2014 (11) TMI 514 - HC - Income Tax

Court affirms Tribunal's decision on cash payment disallowance under Income Tax Act

The Court upheld the Tribunal's decision, dismissing the Revenue's appeal regarding the disallowance of a cash payment under Section 40A(3) of the Income ... Invocation of section 40A(3) – Amount remitted to the account of recipient in bank - cash payment – Held that:- The payment was in cash but it was deposited into the bank account of the recipient - It is not a case where the cash was paid by the assessee and was received by the recipient - An instance of cash being credited to the account of the recipient stands on a higher footing, compared to the different heads, under Rule 6DD of the Rules when payment of cash, even to the banks and other statutory agencies, is recognized, there is no reason why the deposit of cash into the bank account of a recipient cannot be regarded as qualifying for allowances. The objective under the Act is to ensure that the income of an assessee is levied tax and every step is taken to ensure that no part of the income escapes the taxation - The prohibition contained under Section 40A(3) of the Act is more a matter, which genuinely falls in the realm of the Banking Regulation Act - A provision of that nature cannot be understood just in grammatical manner - In Commissioner of Income Tax v. Smt. Shelly Passi [2013 (3) TMI 219 - PUNJAB AND HARYANA HIGH COURT] it has been held that the cash deposited to the bank account of a recipient does not fall within the purview of Section 40A(3) – the order of the Tribunal is upheld – Decided against revenue. Issues:1. Disallowance of cash payment under Section 40A(3) of the Income Tax Act, 1961.Detailed Analysis:The case involves an appeal filed by the Revenue against the order passed by the Income Tax Appellate Tribunal disallowing a cash payment of Rs. 30,95,540 under Section 40A(3) of the Income Tax Act for the Assessment Year 1998-99. The Assessing Officer disallowed 20% of the cash payment made by the respondent, leading to the appeal before the Tribunal. The Tribunal allowed the appeal, stating that since the amount was remitted to the recipient's bank account, the prohibition under Section 40A(3) did not apply, prompting the Revenue's appeal.The key issue revolves around the interpretation of Section 40A(3) of the Act, which prohibits the allowance of expenditure exceeding Rs. 20,000 if paid in cash. However, the provision is not absolute, as the proviso allows for exceptions if payments are covered by relevant rules. Rule 6DD of the Income Tax Rules provides numerous exceptions, including payments made to specified entities like Reserve Bank or State Bank of India. The Assessing Officer had discretion under Clause (j) of Rule 6DD to allow cash payments based on verification, although this clause was deleted in 1995.Despite the respondent not qualifying for the benefit under Rule 6DD(j), the Tribunal's decision was justified based on the circumstances. The Tribunal referenced various High Court judgments, emphasizing that if an order is passed and the books of account are not reliable, deductions under Section 40A(3) can still be considered. The Tribunal highlighted that in this case, the cash payment was deposited into the recipient's bank account, distinguishing it from direct cash transactions, and aligning with the exceptions under Rule 6DD.The Court emphasized that the objective of the Act is to ensure proper taxation of an assessee's income, indicating that the prohibition under Section 40A(3) is more related to banking regulations than a strict grammatical interpretation. Citing judgments from the Panjab and Haryana High Court and the Gujarat High Court, the Court supported the view that cash deposits into a recipient's bank account do not fall under the purview of Section 40A(3). Consequently, the Court upheld the Tribunal's decision, dismissing the appeal without costs and disposing of related petitions.