2008 (3) TMI 350 - AT - Income Tax

Tribunal Upholds Cash Expenditure Disallowance, Clarifies Tax Implications (3)

Income-tax Officer, Ward - I, Murshidabad. Versus Kenaram Saha And Subhash Saha & PARAMOUNT LEATHERS AND ANOTHER

The Tribunal upheld the disallowance under Section 40A(3) of the Income-tax Act, 1961, to curb cash expenditure exceeding Rs. 20,000. It emphasized ... Addition u/s 40A - Held that:- As per Departmental Representative that the necessary facts are not available on record to examine the contention of the assessee that its case falls in clause (k), (l) or (b) of Rule 6DD. We agree with the ld. Departmental Representative. The claim of the assessee would require examination of the facts with reference to the books of account so as to ascertain on which particular date payment was made and whether such date was bank holiday or not so as to ascertain the applicability of Rule 6DD(k). With regard to applicability of Rule 6DD(l) and Rule 6DD(b) also further facts are required to be examined. The learned counsel for the assessee has given the copy of the supply order issued by Sub-Divisional. Controller, Food and Supplies, Jangipur giving direction to the assessee to make the payment in cash. However, it was pointed out by the ld. Departmental Representative that these supply orders are dated 2007 and, therefore, will not be applicable to the year under consideration. What was the exact direction of the supply order in the accounting year relevant to assessment year under consideration would require to be examined. In view of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer. Addition u/s 40A - Held that:- For the first time on 13-3-2006, the Assessing Officer asked the assessee to show cause why the payment exceeding ₹ 20,000 otherwise than by crossed or account payee cheque should not be disallowed under section 40A(3). The assessee furnished its explanation on 21-3-2006 claiming that its case falls within Rule 6DD(f)(ii). The Assessing Officer rejected the assessee's contention on the ground that the assessee could not prove that the parties, to whom the payment had been made, were either cultivators, growers or producers of raw hides and skins. However, it is evident that the Assessing Officer did not allow any opportunity whatsoever to the assessee to lead necessary evidence in support of its contention that the persons from whom hides and skins were purchased were the producers thereof. The CIT(A) has discussed the legal aspects of the issue at length, but the factual matrix of the case has not been examined even at his end. In view of the above, we set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer and direct him to allow adequate opportunity to the assessee to produce necessary evidence in support of its contention. Deduction u/s 80HHC - Held that:- Profits of business for the purpose of section 80HHC means the profits of business as computed under the head 'Profits and gains of business or profession'. Section 29 of the Income-tax Act provides that profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D of the Income-tax Act. Thus, whatever is the profits and gains of the business as computed by the Assessing Officer under the head 'Profits and gains of business or profession', should be taken as profits of the business for the purpose of computation of deduction under section 80HHC. We, therefore, direct the Assessing Officer to recompute the deduction under section 80HHC as per our observation above. Issues Involved1. Disallowance under section 40A(3) of the Income-tax Act, 1961.2. Applicability of Rule 6DD exceptions.3. Interpretation of section 40A(3) and its provisos.4. Constitutional validity of section 40A(3).5. Re-computation of deduction under section 80HHC.6. Double taxation concerns in the context of section 40A(3).7. Specific facts and applicability of Rule 6DD in individual cases.Detailed Analysis1. Disallowance under Section 40A(3)Section 40A(3) was introduced to curb wasteful expenditure and counter tax evasion by disallowing 20% of expenditure made in cash exceeding Rs. 20,000. The Tribunal noted that the purpose of this section was to ensure that payments are made through banking channels to facilitate proper investigation by the tax authorities.2. Applicability of Rule 6DD ExceptionsRule 6DD provides exceptions to the disallowance under section 40A(3). The Tribunal examined whether the payments made by the assessees fell under any of these exceptions:- Rule 6DD(k): Applicable if payments were made on a bank holiday.- Rule 6DD(l): Applicable if payments were made to an agent who was required to make cash payments on behalf of the assessee.- Rule 6DD(b): Applicable if payments were made to the government and required to be made in legal tender.- Rule 6DD(f): Applicable if payments were made for the purchase of produce of animal husbandry, including hides and skins, to the producer.- Rule 6DD(g): Applicable if payments were made for products manufactured or processed without the aid of power in a cottage industry to the producer.3. Interpretation of Section 40A(3) and Its ProvisosThe Tribunal emphasized that section 40A(3) should be interpreted literally, as directed by the Hon'ble Apex Court in the cases of Tara Agencies and Anjum M.H. Ghaswala. The Tribunal rejected the argument that the section should be interpreted to allow genuine business expenditure where the identity of the payee is established.4. Constitutional Validity of Section 40A(3)The Tribunal upheld the constitutional validity of section 40A(3), referencing the Hon'ble Apex Court's decision in Attar Singh Gurmukh Singh, which stated that the section is not arbitrary and does not restrict business activities. The Andhra Pradesh High Court in Smt. Ch. Mangayamma and the Kerala High Court in Kamath Marbles also upheld the section's validity after its amendment in 1995.5. Re-computation of Deduction under Section 80HHCThe Tribunal directed the Assessing Officer to recompute the deduction under section 80HHC based on the profits of the business as computed under the head 'Profits and gains of business or profession,' following the definition provided in Explanation (baa) to section 80HHC.6. Double Taxation ConcernsThe Tribunal clarified that disallowance under section 40A(3) does not result in double taxation, as it does not tax the same income twice in the hands of the same person. This was supported by the Hon'ble Apex Court's decision in ITO v. S. Radha Krishnan.7. Specific Facts and Applicability of Rule 6DD in Individual Cases- Kenaram Saha & Subhash Saha: The case was remanded to the Assessing Officer to verify if payments fell under Rule 6DD(k), (l), or (b).- Nadeem Iqbal: The case was remanded to the Assessing Officer to examine if payments fell under Rule 6DD(l).- Chong Hing Tannery & L.I. Chong Tannery: The cases were remanded to the Assessing Officer to verify if payments fell under Rule 6DD(f) or (g), with the opportunity for the assessee to produce evidence.- Paramount Leathers: Similar to Chong Hing Tannery, the case was remanded for re-examination under Rule 6DD(f) or (g).- Mrinal Ghosh: The payment made on a Sunday fell under Rule 6DD(k), but the other payment did not fall under Rule 6DD(h) as the recipient's place had banking facilities.- Sri Shyamal Kr. Dey: The Tribunal upheld the CIT(A)'s deletion of disallowance under section 40A(3), following the precedent that no further disallowance can be made once a net profit rate is applied.ConclusionThe Tribunal's judgment focused on the interpretation and application of section 40A(3) and Rule 6DD exceptions, upholding the section's constitutional validity and remanding several cases for further factual verification to determine the applicability of Rule 6DD exceptions.