2021 (2) TMI 677 - AT - Income Tax

Tribunal Upholds Disallowance under Income-tax Act, 1961

Suresh Chunnilal Sharma Versus ITO, Ward-Parbhani, Parbhani

Suresh Chunnilal Sharma Versus ITO, Ward-Parbhani, Parbhani - TMI Issues Involved:1. Disallowance under Section 40A(3) of the Income-tax Act, 1961.2. Disallowance under Section 14A read with Rule 8D.Detailed Analysis:1. Disallowance under Section 40A(3):Facts and Background:The assessee, engaged in the business of land plotting, purchased plots for Rs. 9,52,000 in cash. The Assessing Officer (AO) disallowed this expenditure under Section 40A(3) of the Income-tax Act, 1961, which mandates that payments exceeding Rs. 10,000 should be made through an account payee cheque or bank draft. The assessee contended that the payment was made in cash at the insistence of the seller, a senior citizen, and provided an affidavit from the seller. However, the AO and the CIT(A) did not accept this explanation as the seller had multiple bank accounts and frequently used banking facilities.Judgment:The Tribunal upheld the disallowance, stating that the assessee violated Section 40A(3) by making cash payments exceeding Rs. 10,000. The Tribunal noted that the exceptions under Rule 6DD, which allow cash payments in specific circumstances, did not apply to the assessee's case. The Tribunal emphasized that the genuineness of the transaction does not exempt the assessee from the provisions of Section 40A(3). The Tribunal followed the judgment of the jurisdictional High Court in Madhav Govind Dulshete, which sustained disallowance for cash payments exceeding the stipulated limit, irrespective of the transaction's genuineness.Key Points:- The assessee's transaction did not fall under any exceptions provided in Rule 6DD.- The Tribunal emphasized adherence to the binding precedent of the jurisdictional High Court.- The genuineness of the transaction does not negate the applicability of Section 40A(3).2. Disallowance under Section 14A read with Rule 8D:Facts and Background:The assessee earned exempt income from profit shares and dividends but did not offer any disallowance under Section 14A. The AO computed a disallowance of Rs. 7,36,934, which included Rs. 6,45,536 as interest and Rs. 91,398 as half percent of average investments. The CIT(A) upheld this disallowance.Judgment:The Tribunal partially accepted the assessee's contention that sufficient interest-free funds were available to cover the investments yielding exempt income. The Tribunal referred to the Supreme Court's decision in Reliance Industries Limited, which allows the presumption that investments were made from interest-free funds if such funds are sufficient. The Tribunal remanded the matter back to the AO to verify the availability of interest-free funds and determine the appropriate amount of interest disallowable under Section 14A. The disallowance of Rs. 91,398, being half percent of average investments, was upheld.Key Points:- The Tribunal directed the AO to verify the availability of interest-free funds before making a disallowance.- The presumption that investments are made from interest-free funds if sufficient, as per the Supreme Court's decision in Reliance Industries Limited.- The disallowance of Rs. 91,398 was upheld.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal upholding the disallowance under Section 40A(3) and remanding the disallowance under Section 14A back to the AO for further verification. The judgment emphasized strict adherence to statutory provisions and binding precedents.