2023 (10) TMI 1285 - HC - Income Tax

Cash payments without account payee cheques lead to Section 40A(3) deduction disallowance despite business explanations

Rajesh Kumar Versus The Commissioner Of Income Tax And Anr.

The Delhi HC upheld disallowance of deductions under Section 40A(3) for purchases made without account payee cheques. The assessee produced undated ... Addition u/s 40A(3) - purchases made otherwise than by account payee cheque - HELD THAT:- There are undated confirmations that bear identical language. This brought the genuineness of the transactions into serious doubt. According to us, even if we were to accept that the reason given in the confirmation letters was correct, that is, the appellant/assessee was a new entrant in the business, we believe, to allay concerns of the suppliers i.e., the above-mentioned concerns, payments could have been made through bank drafts or other modes, whereby, banking channels were used for the subject payments. We find that the Tribunal has returned with a finding of fact that these confirmations were produced for the first time before the CIT(A). The grounds of appeal preferred before us show that there is nothing stated that would indicate that the appellant/assessee has averred that the said observation was perverse. However, as indicated hereinabove, even if we were to assume that these confirmation letters were produced before the AO, it would still not help the cause of the assessee. Clearly, payments made by the assessee to the concerns violated Section 40A(3) as they were not made through an account payee cheque drawn on a bank, account payee bank draft or through the use of electronic clearing system through a bank account, and therefore, to fall within the ambit of the 1977 circular, the appellant/assessee was required to establish the genuineness of the transactions. The appellant/assessee having failed to do so, led to the deduction being rightly disallowed for the subject payments. Even if the petitioner’s/assessee’s case fell within the ambit of the 1977 circular, the petitioner/assessee could not have been allowed deductions on the subject payments made by the petitioner/assessee as the rule under which leeway was claimed did not exist for the AY in question. Decided against assessee. Issues involved:The appeal concerns Assessment Year (AY) 2013-14 challenging the order passed by the Income Tax Appellate Tribunal sustaining the order of the Commissioner of Income Tax and rejecting the appeal of the assessee.Assessment of Payments:During the assessment proceedings, it was found that payments in respect of certain purchases were made via bearer cheques to three concerns, totaling Rs. 2,77,13,513. The appellant/assessee sought to rely on Rule 6DD(j) of the Income Tax Rules, 1962, along with a 1977 circular, to justify these payments. The appellant contended that there were exceptional circumstances necessitating bearer cheque payments, supported by confirmations from the concerned parties.Validity of Payments:The confirmations provided by the suppliers raised doubts about the genuineness of the transactions, as they contained identical undated language. The Court noted that even if the appellant was a new entrant in the business, payments could have been made through bank drafts or other banking channels to ensure compliance with the law. The Tribunal found that these confirmations were produced for the first time before the Commissioner of Income Tax (Appeals).Legal Compliance and Disallowance:The Court emphasized that payments made by the appellant violated Section 40A(3) of the Income-tax Act as they were not made through prescribed banking methods. Despite the appellant's reliance on the 1977 circular, the Court held that the genuineness of the transactions was not adequately established, leading to the disallowance of deductions for the payments. The Court also highlighted the substitution of Rule 6DD in 2008, which was not considered by the lower authorities in this case.Judgment:The Court found no reason to interfere with the Tribunal's order, dismissing the appeal and stating that no substantial question of law arose for consideration. The parties were directed to act based on the digitally signed copy of the order.