By TIOL News Service

AHMEDABAD, FEB 07, 2014: THE issue before the Bench is - Whether section 40A(3) mandates assessee not to make payment in cash in excess of Rs 20,000/- even at the cost of delay and loss to its business. And the answer goes in favour of the assessee.

Facts of the case

The assessee is involved in the business of distribution of mobile and recharge vouchers of Tata Teleservices Limited (Company) acting as their authorized channel partners. The assessee would make payment to the company for purchase of recharge vouchers. The assessee made such payment through account payee cheques till 22nd August 2005, when a circular was issued by the Company not only to the assessee but to all other distributors in the State stating that the distributors will pay only through demand draft drawn on nationalized bank or through bank deposit slips and where the distributor had a bank account with cooperative bank, the payment should be made in cash. Since the assessee had a bank account with cooperative bank, it was required to deposit cash at the company's office at Surat. During scrutiny assessment the AO observed that had made a total payment of Rs. 33,10,194/ during the year under consideration to the Company by cash on different dates and such payment exceeded Rs. 20,000/ each. The AO issued a notice to the assessee that such payments would be hit by section 40A(3) and therefore cannot be allowed as expenditure. In response the assessee submitted that such payments were made due to business expediency arising from the instructions issued by the Company. It was also submitted that in case the assessee had continued to make payments in cheque, they would have received the recharge vouchers after a period of 45 days which could have adversely affected their business. It was contended that the intention of Section 40A(3) is to prevent deduction on bogus payments. The assessee had made cash deposits with a reputed public limited company, which they were liable to do as per the terms and condition of agreement with the company which they had followed.

However, the AO disallowed the payment and on appeal, the CIT(A) observed that various courts have held that where genuineness of transactions and identity of receivers is established the payments should not be disallowed. He observed that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine . It was observed that it was not the case of the AO that the transactions were not genuine nor the payments were not made. Further the assessee had filed a copy of account of the Company which clearly supported that the payments were made . Therefore, the CIT(A) agreed with the contentions of the assessee and deleted the additions made by the AO. On appeal by the Revenue before the Tribunal, the Tribunal relied on the case of Kenaram Saha & Subhas Saha wherein it was observed that assessee can get exemption from the provision of Section 40A(3) only if he is able to show that his case falls within any of the clauses of Rule 6DD of the Income Tax Rules . Based on this position, the matter was remanded to the AO.

Aggrieved, the assessee has filed this appeal before the High Court.

The counsel of the assessee reiterated the submissions already made before the AO regarding the directives issued by the Company and its compulsion for complying with the same. He, therefore, submitted that there was no breach of section 40A (3) as the whole intention behind enactment of the said provision is to curb black money transactions, whereas, in this case the payments were genuine and reflected in the accounts of the payer as well as payee. The Counsel relied on the decision of the Apex Court in case of Attar Singh Gurmukh Singh v. IncomeTax Officer, Ludhiana.

The Departmental Representative contended that section 40A(3) was clearly attracted to the case as the assessee did not fall in any of the provisions of Rule 6DD.

Having heard the parties, the High Court held that,

++ it could be appreciated that Section 40A and in particular subclause (3) thereof aims at curbing the possibility of on money transactions by insisting that all payments where expenditure in excess of a certain sum [in the present case twenty thousand rupees] must be made by way of account payee cheque drawn on a bank or account payee bank draft;

++ in the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the Appellate Commissioner. The Tribunal also did not disturb such facts but relied solely on Rule 6DD (j) of the Rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of Rule 6DD, consequences envisaged in Section 40A(3) of the Act must follow. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons :-

[a] The paramount consideration of Section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh, section 40A(3) of the Act does not eliminate considerations of business expediencies.

[b] In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow-

[i] the principal company, to which the assessee was a distributor, insisted that cheque payment from a cooperative bank would not do, since the realization takes a longer time;

[ii] the assessee was, therefore, required to make cash payments only;

[iii] Tata Teleservices Limited assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee;

[iv] It is not disputed that the Tata Teleservices Limited did not act on such promise;

[v] if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations;

++ we would find that the payments between the assessee and the Tata Teleservices Limited were genuine. The Tata Teleservices Limited had insisted that such payments be made in cash, which Tata Teleservices Limited in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of section 40A(3) of the Act must be lifted;

++ we notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. IncomeTax Officer, had observed that the exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally.

(See 2014-TIOL-161-HC-AHM-IT)