NIKHIL JAIN (L/H OF BEENA JAIN),NEW DELHI vs. ACIT CIRCLE-31(1), NEW DELHI

Facts of the case, in brief, are that the assessee is an individual having income from house property, business & profession, capital gains and other sources. She filed her return of income on 12th October, 2016 declaring the total income at Rs.18,21,460/-. During the course of assessment proceedings, the AO noted that the assessee has not disallowed any amount in excess of Rs.20,000/-paid

He further observed from Form No.3CD furnished by the assessee wherein it has been clearly mentioned that the assessee has made payments amounting to Rs.24,60,887/- in cash to various parties. He, therefore, asked the assessee to explain as to why the addition should not be made invoking the provisions of section 40A(3) of the IT Act.

So far as purchase of coal/freight charge was concerned, it was submitted by the assessee that it is the trade practice to purchase coal through agents from different suppliers in the country which depends on its availability. The agents earned commission on the transactions made through them either from the buyer or from the seller. On the issue of payment of machinery repairs, it was submitted that the machines are prone to break-down and require immediate repairs. It was submitted that the assessee could not wait to comply with the procedural formalities of making payments through banking channels. So far as staff welfare expenses are concerned, it was submitted by the assessee that the payments were 2

In appeal, the ld.CIT(A) deleted the disallowance of Rs.57,800/- for violations of provisions of section 40A(3) on account of staff welfare expenses. So far as the remaining amount is concerned, the ld.CIT(A) upheld the action of the AO by observing as under:- “5.2.1 I have carefully considered the observations of AO and submissions of appellant. It is seen that as per Form 3CD furnished by assessee, AO noted that assessee had made payments of more than-Rs.20,000/- in cash Rs.24,60,887/- to various parties for freight amounting to inwards/machinery repairs/mobile phone/coal purchase/staff welfare. With respect to purchase of coal amounting to Rs. 13,16,786/- and freight charges payment for transporting coal to assessee’s factory amounting to Rs. B,8l,493/-, appellant has submitted that he did not purchase coal directly from the suppliers but procured it from agents appointed by suppliers to sell coal in their region against payment of commission. He has -further submitted that identity of the supplier is known only when the truck driver reaches his destination and before the coal is unloaded buyers has to pay to the truck driver the entire amount towards coal, freight Charges, enroute expenses and loading & uploading expenses in cash. HE has also submitted that if he fails to make the cash payment, agent diverts the truck to some other buyers. Therefore; it becomes difficult to displease the agents as the truck drivers do not accept payment by cheque. With respect to machinery repairs amounting to Rs. 1,72,408/- he has submitted he has submitted that in case of machinery break down/replacement of parts to make the machine functional, the assessee had to .pay in -cash and payments were made to mechanic in cash. 5.2.2 I have carefully considered the observations of AO and submissions of appellant. Appellant has claimed that payments were made in cash as the other party insisted on payments in cash or otherwise the trucks would be diverted and that it was purchased from the agent of suppliers. Howe4ver, no evidence has been submitted by appellant to establish his claim. Moreover, if 3

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:- “1. That the Ld. CIT(A) has erred in law and on facts in affirming the action of the Assessing Officer by confirming the disallowance of expenses of Rs 24,03,087 u/s 40A(3) of the Income Tax Act. 2. That the ld. CIT(A) has erred in law by confirming the disallowance of Rs 32,400/- for purchase of mobile phone in cash which is a Capital Expenditure on which Section 40A(3)of the Income Tax Act is not applicable. Hence, addition of Rs 32,400/- may please be deleted. 3. That the ld. CIT(A) has erred in law and facts of the case by confirming the disallowance of Rs 13,16,786/- u/s 40A(3) for purchase of coal and Rs 8,81,493/- u/s 40(A)(3) for payment of freight made to the agent as a trade practice and business could not conducted if payment was not made in cash. Hence, addition of Rs 21,98,279/- may please be deleted.

The ld. Counsel for the assessee strongly challenged the order of the CIT(A) in sustaining the addition of Rs.24,03,087/- u/s 40A(3) of the Act out of the total addition of Rs.24,60,887/-. He submitted that the assessee is a manufacturer of textiles and it requires constant supply of coal. Referring to pages 37 to 58 of the paper book, the ld. Counsel submitted that the payments were made for purchase of coal. He submitted that without constant supply of coal the assessee could not have continued the manufacturing process. He submitted that the AO has not disputed the genuineness of the purchases or the payments, but, has disallowed only on account of violations of the provisions of section 40A(3) of the Act. He submitted that in this case since the suppliers are not known to the assessee and the purchases were made from their agents, it would have practically been impossible on the part of the assessee to make the payments through account payee cheque or

