2025 (3) TMI 649 - AT - Income Tax

Tribunal Rules Section 40A(3) Deductions for Fuel and Directors' Pay Valid; Transactions Genuine Under Rule 6DD Exceptions.

The Tribunal concluded that the disallowance of deductions for fuel expenditure and Directors' remuneration under Section 40A(3) of the Income Tax Act, ... Addition u/s 40A(3) - deduction claimed in respect of expenditure on fuel and remuneration to the Directors payment of which is no made by cross cheques or bank drafts - HELD THAT:- We perused the provisions of section 40A(3) of the Act. In our considered opinion the provisions of section 40A(3) are not absolute, as evident from rule 6DD of Income Tax Rules. These provisions of section 40A(3) cannot be read in isolation. This section must be read along with rule 6DD enumerating the exception circumstances under which the provisions of section 40A(3) has no application, which included, inter alia, payments made to the agencies for procuring material could not be disallowed. The press note dated 02.05.1969 issued by the Ministry of Finance clarified that the provisions of section 40A(3) has no application in respect of payments made to agents who solely acting as commission agent. The dealers of petroleum products only acts only as commission agents of petroleum companies. Case of Sri Laxmi Satyanarayana Oil Mill [2014 (8) TMI 486 - ANDHRA PRADESH HIGH COURT] and Smt. Harshila Chordia [2006 (11) TMI 117 - RAJASTHAN HIGH COURT] and Suresh Kumar Agarwal [2001 (1) TMI 51 - ALLAHABAD HIGH COURT] are clearly applicable where in took the view that when the genuineness of the expenditure is not in question, provisions of section 40A(3) has no application. Similarly with regard to the Directors’ remuneration, Directors have offered the remuneration in their respective hands and it is tax neutral transaction and the payees are identified and genuineness of the expenditure is also not in doubt. Therefore, the reasoning adopted by the us in respect of expenditure incurred on fuel, equally hold, good in respect of Directors’ remuneration. Thus having due regard to the circumstances under which the cash payments exceeding Rs. 20,000/- were made, the claim for allowance on expenditure is not hit by section 40A(3) of the Act. Accordingly the AO is directed to allow the deduction. Appeal filed by the assessee stands allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the Assessing Officer (AO) was justified in disallowing the deduction claimed in respect of fuel expenditure and remuneration to Directors, on the grounds that the payments were not made by cross-cheques or bank drafts, as per the provisions of section 40A(3) of the Income Tax Act, 1961.2. Whether the genuineness of the transactions and the business exigencies justify the cash payments, thereby exempting them from the disallowance under section 40A(3).ISSUE-WISE DETAILED ANALYSISIssue 1: Applicability of Section 40A(3) to Fuel Expenditure and Directors' RemunerationRelevant legal framework and precedents:Section 40A(3) of the Income Tax Act, 1961, empowers the AO to disallow any deduction claimed as expenditure if the payment was not made by cross-cheques or bank drafts. However, Rule 6DD of the Income Tax Rules provides exceptions to this rule, allowing for certain circumstances where cash payments may not be disallowed.Precedents cited include CIT v. Suresh Kumar Agarwal, Ramadity Investments v. CIT, and K. Abdu & Co. v. ITO, which emphasize that the genuineness of the expenditure and the business context can impact the applicability of Section 40A(3).Court's interpretation and reasoning:The Tribunal held that Section 40A(3) is not absolute and must be read in conjunction with Rule 6DD, which provides exceptions for genuine business transactions. The court noted that the provisions do not apply to payments made to agents who act solely as commission agents, such as dealers of petroleum products.Key evidence and findings:The court found that the genuineness of the expenditure was not in question. The payments were made to a sister concern for fuel and to Directors as remuneration, both of which were deemed genuine business transactions.Application of law to facts:The Tribunal applied the exceptions under Rule 6DD to the facts, determining that the payments for fuel were made to commission agents and thus did not fall under the purview of Section 40A(3). Similarly, the Directors' remuneration was considered a tax-neutral transaction, with the payees identified and the genuineness of the expenditure not in doubt.Treatment of competing arguments:The appellant argued that the genuineness of the transactions and business exigencies justified the cash payments, citing several precedents. The respondent opposed, arguing that the payments were made in cash to a sister concern and lacked justification. The Tribunal sided with the appellant, emphasizing the genuineness and business context of the transactions.Conclusions:The Tribunal concluded that the disallowance under Section 40A(3) was not applicable, given the genuine nature of the transactions and the exceptions provided under Rule 6DD. The AO was directed to allow the deductions for both fuel expenditure and Directors' remuneration.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'...the provisions of section 40A(3) are not absolute, as evident from rule 6DD of Income Tax Rules. These provisions of section 40A(3) cannot be read in isolation.'Core principles established:The judgment reinforces the principle that Section 40A(3) must be considered alongside Rule 6DD, which provides exceptions for genuine business transactions. The genuineness of the expenditure and the business context are critical in determining the applicability of Section 40A(3).Final determinations on each issue:The Tribunal determined that the disallowance of deductions for fuel expenditure and Directors' remuneration was not justified under Section 40A(3), given the genuine nature of the transactions and the applicable exceptions under Rule 6DD. The appeal was allowed, and the AO was directed to permit the deductions.