it was outside the purview of the provision contained in sec.40A(3) of the Income-tax Act – addition deleted – In favor of assessee Issues Involved:1. Disallowance of cash payments made to South Western Railway for scrap purchases under Section 40A(3) of the Income-tax Act, 1961.2. Applicability of Rule 6DD(b) of the Income-tax Rules, 1962, to the cash payments made to the Government.Detailed Analysis:Issue 1: Disallowance of Cash Payments under Section 40A(3)The primary issue is whether the cash payments made by the assessee to South Western Railway for the purchase of scrap materials, amounting to Rs. 73,91,380/-, should be disallowed under Section 40A(3) of the Income-tax Act, 1961. Section 40A(3) stipulates that any expenditure incurred in respect of which payment is made in excess of Rs. 20,000/- otherwise than by an account payee cheque or bank draft shall not be allowed as a deduction.The Assessing Officer (AO) disallowed the expenditure on the grounds that the payments exceeded Rs. 20,000/- and were made in cash, which is contrary to the provisions of Section 40A(3). The AO further argued that the payments did not qualify as 'legal tender' under Rule 6DD(b), which provides exceptions to Section 40A(3).Issue 2: Applicability of Rule 6DD(b)The assessee contended that the payments made to South Western Railway were covered under the exceptions provided in Rule 6DD(b) of the Income-tax Rules, 1962. Rule 6DD(b) states that payments made to the Government under the rules framed by it, which are required to be made in legal tender, are exempt from the disallowance under Section 40A(3).The assessee argued that the railway authority insisted on cash payments as per the conditions of sale by auction. The AO, however, did not accept this argument, pointing out that the South Western Railway's website mentioned other modes of payment, such as Electronic Fund Transfer. The AO concluded that the payments for the purchase of scrap material could not be considered 'legal tender' and thus disallowed the expenditure.The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the payments did not qualify as 'legal tender' and that the assessee had not demonstrated any unavoidable, exceptional, or justifiable reasons for making cash payments.Tribunal's Analysis and ConclusionThe Tribunal examined the provisions of Section 40A(3) and Rule 6DD(b), noting that the term 'legal tender' is not defined in the Income-tax Act. However, it is generally understood to mean the currency of a country that must be accepted for the payment of debts. The Tribunal found that the payments made by the assessee in cash were indeed in Indian currency, which qualifies as legal tender.The Tribunal referred to various judicial precedents, including the Hon'ble Supreme Court's judgment in Attar Singh Gurmukh Singh v. ITO, which emphasized that genuine and bona fide transactions should not be disallowed under Section 40A(3) if the assessee can demonstrate the impracticality or difficulty of making payments by cheque or bank draft.The Tribunal also considered the judgment of the Hon'ble Rajasthan High Court in CIT v. Kalyan Prasad Gupta, which held that payments made in cash to the Government could not be disallowed under Section 40A(3) if they are covered by Rule 6DD(b).Given that the South Western Railway, a part of the Government of India, insisted on cash payments for the auctioned scrap materials, the Tribunal concluded that the payments were covered under the exceptions provided in Rule 6DD(b). Therefore, the provisions of Section 40A(3) were not applicable in this case.Final DecisionThe Tribunal held that the CIT(A) was not justified in confirming the addition made by the AO. The appeal of the assessee was allowed, and the disallowance of Rs. 73,91,380/- was deleted.