2023 (11) TMI 630 - AT - Income Tax

Cash payments to farmers allowed despite exceeding limits when transactions genuine and payee identity established

M/s. Essargee Construction Pvt. Ltd. Versus ITO 1 (5) Bhopal

M/s. Essargee Construction Pvt. Ltd. Versus ITO 1 (5) Bhopal - TMI Issues Involved:1. Adequate time for specific replies.2. Disallowance of Rs. 2,75,000/- under section 40A(3) for cash payments to farmers.3. Disallowance of Rs. 24,500/- for payment to M/s Shrini Automobiles.4. Disallowance of 30% of directors' salary as ad hoc.Summary:1. Adequate Time for Specific Replies:The assessee claimed that the Commissioner of Income Tax (Appeals) passed the order without giving adequate time for specific replies, thus violating principles of natural justice. This ground was not pressed during the hearing and required no specific adjudication.2. Disallowance of Rs. 2,75,000/- under Section 40A(3):The assessee argued that the cash payments were token amounts made during initial negotiations for land purchases, a common practice in the business. The payments were recorded in sale deeds, and the balance was paid via cheque. The Tribunal found merit in the assessee's explanation, citing business expediency and the genuineness of transactions. The Tribunal relied on precedents, including the Hon'ble Rajasthan High Court's decision in Smt. Harshila Chordia vs. ITO and the Hon'ble Supreme Court's judgment in Attar Singh Gurmukh Singh vs. ITO, which emphasized that genuine transactions should not be disallowed under section 40A(3). The Tribunal concluded that the disallowance was not warranted and deleted it.3. Disallowance of Rs. 24,500/- for Payment to M/s Shrini Automobiles:This issue was not separately detailed in the judgment, but it was implied that the Tribunal's reasoning and decision on cash payments under section 40A(3) would apply similarly.4. Disallowance of 30% of Directors' Salary:The AO had disallowed 30% of the directors' salary, considering it excessive. The Tribunal noted that the AO did not perform a proper exercise to determine a fair salary and relied on an earlier decision in the assessee's case. It emphasized that the directors were paying taxes at the maximum marginal rate, resulting in no revenue loss. The Tribunal found the ad hoc disallowance unjustified and deleted it.Conclusion:The Tribunal allowed the appeal of the assessee, deleted the disallowances under section 40A(3), and found the ad hoc disallowance of directors' salary unjustified. The judgment emphasized the importance of considering business expediency and the genuineness of transactions in tax assessments.