2016 (9) TMI 810 - AT - Income Tax

Assessee's Cash Payments Deemed Genuine and Mandated by Regulations; Disallowance under Section 40A(3) Deleted

The Tribunal found that the cash payments made by the assessee to a wholesale licensee for the purchase of country spirit were genuine and mandated by ... Disallowance made u/s 40A(3) - nature of payment - Held that:- The payment made by the assessee retail vendor to the Principal, Government of West Bengal through its wholesale agent. The relationship between the assessee (authorized retailer) and Government of West Bengal (the supplier) acting under West Bengal Excise Rules through its Authorised Wholesaler Licensee (Agent), both de facto and dejure , is one of ‘Principal’ and ‘Agent’. We hold that the assessee retail vendor had made payment to the said agent (wholesale licensee) would fall under the exception provided in Rule 6DD(k) of the Rules. The ld AR had advanced another argument that the payment is made by the assessee to State Bank of India and accordingly the same would fall under the exception provided in Rule 6DD(a) of the Rules. We find that the assessee had made payments only to the customer of State Bank of India and not to State Bank of India. Hence the assessee’s case does not fall under the exception provided in Rule 6DD(a) of the Rules. We hold from the aforesaid findings that the assessee’s case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Rules. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the disallowance made u/s 40A(3) of the Act. - Decided in favour of assessee. Issues Involved:1. Justification of disallowance under Section 40A(3) of the Income Tax Act, 1961.Detailed Analysis:1. Justification of Disallowance under Section 40A(3) of the Income Tax Act, 1961Facts and Arguments:- The assessee was engaged in the business of trading country spirit and made cash payments exceeding Rs. 20,000 to M/s. Asansol Bottling & Packaging Co. Pvt Ltd (ABPL) for the purchase of country spirit.- The payments were made by depositing cash directly into the bank account of ABPL.- The assessee argued that these payments should fall under the exceptions provided in Rule 6DD(k) and Rule 6DD(a)(ii) of the Income Tax Rules, as the wholesale licensee is an agent of the State Government, and the payments were mandated by the Excise Department's notification.Tribunal's Findings:- The Tribunal reviewed the Notification No. 1208-Ex dated 29.08.2005 issued by the Excise Department, Government of West Bengal, which mandates that retail vendors deposit monies directly into the bank account of wholesale licensees.- The Tribunal highlighted that the transactions were genuine, the identity of the receiver was established, and the payments were made into the bank account of the seller.- It was noted that the primary object of Section 40A(3) was to curb tax evasion and inculcate banking habits, and genuine transactions should not fall under its purview if they comply with the rules.Relevant Judicial Precedents:- Sri Renukeswara Rice Mills vs ITO: Cash payments into the bank account of the payee can be exempt under Rule 6DD if the transaction is genuine and traceable.- Attar Singh Gurmukh Singh vs ITO: Section 40A(3) is designed to prevent tax evasion through cash transactions, but genuine transactions should be exempt.- CIT vs CPL Tannery: Disallowance under Section 40A(3) is not justified if the transactions are genuine and necessary for business operations.- Anupam Tele Services vs ITO: Cash payments mandated by business exigency and accepted by the principal company should not be disallowed under Section 40A(3).- Smt. Harshila Chordia vs ITO: Rule 6DD exceptions should be interpreted liberally.Conclusion:- The Tribunal concluded that the payments made by the assessee were genuine and mandated by the State Government's regulations.- The payments fall under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules, as they were made to the State Government through its agent (wholesale licensee).- The Tribunal deleted the disallowance made under Section 40A(3) of the Act and allowed the appeal of the assessee.Order:- The appeal of the assessee was allowed, and the disallowance under Section 40A(3) was deleted.Pronouncement:- The order was pronounced in the open court on 10.08.2016.