2021 (4) TMI 584 - AT - Income Tax

Tribunal decision: Appeal partly allowed, emphasizing business exigency in evaluating cash payments.

The Tribunal partly allowed the appeal, deleting disallowances for coal purchases, freight payments, machinery repairs, and mobile phone purchase, while ... Disallowance of expenses u/s 40A(3) - assessee has made certain payments in excess of ₹ 20,000/- by cash other than by account payee cheque or bank draft or pay order and, therefore, has violated the provisions of section 40A(3) - CIT(A) upheld the action of the AO in respect of payment on account of freight charges, on account of purchase of coal and on account of machinery repairs - HELD THAT:- So far as the purchase of coal for ₹ 13,16,786/- is concerned, I find, out of the total purchase of ₹ 13,70,16,762/-, the cash purchases are only to the tune of ₹ 13,16,786/-. - we find merit in the submission of the ld. Counsel that at certain times the coal has to be purchased through the agents which was supplied through the truck drivers of the suppliers. The assessee was bound to procure the coal to keep the furnace going to sustain the production. Therefore, procurement of coal against cash payment was a business necessity. Further, the assessee has also paid CST on purchases and the C-Form issued to the supplier is also produced before the lower authorities. The purchases are reflected in the VAT returns of the assessee and the VAT authorities have not found any discrepancy in the VAT/CST assessment for F.Y. 2015-16. Further, the purchase of coal has not been disputed or doubted by the lower authorities for which the genuineness of the purchase is also not in doubt. Agra Bench of the Tribunal in the case of New Kalpana Ent. Udyog [2020 (3) TMI 672 - ITAT AGRA] under somewhat identical circumstances, have held that the payment made to the coal agents for purchase of coal and payment made to truck drivers for freight should not be disallowed u/s 40A(3) r.w. Rule 6DD of the IT Rules - we hold that the order of the CIT(A) sustaining the disallowance u/s 40A(3) of the Act is not justified. Accordingly, the same is directed to be deleted. Freight inward expenses find the same is mainly related to purchase of coal. As find, merit in the argument of the ld. Counsel that the assessee had to pay the cash to the truck drivers for expenses of freight on purchase of coal as a compulsion and exigency of transaction. Further, the lower authorities have not disputed the genuineness of the payment on account of freight charges since no disallowance has been made - we also find merit in the argument of the ld. Counsel that as per the proviso to section 40A(3) in the case of payment made for plying/hiring or leasing goods carriages, the provisions of sub-section (3) and 3A shall have effect as if for the words ‘twenty thousand rupees’, the words ‘thirty five thousand rupees’ have been substituted. From the details furnished by the ld. Counsel, find, most of the payments are below ₹ 35,000/-. In view of the above and in view of the decision of the Agra Bench of the Tribunal in the case of New Kalpana Ent. Udyog vs. ITO (supra) in the preceding paragraph direct the AO to delete the addition. Machinery repair - out of the total machinery repairs of ₹ 27,49,934/- only ₹ 1,72,408/- had been incurred by the assessee in cash. In my opinion, the explanation of the assessee that certain expenses had to be incurred in cash due to certain breakdown of the machinery that requires immediate repairs by replacement of parts to make the machine functional to avoid production loss, is a commercial expediency and the genuineness of the expenditure has not been doubted. I, therefore, hold that due to the extraordinary nature of the expenditure the technicalities should not stand in the way and the disallowance u/s 40A(3) is uncalled for. Disallowance on account of mobile phone - find merit in the argument of the ld. Counsel that the phone was shown in the balance sheet as a capital asset and was not claimed as an expenditure. The Hyderabad Bench of the Tribunal in the case of Kalyan Constructions [2018 (8) TMI 194 - ITAT HYDERABAD] has held that provisions of section 40A(3) do not apply to purchase of an asset. Respectfully following the said decision, I hold that the disallowance u/s 40A(3) of the Act on account of purchase of mobile phone shown in the balance sheet as an asset is uncalled for. Accordingly, the order of the CIT(A) sustaining the disallowance u/s 40A(3) on account of purchase of mobile phone for ₹ 32,400/- is set aside and the AO is directed to delete the addition. Appeal filed by the assessee is partly allowed. Issues Involved:1. Disallowance of expenses under Section 40A(3) of the Income Tax Act.2. Specific disallowance of Rs. 32,400 for purchase of a mobile phone.3. Disallowance of Rs. 13,16,786 for purchase of coal.4. Disallowance of Rs. 8,81,493 for payment of freight.5. Disallowance of Rs. 1,72,408 for machinery repair.6. Alleged violation of principles of natural justice due to lack of show cause notice.7. Validity of expenses incurred in exceptional/unavoidable circumstances.Detailed Analysis:1. Disallowance of Expenses under Section 40A(3):The AO made an addition of Rs. 24,60,887 under Section 40A(3) for payments exceeding Rs. 20,000 in cash. The CIT(A) upheld the disallowance for freight charges, purchase of coal, and machinery repairs but deleted the disallowance for staff welfare expenses. The Tribunal found that the AO's disallowance was based on the cash payments mentioned in Form 3CD and upheld by the CIT(A) without considering the business exigency and genuine nature of transactions.2. Disallowance of Rs. 32,400 for Purchase of Mobile Phone:The Tribunal noted that the mobile phone was shown as a capital asset in the balance sheet and not claimed as an expenditure in the P&L Account. Citing the Hyderabad Bench decision in Kalyan Constructions vs. ITO, it was held that Section 40A(3) does not apply to the purchase of an asset. Consequently, the disallowance was set aside.3. Disallowance of Rs. 13,16,786 for Purchase of Coal:The Tribunal observed that the cash purchases of coal were a business necessity to keep the furnace operational. The purchases were genuine, reflected in VAT returns, and verified by CST assessments. The Tribunal referenced the Agra Bench decision in New Kalpana Ent. Udyog vs. ITO, which held that payments to coal agents and truck drivers should not be disallowed under Section 40A(3) r.w. Rule 6DD. Thus, the disallowance was deleted.4. Disallowance of Rs. 8,81,493 for Payment of Freight:The Tribunal found that the freight expenses were mainly related to coal purchases, paid under compulsion and exigency of transaction. The payments were genuine, and most were below Rs. 35,000, the threshold for goods carriage payments under the proviso to Section 40A(3). The Tribunal directed the AO to delete the addition, aligning with the Agra Bench decision.5. Disallowance of Rs. 1,72,408 for Machinery Repair:The Tribunal noted that the cash payments for machinery repairs were due to sudden breakdowns requiring immediate attention to avoid production loss. The genuineness of the expenditure was not doubted. The Tribunal held that commercial expediency justified the cash payments, and the disallowance under Section 40A(3) was uncalled for.6. Alleged Violation of Principles of Natural Justice:The assessee argued that no show cause notice was issued before making additions under Section 40A(3), violating natural justice principles. The Tribunal did not specifically address this issue but focused on the genuineness and business necessity of the transactions.7. Validity of Expenses Incurred in Exceptional/Unavoidable Circumstances:The Tribunal acknowledged that certain expenses were incurred under exceptional circumstances, such as immediate machinery repairs and urgent coal purchases, which justified cash payments. The Tribunal emphasized the commercial expediency and genuine nature of these transactions, leading to the deletion of related disallowances.Conclusion:The Tribunal partly allowed the appeal, deleting the disallowances for coal purchases, freight payments, machinery repairs, and mobile phone purchase, while upholding the genuine and bona fide nature of the transactions. The decision emphasized the importance of business exigency and commercial expediency in evaluating cash payments under Section 40A(3).