Delhi ITAT Upholds Disallowance of Payments: Income Tax Act Section 40A(3)

The ITAT Delhi upheld the CIT(A)'s decision to disallow payments under section 40A(3) of the Income Tax Act for both freight and truck transport charges. The appellant's attempt to circumvent the law through deliberate splitting of payments led to the addition of &8377; 1,43,449 to their income. Despite partial relief granted by the CIT(A), the ITAT rejected the appellant's appeal for further relief, emphasizing the lack of exceptional circumstances for cash payments and failure to comply with relevant rules.

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Issues involved:
1. Disallowance of payments of freight under section 40A(3) of the Income Tax Act.
2. Applicability of section 40A(3) to truck transport charges payments.

Analysis:

Issue 1: Disallowance of payments of freight under section 40A(3)
The appellant, an individual trading matchboxes and biris, filed a return declaring income of &8377; 2,35,200 for the assessment year 2009-10. During assessment, it was found that the appellant made payments of &8377; 4,30,579 under "freight and cartage" to transporters, with &8377; 4,12,579 exceeding &8377; 20,000 to a single person in contravention of section 40A(3) of the Act. The Assessing Officer disallowed this amount, adding it to the appellant's income. The appellant contended that each payment to the transporter was below &8377; 20,000, thus section 40A(3) did not apply. The Commissioner of Income Tax (Appeals) partially allowed relief to the appellant after considering arguments, case laws, and relevant provisions. However, the AO's addition of &8377; 1,43,449 was confirmed due to conscious splitting of payments to circumvent the law. The appellant's appeal for further relief was dismissed by the ITAT Delhi, upholding the CIT(A)'s order.

Issue 2: Applicability of section 40A(3) to truck transport charges payments
The Range JCIT reported that payments to a specific entity violated section 40A(3), which the appellant contested citing case laws. However, the appellant failed to prove exceptional circumstances for cash payments or compliance with Rule 6DD of the IT Rules, 1962. The ITAT confirmed the AO's addition of &8377; 1,43,449 under section 40A(3) due to deliberate splitting of payments. The appellant's claim for deletion of the addition was rejected by the ITAT, as the relief granted by the CIT(A) was deemed sufficient, and no further substantiation was provided by the appellant.

In conclusion, the ITAT Delhi dismissed the appellant's appeal, upholding the CIT(A)'s order and confirming the disallowance of payments under section 40A(3) for both freight and truck transport charges.

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