2023 (5) TMI 782 - AT - Income Tax

Appellate Tribunal affirms CIT(A) order on Section 40A(3) interpretation

The Appellate Tribunal ITAT DELHI upheld the order of the Ld. CIT(A), dismissing the appeal of the assessee regarding the interpretation of Section 40A(3) ... Addition u/s 40A - Payments made otherwise than by an account payee cheque - as submitted bearer cheques were issued to the supplier parties on demand as assessee was new in the business so the assessee had to accept the demand of the suppliers - HELD THAT:- CIT(A) has rightly observed that a bearer cheque can bounce as well, for insufficient balances therefore giving bearer cheque to parties as the surety of being encashed is not sustainable explanation of business expediency. The bench finds no error in the findings of the Ld. CIT(A) because if the intention was to secure the payments to the parties by bearer cheques to be as good as cash then there are other banking instruments like Banker’s cheque or RTGS/NEFT facilities which would have ensured prompt and secured payments. It is admitted case of assessee that to one of the parties even payments were made by RTGS/NEFT. So there is no question of lack of banking facilities available with the assessee or that when the payments were made such facility was not accessible. When the provision of Section 40A(3) is made in the Act with specific intention to discourage colourable payments then the Ld. Tax Authorities below cannot be expected to accept such casual explanations. There should be a justification in the refusal of a party to not accept payment by way of a crossed cheque/draft to defeat a provision made under Act to discourage cash payments. There is nothing on record to show that the nature of purchases was such that the parties were having decisive role to lay the terms and conditions of mode of payment to be with cash or bearer cheques only and that the assessee's business interest would have suffered due to non-availability of goods otherwise than from this particular party. The law relied, including the Boards’s circular, is thus not applicable on facts and evidence. Decided against assessee. Issues involved:The judgment involves the interpretation of Section 40A(3) of the Income Tax Act, 1961 regarding the disallowance of payments made otherwise than by account payee cheque. The key issues include the justification for issuing bearer cheques, the applicability of CBDT Circular 220, and the burden of proof on the assessee to establish business expediency.Summary:Issue 1: Justification for issuing bearer chequesThe assessee filed a return of income declaring total income and was scrutinized for payments made otherwise than by account payee cheque. The Ld. AO found violations of Section 40A(3) and issued a show cause notice. The assessee claimed exceptional circumstances for issuing bearer cheques, citing the refusal of parties to accept other forms of payment. However, the Ld. CIT(A) upheld the disallowance, emphasizing the lack of convincing evidence and the availability of banking facilities for secure payments.Issue 2: Applicability of CBDT Circular 220The assessee raised grounds challenging the rejection of CBDT Circular 220 by the Ld. CIT(A). The appellant argued that the circular provided sufficient explanation for the urgency in issuing bearer cheques. However, the Ld. Tax Authorities did not acknowledge this explanation, leading to the disallowance of payments made through bearer cheques.Issue 3: Burden of proof on the assesseeThe bench considered the settled proposition of law under Section 40A(3) and Rule 6DD(j) regarding exceptions to disallowance for genuine transactions due to business expediency. The burden of proof was on the assessee to establish the necessity for cash payments. The Ld. CIT(A) found the confirmations provided by parties to be doubtful and highlighted the lack of evidence showing the encashment of bearer cheques by the parties.Conclusion:After careful consideration, the bench upheld the order of the Ld. CIT(A), dismissing the appeal of the assessee. The judgment emphasized the importance of providing concrete evidence to support claims of business expediency and the need for secure payment methods. The grounds raised by the assessee were rejected, and the disallowance of payments made through bearer cheques was sustained.This summary provides a detailed overview of the judgment, highlighting the key issues, arguments presented, and the ultimate decision reached by the Appellate Tribunal ITAT DELHI.