2025 (7) TMI 1810 - AT - Income Tax

Section 40A(3) upheld for excess cash payments; Sections 2(22)(e) and 41(1) additions deleted; Section 36(1)(iii) disallowance sustained

Patidar Builder Pvt. Ltd. Versus Assessing Officer (JCIT-Range-2, Bhopal)

The ITAT upheld the addition under section 40A(3) for cash payments beyond permissible limits, rejecting the assessee's claim of genuine business expenses ... Addition u/s 40A(3) - cash payment beyond permissible limits - payment has been made towards genuine business expenses and hence disallowance should not be made - HELD THAT:- Assessee pleading is made for the sake of argument only and we indicated to Ld. AR during hearing itself that his contention/claim remains unsubstantiated to which Ld. AR instantly agreed. Therefore, the pleading is rejected. Payment was made on Saturday at around 5:30 P.M. after closure of banking hours - The contention raised by Ld. AR was opposed by Ld. DR for revenue on two-fold reasons. Firstly, the assessee has nowhere claimed before lower authorities that the payment was made at 5:30 P.M., this is a new claim by assessee raised for the first time before ITAT and the assessee does not have any evidence to prove the factum of payment having been made at 5:30 P.M. Secondly, the language of Rule 6DD(j) noted above is very clear and gives benefit to assessee only if the bank remains closed for entire day. The language does not grant exception where the bank is observing half-day working. On a careful consideration, we find a considerable merit in the pleadings made by Ld. DR for revenue. Decided against assessee. Addition u/s 2(22)(e) - advance salary paid to director of assessee - HELD THAT:- Both sides are ad idem that the provisions of section 2(22)(e) do not contemplate addition in the hands of assessee-company. Therefore, the addition made by AO in assessee-company’s hands is not as per scheme of section 2(22)(e) and cannot be sustained. In view of this, we delete the addition made by AO. This ground is allowed. Addition u/s 41(1) - Credit balances appearing in Balance-Sheet of assessee - nature and adjustment of the credit balances - HELD THAT:- The undisputed facts emerging from discussions are such that (i) the assessee has received advances from customers against sales, (ii) the assessee has shown those advances in its Balance-Sheet as liabilities and not written off those liabilities in the books of account, and (iii) ultimately, the assessee has adjusted those liabilities against sales made to respective customers. AR that the conditions of section 41(1) are not satisfied. The noting made by AO that the assessee had now shown any closing stock/work-in-progress in its Balance-Sheet is nothing to with the issue involved. Being so, the addition made by AO by invoking section 41(1) is not sustainable and we delete the same. This ground is thus allowed. Disallowance of deduction of interest expenditure claimed by assessee u/s 36(1)(iii) - HELD THAT:- On a careful consideration, we firstly find that the assessee is having sufficient non-interest bearing funds of its own and the current liabilities. The only loan taken by assessee is a car loan whose outstanding balance was just Rs. 9,00,183/-. Secondly, the interest deduction claimed by assessee is just Rs. 1,29,649/- and the major portion is Rs. 1,15,369/- referrable to car loan. Thus, reflect that the assessee has used borrowed funds for giving interest-free loans and advances. ISSUES: Whether disallowance under Section 40A(3) of the Income-tax Act is justified for cash payment exceeding prescribed limits despite business genuineness and timing of payment.Whether addition under Section 2(22)(e) as deemed dividend is sustainable when advance salary is paid to a director.Whether addition under Section 41(1) is warranted for credit balances shown as advances from customers when no deduction was claimed and advances were adjusted against sales.Whether disallowance under Section 36(1)(iii) of interest expense is justified when the assessee has sufficient non-interest-bearing funds and interest-bearing loans are minimal and specifically identified.Whether disallowance of interest paid on belated TDS payment is sustainable when the ground is withdrawn or not pressed before the tribunal. RULINGS / HOLDINGS: Disallowance under Section 40A(3) was upheld as the payment was made in cash exceeding prescribed limits; the exception under Rule 6DD(j) was not applicable since the bank was not closed for the entire day but only observing half-day working, and the assessee failed to substantiate the timing of payment.The addition under Section 2(22)(e) was deleted as the provision does not contemplate addition in the hands of the company; advance salary paid to director cannot be treated as deemed dividend in the hands of the company.The addition under Section 41(1) was deleted because the twin conditions of the section were not satisfied: no allowance or deduction was claimed earlier in respect of the advances, and there was no remission or cessation of trading liability since advances were adjusted against sales.The disallowance of interest expense under Section 36(1)(iii) was deleted as the assessee had sufficient non-interest-bearing funds and the interest-bearing loan was minimal and specifically for a car loan; thus, the interest deduction claimed was justified.The additional ground regarding disallowance of interest on belated TDS payment was dismissed as not pressed before the tribunal. RATIONALE: The court applied the provisions of Section 40A(3) which disallows expenditure for payments made in cash exceeding prescribed limits, subject to exceptions under Rule 6DD; the interpretation of Rule 6DD(j) was held strictly, requiring the bank to be closed for the entire day to avail exception.The court relied on the statutory scheme of Section 2(22)(e), which treats deemed dividends as income in the hands of shareholders, not the company, thereby invalidating addition in the company's hands.The court interpreted Section 41(1) as requiring two cumulative conditions: prior allowance or deduction in respect of loss, expenditure or trading liability, and subsequent remission or cessation of such liability; absence of either condition negates applicability.The court considered financial documents and ledger accounts to assess the nature of funds and loans, applying principles of interest deduction under Section 36(1)(iii), and found no misuse of borrowed funds to grant interest-free advances.The tribunal followed precedent adverse to the assessee on interest on belated TDS payment and accepted the withdrawal of the ground, thus not adjudicating on the merits.