Cash payment disallowance in commission/purchase claims rejected after ledger proof showed no single or aggregate cash payments over threshold

Challenge concerned disallowance of commissions as cash payments exceeding the statutory threshold. Tribunal examined party ledger accounts and found no single transaction or aggregate cash payments to each party exceeding the threshold, so the cash payment provision did not apply; consequence: the assessing officers disallowance (confirmed on review) was deleted and the assessees grounds were allowed. The decision rests on ledger documentary evidence showing absence of qualifying cash payments and the resulting inapplicability of the cash-payment disallowance rule.

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Issues: Whether the disallowance of purchases of Rs.33,37,900/- made under section 40A(3) of the Income-tax Act, 1961 is sustainable where ledger entries, confirmations and bank statements show that payments to each party on any day did not exceed Rs.10,000 and purchases (not commission) were made.

Analysis: Section 40A(3) prescribes disallowance where a person incurs expenditure by way of cash payment in excess of the statutory daily limit thereby rendering such expenditure inadmissible. The statutory cash-limit test is factual and depends on whether payments aggregated on any day to a single payee exceeded the threshold. Documentary evidence such as ledger accounts, confirmations filed by the payees and bank statements are admissible to establish the mode and amount of payments and to show that payments did not exceed the statutory limit. Where the records show that individual or aggregate payments to the concerned parties on any day did not exceed Rs.10,000, the statutory requirement for invoking section 40A(3) is not satisfied and disallowance cannot be sustained. The character of the transactions (purchases versus commission) must be determined on the basis of supporting records rather than suppositions.

Conclusion: Disallowance under section 40A(3) of the Income-tax Act, 1961 in respect of purchases from the three parties is not sustainable. The ledger accounts, confirmations and bank statements establish that payments on any day to each party did not exceed Rs.10,000 and that payments were for purchases and not commission. The disallowance of Rs.33,37,900/- is deleted and the assessee's grounds are allowed.

Ratio Decidendi: Disallowance under section 40A(3) cannot be sustained where contemporaneous ledger accounts, confirmations and bank statements demonstrate that payments to each payee on any day did not exceed the statutory cash limit of Rs.10,000.

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