2016 (6) TMI 216 - AT - Income Tax

ITAT reverses disallowance under Sec 40A(3) citing business expediency, genuine transactions

Prabir Kumar Mullick Versus Income Tax Officer

The ITAT allowed the assessee's appeal, reversing the disallowance of Rs. 2,15,47,820/- under Section 40A(3) of the Income Tax Act. The tribunal ... Disallowance / addition us 40A(3) - cash expenditure - business expediency - Held that:- From the submission of the assessee we find that the assessee was the only authorized dealer in Asansol for the supply of country liquor and authorized Excise Vendors. The assessee can take the delivery of the goods only after depositing the payment with the company. The assessee was to keep sufficient stock of country liquor as prescribed by the Excise Department and in case stock falls short of the prescribed limit otherwise the Department used to impose penalty. Therefore the assessee avoided the process of depositing the cash in his bank account and thereafter getting the demand draft in the name of the company in order to keep the stock within the prescribed limit at all the times. It is also important to note that the company was also not accepting the account payee cheque of the assessee as it will take couple of day time in clearance. So in our considered view the exception provided in the provisions of section 40A(3) with regard to the business expediency then applicable for the assessment year 2008-09 is met by the assessee. The primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to be fallen on account of non-observation of Section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has directly deposited the cash in the account of the companies and has produced the sales bills of the company. The AO has also verified the transactions from the companies by issuing notice under Section 133(6) of the Act. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash. Thus we are inclined to reverse the order of lower authorities. - Decided in favour of assessee Issues Involved:1. Disallowance/Additions under Section 40A(3) of the Income Tax Act, 1961.2. Consideration of provisions under Sections 144/145 of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance/Additions under Section 40A(3) of the Income Tax Act, 1961:The primary issue in this appeal was the disallowance of Rs. 2,15,47,820/- under Section 40A(3) of the Income Tax Act, 1961, which deals with expenses incurred in cash exceeding Rs. 20,000/-. The assessee had made purchases from Asansol Bottling & Packaging Co. Pvt. Ltd. and IFB Agro Industries Ltd., paying in cash directly into the bank accounts of these companies. The Assessing Officer (AO) disallowed these expenses, stating that they violated Section 40A(3) and did not fall under the exceptions provided in Rule 6DD of the Income Tax Rules, 1962.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, leading to the assessee's appeal before the ITAT. The assessee argued that the payments were made directly to the bank accounts of the suppliers as mandated by the Calcutta Gazette Notification No. 188-EX/O/R-4/2000 dated 23.02.2000, and thus should be exempt under Rule 6DD(b).The ITAT examined the conflicting judgments from various High Courts and the ITAT itself. It noted that the object of Section 40A(3) was to curb tax evasion by ensuring payments were traceable. However, in this case, the payees were identified, and the transactions were confirmed by the suppliers in response to notices issued under Section 133(6) of the Act.The ITAT referred to several judicial precedents, including:- CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), which held that if two reasonable constructions of a taxing provision are possible, the one favoring the assessee must be adopted.- Attar Singh Gurmukh Singh vs. ITO (1991) 191 ITR 667 (SC), which emphasized that genuine transactions should not be disallowed under Section 40A(3) if business expediency and other relevant factors are established.- CIT vs. CPL Tannery (2009) 318 ITR 179 (Cal), where the Calcutta High Court ruled in favor of the assessee, considering the business exigency and genuineness of transactions.The ITAT concluded that the assessee's case met the business expediency exception under Section 40A(3) for the assessment year 2008-09. The payments were made to maintain the prescribed stock levels mandated by the Excise Department, and the suppliers did not accept account payee cheques due to clearance delays. Therefore, the disallowance under Section 40A(3) was not justified, and the appeal was allowed in favor of the assessee.2. Consideration of provisions under Sections 144/145 of the Income Tax Act:The assessee also contended that the CIT(A) erred in not properly considering the provisions of Sections 144/145 of the Income Tax Act. However, the ITAT's detailed analysis and decision primarily focused on the disallowance under Section 40A(3). The ITAT found that the AO had verified the transactions, and the suppliers confirmed the sales, thus establishing the genuineness of the transactions.Conclusion:The ITAT allowed the assessee's appeal, reversing the disallowance of Rs. 2,15,47,820/- under Section 40A(3). The tribunal emphasized the importance of business expediency and the genuineness of the transactions, aligning with judicial precedents that favor the assessee when two reasonable interpretations of a taxing provision exist. The ITAT also highlighted that the object of Section 40A(3) was to curb tax evasion, which was not applicable in this case as the transactions were verified and genuine.