Tribunal allows appeal on cash expenses disallowance under Income Tax Act

The Tribunal allowed the assessee's appeal regarding the disallowance of expenses incurred in cash under section 40A(3) of the Income Tax Act. The Tribunal held that the payments made through an agent to the sellers, who required cash payments due to lack of banking facilities, satisfied the requirements of Rule 6DD. The genuineness of the transactions was established, leading to the deletion of the disallowance of Rs.37,01,314/-, emphasizing the practical business circumstances faced by the assessee.

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Issues Involved:
1. Disallowance of expenses incurred in cash amounting to Rs.37,24,414/- under section 40A(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Disallowance of Expenses Incurred in Cash:

Background:
The assessee, engaged in the business of purchasing and selling used vehicles and construction equipment, made cash payments exceeding the limit specified under section 40A(3) of the Income Tax Act for the purchase of five old vehicles/JCB machines. The Assessing Officer (A.O.) disallowed these expenses, amounting to Rs.37,01,314/-, citing a violation of section 40A(3) read with Rule 6DD of the Income Tax Rules, 1962.

Assessee's Contention:
The assessee argued that the sellers were small roadside contractors from distant states, often uneducated and without banking facilities, who insisted on cash payments. The payments were made through an agent, Shri Mohansinh Rawat, who confirmed receiving cash from the assessee to pay the sellers. The assessee provided affidavits and identity proofs of the sellers to establish the genuineness of the transactions.

CIT(A)'s Findings:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, stating that the assessee's case did not fit into the exceptions provided in Rule 6DD of the Income Tax Rules. Specifically:
- Clause (g) of Rule 6DD, which exempts payments made in villages or towns not served by banks, was not applicable as both the assessee and sellers were in areas serviced by banks.
- Clause (k) of Rule 6DD, which exempts payments made to an agent who is required to make further payments in cash on behalf of the assessee, was also deemed inapplicable. The CIT(A) noted that it was not proven beyond doubt that the agent was required to make payments in cash for goods or services on behalf of the sellers.

Tribunal's Analysis:
The Tribunal found that the CIT(A) erred in interpreting clause (k) of Rule 6DD. The rule specifies that payments made by a person to an agent, who is required to make payments in cash on behalf of such person, are exempt from the rigors of section 40A(3). The Tribunal noted:
- The genuineness of the transactions was established through affidavits and identity proofs of the sellers.
- The agent, Shri Mohansinh Rawat, confirmed receiving cash from the assessee to pay the sellers.
- The sellers did not have bank accounts and insisted on cash payments.

The Tribunal held that the situation envisaged in clause (k) of Rule 6DD was satisfied, as the payments were made to an agent who further paid the sellers in cash. The CIT(A)'s interpretation that the agent should receive cash from the sellers was incorrect, as it is the buyer (assessee) who is required to make payments.

Conclusion:
The Tribunal directed the deletion of the disallowance of Rs.37,01,314/-, allowing the assessee's appeal. The Tribunal's order emphasized the proper interpretation and application of clause (k) of Rule 6DD, recognizing the genuineness of the transactions and the practical business circumstances faced by the assessee.

Order Pronouncement:
The appeal of the assessee was allowed, and the order was pronounced in the Court on 2nd December 2022 at Ahmedabad.

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