Tribunal overturns disallowance under Section 40A(3) finding genuine business transactions

The Tribunal allowed the appeal of the assessee, concluding that the disallowance of Rs. 1,54,97,974/- under Section 40A(3) was not justified. The payments made on a bank holiday fell under exceptions provided in Rule 6DD(j) and were genuine transactions for business expediency. The Tribunal found no reason for the disallowance and deleted the amount disallowed by the Assessing Officer and upheld by the CIT(A).

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Issues Involved:
1. Violation of principles of natural justice due to lack of opportunity for the assessee to be heard.
2. Disallowance of Rs. 1,54,97,974/- under Section 40A(3) of the Income Tax Act due to cash payments.
3. Applicability of Rule 6DD exceptions for cash payments made on bank holidays.
4. Business expediency and genuineness of transactions in relation to disallowance under Section 40A(3).

Issue-wise Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee contended that the CIT(A) erred by passing an order without providing an opportunity for the assessee to be heard, violating the principles of natural justice. The non-appearance before the CIT(A) was due to reasons beyond the control of the assessee. The Tribunal noted that the CIT(A) dismissed the appeal ex parte due to continued non-compliance and non-prosecution by the assessee.

2. Disallowance under Section 40A(3):
The AO observed that the assessee made substantial cash payments totaling Rs. 1,54,97,974/- for purchasing land, invoking Section 40A(3) to disallow these payments. The assessee argued that these payments were made under exceptional circumstances as provided in Rule 6DD, specifically on a bank holiday, and thus should not be disallowed. The CIT(A) upheld the AO’s disallowance, noting sufficient application of mind by the AO and the assessee's failure to controvert factual findings regarding the violation of Rule 6DD.

3. Applicability of Rule 6DD Exceptions:
The Tribunal examined the applicability of Rule 6DD(j), which provides exceptions for disallowance under Section 40A(3) for payments made on days when banks are closed. The assessee made advance payments on 05.08.2012, a Sunday, which was a bank holiday. The Tribunal found that the payments were made due to the unavailability of banking facilities on that day, and thus, should be covered under the exceptions provided in Rule 6DD(j).

4. Business Expediency and Genuineness of Transactions:
The assessee argued that the payments were made out of business expediency and the genuineness of the transactions was not in doubt. The Tribunal noted that the transactions were genuine and bona fide, supported by various documents, including sale deeds and an affidavit from a real estate broker. The Tribunal emphasized that when the genuineness of transactions is not doubted, disallowance under Section 40A(3) is not justified. This view was supported by various judicial precedents, including decisions from the High Courts of Madras, Andhra Pradesh, Punjab and Haryana, and Rajasthan.

Conclusion:
The Tribunal concluded that the disallowance of Rs. 1,54,97,974/- under Section 40A(3) was not justified. The payments were made on a bank holiday, falling under the exceptions provided in Rule 6DD(j), and were genuine transactions made out of business expediency. Accordingly, the Tribunal allowed the appeal of the assessee, deleting the disallowance made by the AO and sustained by the CIT(A).

Order:
The appeal of the assessee is allowed. The disallowance of Rs. 1,54,97,974/- under Section 40A(3) is deleted.

Order pronounced on 27-06-2018.

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