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

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 on merit due to audit objection. The ld.CIT(A) found the payment of Rs. 4,35,000 was for business purposes and fell under the Rule 6DD(b) exception, justifying the cash payment. The ld.CIT(A) correctly applied the Income Tax Rules and CBDT Circular, leading to the deletion of the disallowance. The Tribunal upheld this decision, allowing the appeal and pronouncing the order on 4th December 2019 in Ahmedabad.

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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.

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