2014 (12) TMI 251 - AT - Income Tax

ITAT upholds CIT(A)'s decision on disallowances under Section 40A(3) based on Rule 6DD exceptions. (A) (3)

The ITAT upheld the CIT(A)'s decision to delete disallowances made by the AO under Section 40A(3). The cash payments made by the real estate company were ... Disallowance on payments made in places where no banking facility is available u/s 40A(3) - Claim of exemption in respect of cash payments – Held that:- Following the decision in The Deputy CIT Circle-1(1) Hyderabad Versus M/s. Abhinandana Housing Pvt. Ltd. [2014 (2) TMI 1021 - ITAT HYDERABAD] - cash payments made are covered by exceptions provided under different clauses of Rule 6DD, hence, no disallowance can be made u/s 40A(3) – in Sahitya Housing Pvt. Ltd. vs. DCIT [2014 (2) TMI 811 - ITAT HYDERABAD] it has been held that Sec 40A(3) itself provides that the exceptions will have to be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors - considering the nature of activity of the Assessee and the necessity for them to pay cash to the land owners, it was held that the condition under Rule 6DD for exemption viz., transactions should have taken place on Bank Holidays should be read down in the case of the Assessee - no banking facility is available where the properties were purchased by Assessee, therefore, there was no choice for the assessee except to make the payments in cash due to exceptional or unavoidable circumstances as provided under Rule 6DD - since there is no evidence brought on record by the AO to suggest the availability of banking facility in the place where the properties were purchased by the assessee, therefore, in view of Rule 6DD(g) the disallowance cannot be made u/s. 40A(3) - the CIT(A) is justified in deleting the addition – Decided against revenue. Cash payments made on holidays - payments were made in installments - requirement to make payments on holiday to claim exception under Rule 6DD(j) or not – Held that:- The CIT(A) rightly directed the AO to verify whether cash payments disallowed by the AO were made on public holiday and if it is so to allow the expenditure as per rule 6DD(j) of the IT Rules – Decided against revenue. Addition on payments made to agents sustained – Held that:- Revenue contended that the agents worked for other persons as agents and they cannot be agents to the assessee - There is no prohibition or restriction on a middleman to work as agent of different parties, if he was acting on behalf of the assessee as agent - The assessee's case falls under the purview of clause 6DD(k) of IT Rules, 1962 - Being so, exemption is to be given and addition cannot be made u/s. 40A(3) of the Act. The reasons advanced by the Department are not appropriate. Accordingly, we are inclined to allow the claim of the assessee at ₹ 3,15,65,263 – revenue has failed to bring any material on record to show that facts in the assessment year are in any way different from facts considered by the coordinate bench, respectfully following the aforesaid decision of the coordinate bench, the order of the CIT(A) is upheld – Decided against revenue. Issues Involved:1. Disallowance under Section 40A(3) for cash payments in places without banking facilities.2. Disallowance under Section 40A(3) for cash payments made on holidays.3. Disallowance under Section 40A(3) for cash payments made through agents.4. Disallowance under Section 40A(3) for cash payments related to purchases from earlier years.Detailed Analysis:1. Disallowance under Section 40A(3) for Cash Payments in Places Without Banking Facilities:The assessee, a real estate company, made cash payments totaling Rs. 18,62,375 in places where no banking facility was available, invoking Clause (g) of Rule 6DD. The Assessing Officer (AO) disallowed these payments, asserting that the villages in question were in developed districts with banking facilities. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) upheld the assessee's claim, referencing confirmations from village surpanches that certified the absence of banking facilities. The ITAT reiterated that Rule 6DD(g) exempts such payments if no banking facility is available, and the AO's assumptions were not substantiated by evidence.2. Disallowance under Section 40A(3) for Cash Payments Made on Holidays:The assessee claimed an exemption for Rs. 22,20,000 in cash payments made on bank holidays under Clause (i) of Rule 6DD. The AO disallowed this, arguing that there was no necessity to make payments on holidays as transactions were not settled on those specific days. The CIT(A) and ITAT, however, found that the payments were indeed made on holidays, and thus fell within the exception provided by Rule 6DD(j). The ITAT emphasized that business expediency and practical difficulties justify such payments.3. Disallowance under Section 40A(3) for Cash Payments Made Through Agents:The AO disallowed Rs. 36,53,097 paid through agents, contending that these agents were merely brokers and not regular agents, thus not qualifying for the exemption under Clause (k) of Rule 6DD. However, the CIT(A) and ITAT disagreed, noting that the agents facilitated transactions and received commissions, which were subject to TDS. The ITAT clarified that the term 'agent' includes brokers who act on behalf of the assessee, and thus, the payments were exempt under Rule 6DD(k).4. Disallowance under Section 40A(3) for Cash Payments Related to Purchases from Earlier Years:The AO also disallowed Rs. 49,04,500 for cash payments made for purchases from earlier years, applying Section 40A(3). The CIT(A) and ITAT found that these payments were similarly covered under the exceptions provided by Rule 6DD. The ITAT referenced its earlier decision in the assessee's case for AY 2009-10, affirming that such payments, if falling within the exceptions, should not be disallowed.Conclusion:The ITAT upheld the CIT(A)'s decision to delete the disallowances made by the AO under Section 40A(3), confirming that the cash payments made by the assessee were covered by the exceptions provided under various clauses of Rule 6DD. The appeals by the department were dismissed, affirming that the payments were made under circumstances that justified the exceptions, and the AO's assumptions were not supported by substantial evidence.