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

The Delhi HC upheld disallowance of deductions under Section 40A(3) for purchases made without account payee cheques. The assessee produced undated confirmations with identical language, raising doubts about transaction genuineness. The court found that even accepting the assessee's explanation as a new business entrant, payments could have been made through banking channels like bank drafts. The Tribunal's factual finding that confirmations were produced only before CIT(A) was not challenged. The HC concluded that payments violated Section 40A(3) requirements, and the assessee failed to establish transaction genuineness, justifying the disallowance.

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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.

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