2017 (4) TMI 532 - AT - Income Tax

Tribunal upholds CIT(A) decision on payment disallowance under Section 40A(3)

The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 40A(3), concluding that the payments made by the assessee were genuine ... Disallowance u/s 40A(3) - Held that:- The fact that assessee was forced to carry on its transportation activity through the assistance of agents is proved beyond doubt. Hence we hold that it does not make any difference whether the said agent through whom the business per se was carried on , was appointed by the assessee or by the truck owners association. The assessee had stated that out of the total consideration of hire charges paid by the assessee, a portion is also attributed towards the agency commission which is being recovered by the truck owners. Hence it could be concluded that the assessee indeed had paid commission to the agents and the same has been routed through payment made to truck owners towards truck hire charges. We also find that the Hon‟ble Rajasthan High court in the case of Smt Harshila Chordia vs ITO (2006 (11) TMI 117 - RAJASTHAN HIGH COURT) had held that the exceptions contained in Rule 6DD of the Rules are not exhaustive and that the said rule must be interpreted liberally. Thus we hold that the subject mentioned cash payments would fall under the ambit of exception provided in Rule 6DD(k) of the Rules in the facts and circumstances of the case and accordingly the provisions of section 40A(3) of the Act could not be made applicable in the instant case. - Decided against revenue Issues Involved:1. Whether the CIT(A) was justified in deleting the disallowance under Section 40A(3) of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Deletion of Disallowance Under Section 40A(3)The only issue to be decided in this appeal is whether the CIT(A) was justified in deleting the disallowance under Section 40A(3) of the Income Tax Act, 1961, in the facts and circumstances of the case.The assessee, a limited company engaged in the business of transportation, made substantial cash payments towards transportation of goods, which the Assessing Officer (AO) contended violated Section 40A(3) of the Act. The AO observed that these payments did not fall under any of the exceptions provided in Rule 6DD of the Income Tax Rules and thus disallowed a sum of Rs. 2,88,19,342/-.The assessee argued that the payments were made to agents or local truck owners' associations, which should be exempt under Rule 6DD(k). The payments were made in cash due to practical difficulties such as the non-availability of banking facilities and the need for immediate payments to truck drivers who often do not accept cheques.The CIT(A) considered the assessee's business model, which involved hiring trucks through agents or local truck owners' associations, and noted that the payments were genuine and made under compelling circumstances. The CIT(A) referenced various judicial precedents, including the Guwahati High Court judgment in Walford Transport (Eastern India) Ltd. vs CIT, which emphasized that the purpose of Section 40A(3) is to prevent tax evasion and not to disallow legitimate business expenses.The CIT(A) also considered the remand report from the AO, which confirmed that the payments were genuine and the income had been accounted for, but the corresponding expenses had not been considered during the assessment. The CIT(A) concluded that the assessee's case fell under the exceptions provided in Rule 6DD(k) and deleted the disallowance.The Revenue appealed against this decision, arguing that the agents were not appointed by the assessee and that there was no evidence to prove that the agents had to make cash payments on behalf of the assessee. The Revenue also contended that the genuineness of the transactions was irrelevant for the purpose of Section 40A(3).The Tribunal, after considering the submissions and evidence, held that the assessee was compelled to use agents due to practical business exigencies and that the payments were genuine. The Tribunal referenced several judicial precedents, including the Ahmedabad Tribunal's decision in Chartered Logistics Ltd. vs ACIT, which supported the assessee's position. The Tribunal concluded that the payments fell under the exceptions provided in Rule 6DD(k) and upheld the CIT(A)'s decision to delete the disallowance.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming that the cash payments made by the assessee were covered under the exceptions in Rule 6DD(k) and that the disallowance under Section 40A(3) was not justified.Order:The appeal of the Revenue is dismissed.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 40A(3), concluding that the payments made by the assessee were genuine and covered under the exceptions provided in Rule 6DD(k).