2025 (4) TMI 1125 - AT - Income Tax

Assessee wins appeal on cash payments over Rs 20,000 under Section 40A(3) due to business compulsion and Rule 6DD exception

ITAT Kolkata allowed the assessee's appeal regarding cash payments exceeding Rs. 20,000 under Section 40A(3). The tribunal held that cash payments for ... Cash Payment exceeding Rs. 20000/- - Addition by invoking the provisions of Section 40A(3) - payments toward purchase of land/plots/expenses made/incurred by assessee - HELD THAT:- It is not the case of the AO that the cash payments were not genuine and intended to evade taxes. Therefore the cash payments made by the assessee were out of business compulsion and commercial consideration and are covered by the exception provided in Rule 6DD. The facts of the instant case are materially similar as decided by the co-ordinate bench above. Therefore, respectfully following the case of M/s A Daga Royal Artis [2018 (6) TMI 1240 - ITAT JAIPUR] we set aisle the order of the ld. CIT (A) and direct the ld. AO to delete the addition. Cash deposits during the demonetization period - HELD THAT:-As we find that the money was received from different persons to whom the payments were made on account of advances for land purchase/plots. We have examined the cash book of the assessee and find that assessee has duly shown these receipts against the advances already given against purchase of land/plots. Therefore, we are not in agreement with the conclusion drawn by the ld. CIT (A) on this issue and accordingly, we set aside the order of the ld. CIT (A) on this issue by directing the ld. AO to delete the addition. The appeal of the assessee is allowed. The core legal questions considered in this judgment relate primarily to the applicability and interpretation of Section 40A(3) of the Income Tax Act, 1961, and related provisions, including Rule 6DD of the Income Tax Rules, 1962. Specifically, the issues are:Whether payments made in cash exceeding Rs. 20,000/- per day to vendors for purchase of land/plots and related expenses can be disallowed under Section 40A(3) of the Act.The scope and applicability of exceptions under Rule 6DD of the Rules, particularly the explanation relating to business expediency and unavoidable circumstances.The genuineness of the transactions and identity of payees in the context of cash payments made.The extent to which considerations of business expediency and other relevant factors can exempt an assessee from disallowance under Section 40A(3).The validity and interpretation of additions made under Section 40(a)(ia) and disallowance of cash deposits during the demonetization period under Section 69A of the Act.Issue-wise Detailed Analysis:1. Disallowance of Cash Payments under Section 40A(3) for Purchase of Land and Related ExpensesLegal Framework and Precedents: Section 40A(3) disallows deduction of expenditure if payment or aggregate payments to a person in a day exceed Rs. 20,000/- otherwise than by account payee cheque or bank draft. The provisos to the section allow exceptions considering the nature and extent of banking facilities, business expediency, and other relevant factors. Rule 6DD of the Income Tax Rules provides specific exceptions to this requirement, including payments made on days when banks are closed.The Supreme Court in Attar Singh Gurmukh Singh upheld the constitutional validity of Section 40A(3) and clarified that the provision is not intended to restrict business activities but to curb black money and ensure genuineness of payments. The Court emphasized that the section must be read along with Rule 6DD, which allows exceptions based on business expediency and unavoidable circumstances. The genuineness of the transaction and identity of the payee are critical considerations.Other High Court decisions, including Smt. Harshila Chordia (Rajasthan High Court), Anupam Tele Services (Gujarat High Court), and Gurdas Garg (Punjab & Haryana High Court), have reinforced that the exceptions under Rule 6DD are not exhaustive and must be liberally construed. They held that if genuineness of the transaction and identity of payee are established, and business expediency is demonstrated, disallowance under Section 40A(3) should not be made.Court's Interpretation and Reasoning: The Court noted that the assessee was engaged in purchase and sale of land/plots, with payments made partly in cash and partly by cheque, all duly recorded in registered sale deeds and audited accounts. The AO had disallowed payments exceeding Rs. 20,000/- in cash aggregating to over Rs. 3.14 crores under Section 40A(3), relying on the tax audit report and statements recorded under Section 131.The assessee's explanation was that sellers, mostly residents of rural areas, insisted on cash payments, making it commercially expedient to pay partly in cash. The Court found that the payments were genuine, the identity of payees