2015 (8) TMI 569 - HC - Income Tax

Court rules in favor of appellant on deduction disallowance and income addition issues

Gurdas Garg Versus The Commissioner of Income Tax (Appeals), Bathinda And Another

The Court ruled in favor of the appellant/assessee on both issues. The disallowance of deductions under Section 40A(3) for cash payments exceeding Rs. ... Entitlement to deductions in respect of cash payments in excess of ₹ 20,000/- made to the vendors for land in view of Section 40A - Tribunal denied deductions - Held that:- Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act - Decided in favour of the assessee. Addition on account of the appellant not charging interest from his debtors - Held that:- It has not been denied that interest free funds were available. Nor has it been denied that interest free advances were made by the appellant. In fact, the latter has been accepted by the Assessing Officer. The contention that the appellant has not established that it was the interest free funds that were actually advanced as interest free advances is without substance. Money has no identity. So long it is established that the interest free advances are made by an assessee who has adequate free reserves, it is sufficient to establish that the amounts advanced interest free cannot be added to the assessee's income. It was not contended that the interest free advances exceeded the interest free funds available with the appellant. Nor was it established that a particular advance received was in turn advanced by the assessee interest free.- Decided in favour of the assessee. Issues Involved:1. Deduction disallowance under Section 40A(3) of the Income Tax Act, 1961 for cash payments exceeding Rs. 20,000.2. Addition of Rs. 7,76,043/- due to non-charging of interest from debtors.Issue-wise Detailed Analysis:Re: Question No. 1 - Deduction Disallowance under Section 40A(3):1. Context and Background:- The appellant, engaged in trading properties, made cash payments exceeding Rs. 20,000 for land purchases during the assessment year 2009-10.- The Assessing Officer disallowed these payments under Section 40A(3) of the Income Tax Act, 1961, a decision upheld by the Tribunal but reversed by the CIT (Appeals).2. Section 40A(3) and Proviso:- Section 40A(3) disallows deductions for cash payments exceeding Rs. 20,000, except under prescribed circumstances considering business expediency and banking facilities.- The proviso to Section 40A(3) allows exceptions based on the nature and extent of banking facilities and business considerations.3. CIT (Appeals) Findings:- The CIT (Appeals) established the identity and genuineness of the transactions and payees, and certified the amounts by the Stamp Registration Authority, thus allowing the deductions.4. Tribunal's Stand:- The Tribunal did not dispute the genuineness of the transactions but restricted the applicability of the proviso to Rule 6DD of the Income Tax Rules, 1962, disallowing the deductions based on a strict interpretation of Section 40A(3).5. Court's Analysis:- The Court referenced judgments supporting a liberal interpretation of Rule 6DD, emphasizing business expediency and genuine transactions.- Rajasthan High Court in Smt. Harshila Chordia vs. Income Tax Officer and Supreme Court in Attar Singh Gurmukh Singh vs. ITO highlighted that genuine transactions should not be penalized and the rule should be liberally construed.6. Conclusion:- The Tribunal's disallowance was set aside as the reasons for cash payments were valid and made out a case of business expediency.- Payments were not disallowed under Section 40A(3).Re: Question No. 2 - Addition Due to Non-Charging of Interest:1. Context and Background:- The appellant advanced Rs. 97,79,200 between 01.04.2008 and 04.12.2008 without charging interest, claiming substantial interest-free funds were available.2. Assessing Officer's and Tribunal's Stand:- The Assessing Officer accepted the availability of interest-free funds but added Rs. 7,76,043 to the appellant's income, a decision upheld by the Tribunal due to a lack of specific evidence linking interest-free funds to the advances.3. Court's Analysis:- The Court found the Tribunal's observations difficult to understand as the availability of interest-free funds and advances were not denied.- It emphasized that money has no identity, and as long as interest-free advances do not exceed the available interest-free funds, the addition to income is unjustified.4. Conclusion:- The Tribunal's addition was set aside, recognizing that the appellant had adequate interest-free reserves to make the advances.Final Judgment:- Both questions were answered in favor of the appellant/assessee.- The appeal was allowed with no order as to costs.- The Court noted a discrepancy in Rule 6DD due to amendments but did not examine its effect, leaving it open for further proceedings if necessary.