2016 (9) TMI 813 - AT - Income Tax

Tribunal allows appeal on genuine payments, dismisses unexplained cash credit addition.

The Tribunal allowed the appeal regarding the disallowance under section 40A(3) of the Income Tax Act, holding that the payments were genuine and fell ... 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 we have no hesitation in deleting the disallowance made u/s 40A(3) - Decided in favour of assessee. Issues Involved:1. Justification of disallowance under section 40A(3) of the Income Tax Act, 1961.2. Addition of undisclosed bank balance as unexplained cash credit.Issue-wise Detailed Analysis:1. Justification of Disallowance under Section 40A(3) of the Income Tax Act, 1961:The first issue to be decided in these appeals is whether the CIT(A) was justified in upholding the disallowance made under section 40A(3) of the Income Tax Act, 1961. The assessee, a partnership firm engaged in retail trading of liquor, made cash payments exceeding Rs. 20,000 to M/s Asansol Bottling & Packaging Co. Pvt Ltd (ABPL) for the purchase of country spirit. These payments were made by depositing cash into the bank account of ABPL. The AO invoked section 40A(3), which restricts cash payments exceeding Rs. 20,000, and made the disallowance, which was upheld by the CIT(A).The assessee argued that the payments were made as per the Excise Department's notification, which mandated direct deposits into the bank account of the wholesale licensee (ABPL). The assessee contended that these payments should fall under the exceptions provided in Rule 6DD(k) of the IT Rules, as the wholesale licensee acts as an agent of the Government. The AR also cited the Bangalore Tribunal decision in Sri Renukeswara Rice Mills vs ITO, which held that cash payments deposited into the payee's bank account qualify for exemption under Rule 6DD.The Tribunal considered the genuineness of the transactions, the identity of the receiver, and the fact that the payments were made directly into the bank account of the seller. The Tribunal emphasized that the primary object of section 40A(3) was to curb tax evasion and ensure the genuineness of transactions. The Tribunal also referred to several judicial precedents supporting the view that genuine transactions should not attract disallowance under section 40A(3).The Tribunal concluded that since the payments were genuine, made to a government-mandated account, and the identity of the receiver was established, the disallowance under section 40A(3) was not justified. The Tribunal held that the assessee's case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the IT Rules, thereby deleting the disallowance.2. Addition of Undisclosed Bank Balance as Unexplained Cash Credit:The second issue concerned the addition of Rs. 29,620 as unexplained cash credit due to an undisclosed bank balance in the assessee's current account with Corporation Bank, Asansol. The AO observed that this closing balance was not reflected in the assessee's balance sheet and brought it to tax as unexplained cash credit, which was upheld by the CIT(A).The Tribunal noted that the assessee failed to provide any satisfactory explanation regarding the undisclosed bank account either before the lower authorities or the Tribunal. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and upheld the addition of Rs. 29,620 as unexplained cash credit.Conclusion:The Tribunal allowed the appeal concerning the disallowance under section 40A(3) by holding that the payments were genuine and fell under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the IT Rules. However, the Tribunal dismissed the appeal regarding the addition of Rs. 29,620 as unexplained cash credit due to the lack of satisfactory explanation from the assessee. Thus, the appeal was partly allowed for the assessment year 2008-09 and fully allowed for the assessment year 2009-10.