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Tax Publishers Ravinder Kumar Sharma v. DCIT [ITA No. 1077/JP/2018, dt. 11-11-2020] : 2020 TaxPub(DT) 4817 (Jp.-Trib.) Disallowance of payments in cash under section 40A(3) *Facts:* Assessee had to pay certain amounts in cash for buying lands. It is not known from the verdict as to whether the assessee is in business or has purchased these lands as a capital investment but a presumption is drawn that assessee is into business. The lower authorities held that the cash payments are to be disallowed under section 40A(3). On higher appeal -- Held in favour of the assessee that the provisions of section 40A(3) ought to be read in a purposive intent no matter the rules existing on date. The identity of the parties and the circumstances in what the payments had to be made in cash have been adequately proven so no disallowance is warranted bereft no clause existing in rule 6DD. Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC) : 1991 TaxPub(DT) 1528 (SC) Smt. Harshila Chordia v. ITO (2008) 298 ITR 349 (Raj) : 2007 TaxPub(DT) 0716 (Raj-HC) ITO v. Shyam Apparels (P) Ltd. (ITA No. 497/JP/2016) : 2018 TaxPub(DT) 0078 (Jp-Trib) Shree Salasar Overseas (P) Ltd. (2012) 66 DTR 9 (Jp-Trib) : 2012 TaxPub(DT) 0947 (Jp-Trib) M/s. Daga Royal Arts, Jaipur v. ITO, Jaipur (ITA No. 1065/Jp/2016, dated 15-5-2018) : 2018 TaxPub(DT) 2971 (Jp-Trib) Rule 6DD does not contain all the possible exclusions. Section 40A(3) cannot be read in isolation to rule 6DD. But the main section itself confers the benefit in genuine cases. "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." 25. Here, it is relevant to note that there has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors are concerned, as existed at relevant point in time and as considered by the Hon'ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impugned assessment year i.e. assessment year 2013-14. However, Rule 6DD(j) has been amended and by Notification, dated 10-10-2008, it now provides for an exception only in a scenario where the payment was required to be made on a day on which banks were closed either on account of holiday or strike. A question which arises for consideration is whether the legal proposition so laid down by the Hon'ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to which such delegated legislation is subservient has been retained in its entirety. Alternatively, can it be said that what has been prescribed as exceptional circumstances in Rule 6DD as amended are exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations. 26. If we look at the legislative history of section 40A(3) and Rule 6DD, we find that initially, section 40A(3) provides for disallowance of 100% of the expenditure unless the matter falls under exception as provided in Rule 6DD(j). Later on, section 40A(3) has been amended to provide for disallowance of 20% of the expenditure incurred in cash and Rule 6DD(j) was omitted. Hereafter, by virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of latest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike. 27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme Court (in Attar Singh Gurumukh Singh supra) regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the assessing officer whereby genuine business expenditure should not suffer disallowance". *Editorial Note:* The decision has brought forth the basic tenet as to why section 40A(3) was enacted and in genuine cases it is important that an assessee manifests the circumstances and the identity of the recipients to avoid the disallowance of cash payments. If the assessee was not in business but had acquired the lands as a capital asset then no addition can be made under section 40A(3). The first proviso to section 3(A) still contains the favourable point that no disallowance under section 40A(3) can be done in such cases and under such circumstances as may be prescribed (rule 6DD) having regard to the nature and extent of banking facilities available, "considerations of business expediency and other factors".

Tax Publishers

Ravinder Kumar Sharma v. DCIT [ITA No. 1077/JP/2018, dt. 11-11-2020] : 2020 TaxPub(DT) 4817 (Jp.-Trib.)

Disallowance of payments in cash under section 40A(3)

Facts:

Assessee had to pay certain amounts in cash for buying lands. It is not known from the verdict as to whether the assessee is in business or has purchased these lands as a capital investment but a presumption is drawn that assessee is into business. The lower authorities held that the cash payments are to be disallowed under section 40A(3). On higher appeal --

Held in favour of the assessee that the provisions of section 40A(3) ought to be read in a purposive intent no matter the rules existing on date. The identity of the parties and the circumstances in what the payments had to be made in cash have been adequately proven so no disallowance is warranted bereft no clause existing in rule 6DD.

Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC) : 1991 TaxPub(DT) 1528 (SC)

Smt. Harshila Chordia v. ITO (2008) 298 ITR 349 (Raj) : 2007 TaxPub(DT) 0716 (Raj-HC)

ITO v. Shyam Apparels (P) Ltd. (ITA No. 497/JP/2016) : 2018 TaxPub(DT) 0078 (Jp-Trib)

Shree Salasar Overseas (P) Ltd. (2012) 66 DTR 9 (Jp-Trib) : 2012 TaxPub(DT) 0947 (Jp-Trib)

M/s. Daga Royal Arts, Jaipur v. ITO, Jaipur (ITA No. 1065/Jp/2016, dated 15-5-2018) : 2018 TaxPub(DT) 2971 (Jp-Trib)

Rule 6DD does not contain all the possible exclusions. Section 40A(3) cannot be read in isolation to rule 6DD. But the main section itself confers the benefit in genuine cases.

"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."

25. Here, it is relevant to note that there has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors are concerned, as existed at relevant point in time and as considered by the Hon'ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impugned assessment year i.e. assessment year 2013-14. However, Rule 6DD(j) has been amended and by Notification, dated 10-10-2008, it now provides for an exception only in a scenario where the payment was required to be made on a day on which banks were closed either on account of holiday or strike. A question which arises for consideration is whether the legal proposition so laid down by the Hon'ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to which such delegated legislation is subservient has been retained in its entirety. Alternatively, can it be said that what has been prescribed as exceptional circumstances in Rule 6DD as amended are exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations.

26. If we look at the legislative history of section 40A(3) and Rule 6DD, we find that initially, section 40A(3) provides for disallowance of 100% of the expenditure unless the matter falls under exception as provided in Rule 6DD(j). Later on, section 40A(3) has been amended to provide for disallowance of 20% of the expenditure incurred in cash and Rule 6DD(j) was omitted. Hereafter, by virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of latest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike.

27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme Court (in Attar Singh Gurumukh Singh supra) regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the assessing officer whereby genuine business expenditure should not suffer disallowance".

Editorial Note: The decision has brought forth the basic tenet as to why section 40A(3) was enacted and in genuine cases it is important that an assessee manifests the circumstances and the identity of the recipients to avoid the disallowance of cash payments. If the assessee was not in business but had acquired the lands as a capital asset then no addition can be made under section 40A(3). The first proviso to section 3(A) still contains the favourable point that no disallowance under section 40A(3) can be done in such cases and under such circumstances as may be prescribed (rule 6DD) having regard to the nature and extent of banking facilities available, "considerations of business expediency and other factors".