The Delhi Bench of the Income Tax Appeal Tribunal (ITAT) has ruled that no disallowance can be made under Section 40A(3) of the Income Tax Act of 1961 for payments made otherwise than by account checks or bank drafts for the purchase of farmland, where the seller of the farmland insisted on payment in cash.
The bench of Saktijit Dey (judicial member) and Pradip Kumar Kedia (accounting member) observed that business expediency considerations and other relevant factors, which provide an exception to Section 40A(3), did not diluted even after the amendment of Rule 6DD(j) of the Income Tax Rules 1962.
Therefore, the ITAT held that when the seller of the agricultural land had made a condition precedent to the registration of the deed of sale by insisting that payment be made in cash, the assessee was compelled to make the cash payment due to commercial expediency and therefore no 40A(3) rejection could be made.
The rated M/s. Geo Connect Ltd. is in the real estate business, which purchased agricultural land from an elderly person. The assessee issued bearer checks in the amount of more than one crore of rupees for the consideration for the sale of the said land.
During the valuation process, the Valuation Officer (AO) observed that the appraise had made the said payments for the purchase of farmland other than through account checks or bank drafts, in breach of Section 40A(3) of the Income Tax Act 1961, read together with Rule 6DD of the Income Tax Rules 1962. Accordingly, the AO disallowed the expenses incurred by the person assessed under Section 40A(3) of the Income Tax Act. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the order made by the AO. Against this, the person evaluated filed an appeal with the ITA.
The rated M/s. Geo Connect Ltd. argued before ITAT that the payments were made for the purchase of farmland and that the seller of the farmland insisted that the full consideration be paid in cash. Therefore, the assessee claimed that she had no alternative but to make the payment by checks to bearer.
The assessee added that the purpose of Section 40A(3) is to ensure that no fictitious amount is claimed as an expense by the holder and that the intention of the legislator is not to restrict the activity real business.
Arguing that the primary purpose of Section 40A(3) is to combat tax evasion and not to hinder genuine transactions, the person being assessed argued that where the bearer is able to establish the identity of the recipient and the authenticity of the payment or transaction, cash payments cannot be refused under section 40A(3).
Section 40A(3) of the Income Tax Act provides that any expenditure in excess of ten thousand rupees made other than by check from the beneficiary of the account or bank draft shall not be permitted. as a deduction.
The first condition of Section 40A(3) provides that no refusal under Section 40A(3) shall be made in certain prescribed cases and circumstances, having regard to the nature and extent of banking facilities available as well as consideration of business opportunity and other relevant factors. In addition, Rule 6DD of the Income Tax Rules prescribes the exceptions under which Section 40A(3) would not apply.
The ITA observed that the assessee had argued before the AO that the seller of the agricultural land had made a condition precedent to the registration of the deed of sale by insisting that the full consideration be paid in cash before the record.
In reviewing the bank statements, ITA found that the consideration for the sale had been paid to the seller by bearer checks, which were withdrawn the same day and that on the same day the deed of sale was registered at the benefit of the appraised. Consequently, the Court held that the assessee had established the authenticity of the transaction between the parties, the payment made by the assessee and the purpose of said payment.
The Tribunal referred to the provisions of Rule 6DD(j), as it existed prior to its amendment, which provides that Section 40A(3) of the Income Tax Act would not apply where the assessee satisfies the income tax officer that payment cannot be made in accordance with section 40A(3) because of exceptional or unavoidable circumstances, or because payment in the manner prescribed is not was not practicable, or, given the nature of the transaction, it would have caused real hardship to the beneficiary.
The ITA has ruled that in light of the provisions of Section 40A(3) read with Rule 6DD, no rejection under Section 40A(3) can be made if the transaction for which payment was made was genuine and due to business expediency and other compelling factors that said payment should be made in cash.
In addition, ITAT observed that the Supreme Court of Attar Singh Gurmukh Singh vs ITO (1991), while confirming the constitutional validity of section 40A, paragraph 3, had held that the said provision was not intended to restrict commercial activity and that the restrictions provided for therein were only intended to limit the possibilities of using or to create black money and therefore such restrictions should not be considered as restricting freedom of trade or business. So the Apex Court held that considerations of business expediency and other relevant factors are not excluded from the scope of Section 40A(3) and that it is open to the assessee to satisfy the AO that payment in the manner prescribed under Section 40A(3)() was impractical or would have caused actual hardship to the recipient.
The Tribunal noted that in the case of A. Daga Royal Arts v ITO (2018), the Jaipur Bench of ITA ruled that the legal proposition made by the Supreme Court regarding the consideration of business expediency and other relevant factors was not diluted in any way even after the amendment of the 6DD(j) rule. Furthermore, the Court in A. Daga Royal Arts (2018) held that there had been no change in the provisions of section 40A(3) with respect to the examination of commercial expediency and other relevant factors and that the rules established by way of Delegated legislation could not override substantive legislation in the form of Section 40A(3), which did not change in character.
While observing that the sincerity of the payment made by the assessee was not in doubt and that the beneficiary of the sum had set a condition precedent to the registration of the deed of sale by insisting that the payment be made in cash, the ITAT determined that the assessee was compelled to make the cash payment due to the business opportunity and therefore no 40A(3) denial could be made.
Reiterating that no denial under Section 40A(3) can be made where the seller of the farmland has insisted on cash payment, ITAT allowed the appeal and removed the denials made by the seller. ‘AO.
Case title: M/s. Geo Connect Ltd. against DCIT
Date: 29.08.2022 (ITAT Delhi)
Representative of the Assessed/Appellant: Mr. Rohit Jain, Lawyer; Ms. Manisha Sharma, Lawyer
Tax Representative / Defendant: Mrs. Anupama Singla, Sr. DR
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