So far as freight inward expenses of Rs.8,81,493/- is concerned, he submitted that out of the total freight expenses of Rs.25,74,906/-, the cash components includes Rs.8,81,493/- which mainly relates to purchase of coal. He submitted that the assessee had to pay cash to the truck drivers for expenses of freight on purchase of coal under compulsion and exigencies of transaction. The lower authorities have not disputed regarding the genuineness of the payments as

So far as the machinery repairs of Rs.1,72,408/- is concerned, he submitted that out of the total machinery repair expenses of Rs.27,49,934/-, only an amount of Rs.1,72,408/- has been incurred in cash which, again, are due to sudden breakdown of machinery that required immediate repair or replacement of parts to make the machine functional to avoid production loss. Therefore, no disallowance u/s 40A(3) is called for.

So far as the purchase of mobile phone amounting to Rs.32,400/- is concerned, he submitted that the same has been shown under the fixed assets and not claimed as an expenditure in the P&L Account. Therefore, no disallowance u/s 40A(3) is called for. Referring to the decision of the Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO, reported in 191 ITR 667, he submitted that the provisions of section 40A(3) only empowers the AO to disallow the deduction claimed as expenditure in respect of which payment is not made by 7

The ld. DR, on the other hand, heavily relied on the order of the CIT(A). He submitted that the ld.CIT(A) has given valid reasons while sustaining the part disallowances made by the AO u/s 40A(3) of the IT Act. He accordingly submitted that the order of the ld.CIT(A) being based on factual aspect and as per the provisions of the Act, the same should be upheld and the grounds raised by the assessee should be deleted.

I have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case made an addition of Rs.24,60,887/- u/s 40A(3) of the Act on the ground that the assessee has made certain payments in excess of Rs.20,000/- by cash other than by account payee cheque or bank draft or pay order and, therefore, has violated the provisions of section 40A(3) of the Act. I find, the ld.CIT(A) upheld the action of the AO in respect of payment of Rs.8,81,493/- on account of freight charges, Rs.13,16,786/- on account of purchase of coal and Rs.1,72,408/- on account of machinery repairs. He also sustained the disallowance made by the AO on account of purchase of mobile amounting to Rs.32,400/-. He, however, deleted the disallowance on account of staff welfare expenses. It is the submission of the ld. Counsel that the lower authorities have wrongly invoked the provisions of section 40A(3) of the IT Act on account of freight charges, machinery repairs, expenses on mobile and payments made for purchase of coal.

So far as the purchase of coal for Rs.13,16,786/- is concerned, I find, out of the total purchase of Rs.13,70,16,762/-, the cash purchases are only to the tune of Rs.13,16,786/-. I find merit in the submission of the ld. Counsel that at certain times the coal has to be purchased through the agents which was supplied through the truck drivers of the suppliers. The assessee was bound to procure the coal to keep the furnace going to sustain the production. Therefore, procurement of coal

So far as the freight inward expenses of Rs. Rs.8,81,493/- is concerned, I find the same is mainly related to purchase of coal. I find, merit in the argument of the ld. Counsel that the assessee had to pay the cash to the truck drivers for expenses of freight on purchase of coal as a compulsion and exigency of transaction. Further, the lower authorities have not disputed the genuineness of the payment on account of freight charges since no disallowance has been made. I also find merit in the argument of the ld. Counsel that as per the proviso to section 40A(3) in the case of payment made for plying/hiring or leasing goods carriages,

So far as the machinery repair of Rs. 1,72,408/- is concerned, I find, out of the total machinery repairs of Rs.27,49,934/- only Rs.1,72,408/- had been incurred by the assessee in cash. In my opinion, the explanation of the assessee that certain expenses had to be incurred in cash due to certain breakdown of the machinery that requires immediate repairs by replacement of parts to make the machine functional to avoid production loss, is a commercial expediency and the genuineness of the expenditure has not been doubted. I, therefore, hold that due to the extraordinary nature of the expenditure the technicalities should not stand in the way and the disallowance u/s 40A(3) is uncalled for.

So far as the disallowance on account of mobile phone of Rs.32,400/- is concerned, I find merit in the argument of the ld. Counsel that the phone was shown in the balance sheet as a capital asset and was not claimed as an expenditure. The Hyderabad Bench of the Tribunal in the case of Kalyan Constructions vs. ITO, vide ITA No.2113/Hyd./2017, has held that provisions of section 40A(3) do not apply to purchase of an asset. Respectfully following the

In the result, the appeal filed by the assessee is partly allowed. The decision was pronounced in the open court on 08.04.2021.