Whether when genuineness of transaction is not in doubt, even then 20% disallowance is warranted for violation of Sec 40A(3) - YES: ITAT

THE issues before the Bench are - Whether when the genuineness of the transaction is not in doubt, even then 20% disallowance is warranted for violation of Sec 40A(3) and Whether the disallowance made u/s 40a(ia) can be made only on the amounts payable by the assessee. And the answers go against the assessee.

Facts of the case

The assessee is engaged in the business of forming layouts on turnkey basis for housing co-operative societies. As the assessee could not furnish any plausible explanation as to why the payments other than the account payee cheques should not be disallowed u/s 40A(3), the AO disallowed 20% of such payment and added back to the total income of the assessee. The CIT(A) observed that the payments were made by bearer cheques, so that cheques were encashed in the banks and, therefore, the facility of banks were utilized. Therefore, according to him, the assessee had not proved the necessity of making the payments in cash other than by account payee cheques. The CIT(A) held that where the genuineness of the transactions was not proved, then the entire amount was not to be allowed and even if the transactions were genuine, the disallowance u/s 40A(3) was to be made if the payment was not made by account payee cheque except in the circumstances mentioned in sec. 40A(3) r.w Rule 6DD and upheld the disallowance made by the AO. The AO made the disallowance of commission payment and interest on vehicle finance u/s 40a(ia) on the ground that the assessee had failed to make deduction of tax at source on these payments. The CIT(A) confirmed the order of the AO.

On Appeal before the Tribunal the Assessee's Counsel submitted that the directors of the company were acting as agents of the company for entering into sale agreements for purchase of land and, therefore, clause (k) of Rule 6DD applies, wherein it was provided that where the payment was made to commission agent who was required to make payment in cash for goods or services on behalf of such person, then no disallowance u/s 40A(3) can be made.

The DR submitted that the CIT(A) had extensively dealt with each of the payments and had found that most of the land owners resided in Mysore and further that the bearer cheques were also encashed in Mysore, where bank facilities were very much available and, therefore, disallowance u/s 40A(3) was justified.

Having heard the parties, the Tribunal held that,

++ we find that there is no doubt that there is contravention of provision of sec. 40A(3). For the applicability of exceptions provided under Rule 6DD, the assessee has to establish the hardship or inconvenience that is caused to the payees if the payments are made by the account payee cheques;

++ as rightly pointed out by the CIT(A), the bearer cheques had to be encashed in the banks only and, therefore, the argument of the assessee that the payment had to be made in cash to the agriculturists is not acceptable. The hardship or inconvenience faced by the agriculturists is also not demonstrated by the assessee. The assessee’s reliance on clause (k) of Rule 6DD is also not acceptable for the reason that the payments were directly made to the agriculturists and not to its agents i.e the directors. Even if it is accepted that the payments are made by the assessee to its directors, the onus still lies on the assessee to prove that the directors were compelled to make payment by cash or bearer cheques on behalf of the assessee;

++ as already held by various Courts as brought out by the CIT(A) in his order, the applicability of sec. 40A(3) and its constitutional validity has been upheld irrespective of whether the transaction is genuine or otherwise. As rightly pointed out by the CIT(A), the genuineness of the transactions are irrelevant, as in the case of non-genuineness transactions, entire payments is to be disallowed, whereas in the case of genuine cases only 20% of the payments are to be disallowed and treated as profits and gains of business or profession of the assessee;

++the disallowance u/s 40a(ia) of both the commission payments and interest on vehicle finance is on the amounts paid by the assessee to the respective authorities. We find that the issue is covered by the Special Bench of the Tribunal in the case of M/s Merilyn Shipping & Transports Visakhapatnam, wherein it was held that the disallowance made u/s 40a(ia) can be made only on the amounts payable by the assessee and, therefore, respectfully following the said decision of the Special Bench, the additions made on account of the disallowance u/s 40a(ia) on the amounts paid by the assessee are deleted.