was established through registered sale deeds, and the source of cash payments was withdrawals from the assessee's bank accounts. The Court held that these facts satisfy the test of business expediency and fall within the exceptions contemplated under Rule 6DD and the provisos to Section 40A(3).The Court extensively relied on precedents, particularly the decision in M/s A Daga Royal Arts Vs. ITO, which held that Section 40A(3) and Rule 6DD must be read together, and genuine transactions made due to business expediency should not attract disallowance. The Court emphasized that the purpose of Section 40A(3) is to prevent use of unaccounted money and not to penalize honest business transactions.The Court further analyzed legislative amendments to Rule 6DD and concluded that while the rule's exceptions have been narrowed over time, the principle of considering business expediency and other relevant factors remains intact in Section 40A(3). The Court rejected the AO's mechanical application of the provision without appreciating the commercial realities and genuine business necessities.Key Evidence and Findings: The registered sale deeds, audited accounts, tax audit reports, and statements under Section 131 established the genuineness and identity of the payees. The detailed bank withdrawal and payment records demonstrated that cash payments were made from disclosed sources. The Court found no evidence of tax evasion or use of unaccounted money.Application of Law to Facts: Applying the legal principles and precedents to the facts, the Court concluded that the cash payments were made under compulsion and commercial expediency, satisfying the exceptions under Rule 6DD and provisos to Section 40A(3). Therefore, the disallowance of Rs. 3.14 crores was unwarranted.Treatment of Competing Arguments: The AO and CIT(A) took a strict view, emphasizing the statutory limit on cash payments and ignoring the exceptions and business expediency. The Court rejected this rigid approach, noting that the AO did not dispute the genuineness or identity of payees but focused solely on the mode of payment exceeding Rs. 20,000/- in cash. The Court held that such an approach defeats the legislative intent.Conclusion: The Court set aside the disallowance under Section 40A(3) and directed the AO to delete the addition related to cash payments for purchase of land and related expenses.2. Disallowance under Section 40(a)(ia) and Addition on Account of Cash Deposits during DemonetizationLegal Framework: Section 40(a)(ia) pertains to disallowance of certain payments made without deduction of tax at source. Section 69A deals with unexplained cash credits, allowing addition where cash deposits are not satisfactorily explained.Court's Interpretation and Reasoning: The AO disallowed Rs. 13.5 lakhs under Section 40(a)(ia) relating to payments for land purchases and added Rs. 23.65 lakhs on account of cash deposits during demonetization under Section 69A. The CIT(A) confirmed both additions.The Court noted that the issue regarding payments for land purchase under Section 40(a)(ia) was similar to the issue under Section 40A(3) already decided in favor of the assessee. Accordingly, the Court applied the same reasoning and set aside the disallowance under Section 40(a)(ia).Regarding the addition on account of cash deposits during demonetization, the Court examined the cash book and found that these deposits were receipts from various persons against advances given for land purchases. The Court found that the assessee had adequately explained these receipts and that they were not unexplained cash credits.The Court disagreed with the CIT(A)'s confirmation of the addition and directed deletion of the same.Conclusion: The Court allowed the appeal on both counts, deleting the additions under Sections 40(a)(ia) and 69A.Significant Holdings:'Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities... The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule.''The primary object of enacting section 40A(3) was two-fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community... The genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration which has been overlooked by the Tribunal.''The exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally... The consequence which was provided was to disallow deduction of such payments/expenses which were not through bank either by crossed cheques or by demand draft or by pay order.''The identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee's bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case... Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act.'The Court finally concluded that the disallowances under Sections 40A(3), 40(a)(ia), and additions under Section 69A were not justified on the facts and in law, and accordingly allowed the appeals of the assessee, directing deletion of the impugned additions.