2014 (2) TMI 30 - HC - Income Tax

Disallowance under section for cash payments for recharge vouchers; court upholds genuineness and lifts rigors for payments to telecom vendor.

Disallowance for cash payments was examined where an assessees purchased recharge vouchers and paid a telecommunications vendor in cash; the court found ... Disallowance u/s 40A(3) - payment in case for purchase of recharge vouchers from Tata Teleservices Limited - Held that:- The payments between the assessee and the Tata Teleservices Limited were genuine - The Tata Teleservices Limited had insisted that such payments be made in cash, which Tata Teleservices Limited in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of section 40A(3) of the Act must be lifted. - if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. Relying upon the decision in Smt. Harshila Chordia vs. Income Tax Officer [2006 (11) TMI 117 - RAJASTHAN HIGH COURT] - The exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally - The guideline laid down in the aforesaid judgement should be applied only to cash payments made by the assessee to the Tata Teleservices Limited and not to the other two agencies viz., Rajvi Enterprise and R.D Infocom - Decided in favour of assessee. Issues: Whether Section 40A(3) of the Income-tax Act, 1961 applies to cash payments exceeding Rs.20,000 made to the principal supplier where payments were made in cash pursuant to the supplier's directive and the payments were genuine and reflected in the parties' accounts.Analysis: Section 40A(3) disallows deduction for payments above the prescribed limit made otherwise than by account payee cheque or bank draft, subject to prescribed exceptions. Rule 6DD lists specific circumstances where disallowance shall not be made, but the proviso to Section 40A(3) and settled precedents recognise that considerations of business expediency, genuineness of transaction and identity of the payee can exempt a bona fide payment from disallowance. On the facts decided, cash payments were made only because the supplier instructed distributors to pay in cash to avoid delay in receipt of goods, the payments were genuine and recorded in the supplier's account, and the supplier undertook to deposit the amounts in bank. The Tribunal's sole reliance on absence of a literal fit within Rule 6DD(j) overlooked the proviso and authoritative decisions recognising business exigencies and the primacy of genuineness and payee identity.Conclusion: Section 40A(3) does not apply to the cash payments in question; the disallowance under Section 40A(3) is not warranted in respect of those payments.