2019 (12) TMI 1330 - AT - Income Tax

High Court overturns Tribunal ruling on cash payment disallowance under Income Tax Act

DCIT, Cir. 2 (1) (2) Ahmedabad Versus M/s. Kunj Infrastructure P. Ltd.

The High Court set aside the Tribunal's order deleting the disallowance under section 40A(3) of the Income Tax Act and remitted the case for adjudication ... Addition u/s 40A - Expenditure in cash - HELD THAT:- Section 40A(3) contemplates that where assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on bank account excess ₹ 20,000/- then no deduction shall be allowed in respect of such payment. Rule 6DD of Income Tax Rules, 1962 provide an exemption from applicability of this clause, and the ld.CIT(A) has followed rule 6DD which has been explained by the Board in its Circular No.220. This explanation has been submitted by the assessee in its written submissions reproduced by the ld.CIT(A) on page no.7. CIT(A) is of the opinion that the case of the assessee falls within the exception because it has made this payment on account of business exigency and it was not practical to make the payment through account payee cheque. - Decided in favour of assessee. Issues:Appeal against deletion of disallowance under section 40A(3) of the Income Tax Act.Analysis:The Revenue filed an appeal before the Tribunal challenging the order of the ld.CIT(A) deleting the disallowance of Rs. 4,35,000 made by the AO under section 40A(3) of the Income Tax Act for the assessment year 2010-11. The AO disallowed the amount as it was paid in cash to M/s.C.C. Gandhi & Co., which was considered a violation of section 40A(3). The ld.CIT(A) deleted the disallowance, leading to the Revenue's appeal. However, the Tribunal dismissed the appeal citing low tax effect. The Revenue then approached the High Court, which set aside the Tribunal's order and remitted the case back for adjudication on merit due to the audit objection that led to the reassessment.The ld.CIT(A) found that the payment of Rs. 4,35,000 was made for stamp duty, registration fee, typing, Xerox, and other expenses related to statutory requirements for a loan from SBI, which was for business purposes. The appellant argued that due to financial crises, cash payment was necessary, and the payment was not disallowable under section 40A(3) as it fell under Rule 6DD(b) exception. The ld.CIT(A) agreed, stating that the payment was made due to business exigency and not practical to make through a bank draft. The appellant's submission was supported by CBDT Circular No. 220. Therefore, the ld.CIT(A) deleted the disallowance, and the appeal was allowed.The ld.CIT(A) correctly applied Rule 6DD of the Income Tax Rules, 1962, and the exception provided therein, as explained in CBDT Circular No.220. The payment made by the appellant was deemed to be for business exigency, justifying the cash payment and falling within the exception clause. The Tribunal upheld the ld.CIT(A)'s decision to delete the disallowance, emphasizing that the payment was necessary for business purposes and not subject to disallowance under section 40A(3). Consequently, the appeal of the assessee was allowed, and the order was pronounced on 4th December 2019 at Ahmedabad.