2019 (9) TMI 685 - AT - Income Tax

Tribunal overturns disallowance under Section 40A(3) of Income Tax Act, finding payments genuine and justifiable

The tribunal allowed the assessee's appeal, ruling that the disallowance of Rs. 49,43,544/- under Section 40A(3) of the Income Tax Act was not justified. ... Cash payments made to Royal Calcutta Turf Club u/s. 40A(3) - payment of operational expenses in relation to Horse Race - HELD THAT:- There is no dispute about assessee’s carrying on licensed bookmaker’s business with RCTC and therefore, he made the impugned cash payment to the said club only as ‘ operational charges’ has nowhere been doubted. The said operational charge relate to setting on horse racing conducted in the club on Saturdays/Sundays/Holidays only. Assessee’s agreement with the club. The same suggest that the bookmakers have to pay operational charges in relation to previous day(s) horse racing next day & prior to commencement of the day(s) rates. Learned Departmental Representative fails to dispute that non compliance of this agreement clauses attracts appropriate action against book makers. It therefore emerges that all these clinching agreement’s conditions only made the assessee to pay operational charges to the club in cash at the earliest in order to avoid appropriate actions. This tribunal ‘s co-ordinate bench’s decision in Sri Manoranjan Raha v/s. ITO [2016 (1) TMI 359 - ITAT KOLKATA] holds that impugned disallowance provision does not apply in case of overwhelming genuine payments coupled with business exigencies which may go beyond the prescribed rule 6DD of the Income Tax Rules, 1962.- Decided in favour of assessee. Issues Involved:1. Disallowance of cash payments under Section 40A(3) of the Income Tax Act, 1961.2. Examination of whether the payments made by the assessee fall under the exceptions provided in Rule 6DD of the Income Tax Rules, 1962.3. Consideration of the genuineness and business exigency of the payments made by the assessee.Issue-wise Detailed Analysis:1. Disallowance of Cash Payments under Section 40A(3) of the Income Tax Act, 1961:The primary issue in this case revolves around the disallowance of Rs. 49,43,544/- made by the assessee to the Royal Calcutta Turf Club (RCTC) in cash, which was disallowed by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act, 1961. The AO argued that the payments made by the two entities under the proprietorship of the appellant were clubbed together, resulting in a violation of Section 40A(3) which mandates that payments exceeding Rs. 20,000/- must be made through an account payee cheque or demand draft. The AO also noted that the appellant did not maintain separate accounts for the two entities, and the audited accounts reflected aggregate amounts of transactions.2. Examination of Whether the Payments Made by the Assessee Fall Under the Exceptions Provided in Rule 6DD of the Income Tax Rules, 1962:The assessee argued that the payments made to RCTC should fall under the exceptions provided in Rule 6DD(k) and Rule 6DD(j) of the Income Tax Rules, 1962. The assessee contended that the payments were made as an agent to the principal (RCTC) and were required to be made in cash due to the operational exigencies of the business. The appellant also cited that the payments made on Saturdays, Sundays, and holidays should be exempt from disallowance under Rule 6DD(j) since banking services were not available during those times. However, the CIT(A) dismissed these arguments, stating that in a metropolitan city like Kolkata, banking facilities are widely available, and there were no compelling circumstances necessitating cash payments.3. Consideration of the Genuineness and Business Exigency of the Payments Made by the Assessee:The tribunal found that the payments made by the assessee to RCTC were genuine and were necessitated by business exigencies. The tribunal referred to the agreement between the assessee and RCTC, which mandated that operational charges must be paid in cash before the commencement of the next race day to avoid penalties. The tribunal also cited previous judgments, including the decision in ITA No. 1448/Kol/2011, which held that disallowance under Section 40A(3) does not apply in cases of genuine payments coupled with business exigencies. The tribunal concluded that the assessee's payments were genuine and made under business exigencies, and therefore, the disallowance under Section 40A(3) was not justified.Conclusion:The tribunal allowed the assessee's appeal, holding that the disallowance of Rs. 49,43,544/- under Section 40A(3) was not warranted. The tribunal emphasized the genuineness of the payments and the business exigencies that necessitated cash payments, thereby granting relief to the assessee.Order:The assessee's appeal was allowed, and the disallowance of Rs. 49,43,544/- made under Section 40A(3) was deleted.