2021 (12) TMI 95 - AT - Income Tax

Cash payments to group companies deemed genuine by ITAT under Income Tax Act; disallowance under Section 40A(3) rejected (3)

The ITAT upheld the CIT(A)'s decision that cash payments made by the assessee to its group companies were genuine and not subject to disallowance under ... Addition u/s 40A(3) - payment made in cash by the assessee to its group companies - Revenue’s argument in support of Section 40A(3) cash payment disallowance is that the operation thereof ought to be excluded merely because the twin entities herein are group concerns - HELD THAT:- There is hardly any dispute about the basic fact that both the payer and payee(s) herein are group entities only. Overwhelming genuine expenditure payments deserve to be accepted even if they have been made in cash. We further take note of the hon'ble apex court’s landmark decision in Attar Singh Gurmukh Singh [1991 (8) TMI 5 - SUPREME COURT] that this statutory provision comes into play so as to prevent unaccounted cash from being ploughed in the system. Case law Harshita Chordia [2006 (11) TMI 117 - RAJASTHAN HIGH COURT] and Anupam Tele Services [2014 (2) TMI 30 - GUJARAT HIGH COURT] held that such overwhelming genuine payments ought not to be disallowed in light of the restrictive interpretation of rule 6DD of the Income Tax Rules which is not self-exhaustive. We therefore quote hon'ble apex court’s yet another landmark decision in CIT Vs. K.Y.Pilliah [1966 (10) TMI 35 - SUPREME COURT] to express our complete agreement with the CIT(A)’s conclusion deleting the impugned Section 40A(3) disallowance in entirety without delving much deeper in the relevant facts herein. - Decided against revenue. Issues Involved:1. Applicability of Section 40A(3) of the Income Tax Act.2. Genuineness of the transactions and identity of the payee.3. Business expediency and practical difficulties in compliance with Section 40A(3).Issue-wise Detailed Analysis:1. Applicability of Section 40A(3) of the Income Tax Act:The Revenue challenged the CIT(A)’s decision that cash payments made by the assessee to its group companies were outside the purview of Section 40A(3), arguing that these payments did not fall under any exceptions specified in Rule 6DD. The CIT(A) had relied on Supreme Court rulings in Attar Singh Gurmukh Singh Vs. ITO and jurisdictional High Court decisions, which were rendered before amendments to Rule 6DD. The CIT(A) concluded that the payments were genuine and the identity of the payee was established, thus not warranting disallowance under Section 40A(3).2. Genuineness of the Transactions and Identity of the Payee:The CIT(A) found that the appellant company made significant purchases from its group companies, with a substantial portion paid in cash. The cash payments were directly utilized by the group companies to expedite payments to their suppliers. The appellant provided confirmations that cash received from counter sales was directly remitted to the group companies. The CIT(A) noted that the transactions were genuine, the identity of the payee was established, and the appellant declared a healthy gross profit. The AO did not dispute the book results or the arm's length nature of the transactions. The CIT(A) concluded that the transactions were bona fide and genuine, and the provisions of Section 40A(3) were not absolute, considering business expediency and other relevant factors.3. Business Expediency and Practical Difficulties in Compliance with Section 40A(3):The CIT(A) cited various judicial precedents, including the Supreme Court’s ruling in Attar Singh Gurmukh Singh, which emphasized that Section 40A(3) should not be read in isolation from Rule 6DD. The provisions were intended to regulate business transactions and prevent the use of unaccounted money, not to restrict genuine business activities. The CIT(A) observed that the appellant's group companies had borrowed funds and required immediate cash deposits to reduce interest costs and avoid crossing overdraft limits. The CIT(A) concluded that the cash payments were made out of business necessity and were genuine, thus not attracting disallowance under Section 40A(3).Conclusion:The ITAT upheld the CIT(A)’s decision, noting that both payer and payee were group entities and the transactions were genuine. The ITAT agreed with the CIT(A) that the cash payments were made out of business expediency and practical difficulties, and the provisions of Section 40A(3) were not absolute. The ITAT dismissed the Revenue’s appeal, emphasizing that the statutory provision aimed to prevent unaccounted cash transactions and should not penalize genuine business transactions. The judgment was pronounced on 26th August 2021, acknowledging the delay due to the COVID-19 lockdown situation as per the Supreme Court’s directions.