2018 (10) TMI 1732 - AT - Income Tax

ITAT Kolkata: Cash payments exempt under sec 40A(3)

Income-tax Officer, Wd-1 (2), Jalpaiguri Versus M/s. Ethelbari C.S. Shop

Income-tax Officer, Wd-1 (2), Jalpaiguri Versus M/s. Ethelbari C.S. Shop - TMI Issues: Appeal against deletion of addition under section 40A(3) of the Income-tax Act, 1961.Analysis:1. Issue of Deletion of Addition under Section 40A(3):The primary issue in this case revolves around the deletion of an addition of Rs. 1,13,84,651 made under section 40A(3) of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed the amount as the assessee had made cash payments above Rs. 20,000 to certain parties for the purchase of country spirit and foreign liquor, violating the provisions of section 40A(3). The AO contended that the payments were not made through A/c payee cheque/Demand Draft/RTGS, hence violating the said provision. However, the assessee argued that the payments were made to licensees of the Excise department of the Government of West Bengal, and the genuineness of the payments was not in question as they were made through bank deposits directly into the seller's account. The AO invoked section 40A(3) to disallow the amount, which was subsequently deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) relied on a Tribunal decision in a similar case to grant relief to the assessee. The Tribunal, in the referenced case, held that the payments made in cash were exempt under Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules due to commercial expediency. The Tribunal found no reason to interfere with the CIT(A)'s order as the department failed to challenge the reliance on the earlier Tribunal decision or provide any new facts or legal arguments to distinguish the cases. Consequently, the appeal of the revenue was dismissed, upholding the deletion of the addition under section 40A(3).2. Legal Interpretation and Precedent:The case involved a detailed analysis of the provisions of section 40A(3) of the Income-tax Act, 1961, which restricts cash payments exceeding a specified limit. The Tribunal's reliance on a previous decision to grant relief to the assessee highlighted the importance of legal precedent in tax matters. The judgment emphasized the need for parties to provide valid explanations and adhere to the exceptions laid down in the Income Tax Rules to avoid disallowances under section 40A(3). The decision underscored the significance of commercial expediency and compliance with the prescribed rules to justify cash transactions and prevent adverse tax implications. The case serves as a reminder of the legal principles governing cash payments in business transactions and the relevance of prior judicial interpretations in resolving similar disputes.3. Conclusion:The judgment by the Appellate Tribunal ITAT Kolkata upheld the deletion of the addition under section 40A(3) of the Income-tax Act, 1961, based on the assessee's compliance with the exceptions provided in the Income Tax Rules and the commercial expediency of the transactions. The decision reaffirmed the importance of legal precedent, valid explanations, and adherence to statutory provisions to avoid adverse tax consequences. By dismissing the revenue's appeal, the Tribunal emphasized the need for parties to establish the legitimacy and necessity of cash transactions within the framework of the law to prevent disallowances and ensure tax compliance.