Cheque payment and TDS do not prove business expenditure; cash payments in remote villages escaped section 40A(3) disallowance.

Proof of payment by account payee cheque and deduction of tax at source does not by itself establish that land development charges or commission were incurred wholly and exclusively for business purposes; supporting evidence of the nature and necessity of the expenditure remained essential, so both claims were remanded for fresh verification. Cash payments to landowners in remote village projects were treated as falling within the statutory exception to section 40A(3) because banking facilities were unavailable at those locations, and that relief was upheld.

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Issues: (i) whether the claim of land development charges of Rs. 32,00,000 was allowable on the basis of cheque payment and deduction of tax at source; (ii) whether the claim of commission expenditure was allowable on the basis of cheque payment and deduction of tax at source; (iii) whether the disallowance under section 40A(3) was justified in respect of cash payments made to landowners for projects situated in remote villages.

Issue (i): whether the claim of land development charges of Rs. 32,00,000 was allowable on the basis of cheque payment and deduction of tax at source.

Analysis: The underlying question was whether the assessee had discharged the burden of proving that the expenditure was incurred wholly and exclusively for business purposes. Mere proof of payment by account payee cheque and deduction of tax at source was held insufficient when the supporting evidence for the nature and necessity of the expenditure was not satisfactorily established. The matter was therefore sent back for fresh examination.

Conclusion: The deletion of disallowance was set aside and the issue was remanded to the Assessing Officer for fresh adjudication; the Revenue succeeded on this ground for statistical purposes.

Issue (ii): whether the claim of commission expenditure was allowable on the basis of cheque payment and deduction of tax at source.

Analysis: The same principle was applied to the commission claim. The decisive requirement was proof that the commission expenditure was incurred wholly and exclusively for the business, and the mode of payment by cheque with tax deduction did not by itself establish allowability. Fresh verification was directed.

Conclusion: The deletion of disallowance was set aside and the issue was remanded to the Assessing Officer for fresh adjudication; the Revenue succeeded on this ground for statistical purposes.

Issue (iii): whether the disallowance under section 40A(3) was justified in respect of cash payments made to landowners for projects situated in remote villages.

Analysis: The cash payments were accepted as falling within the exceptional circumstances relied upon by the first appellate authority, namely the absence of banking in the project locations. No material was shown to displace that finding.

Conclusion: The disallowance under section 40A(3) was not sustained and the relief granted to the assessee was upheld.

Final Conclusion: The appeal succeeded only to the limited extent of remand on the expenditure claims, while the relief granted on the cash-payment disallowance was affirmed.

Ratio Decidendi: Proof of cheque payment and tax deduction does not by itself establish that an expenditure was incurred wholly and exclusively for business purposes, whereas cash payments may escape disallowance where the statutory exception is attracted by exceptional circumstances.

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