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Facts
The assessee, engaged in trading red chillies, made a payment of Rs. 33,77,400 to one Mr. Thimappa Jangali via cheque. The AO disallowed this payment under Section 40A(3) of the Income Tax Act for non-compliance with cash payment rules. The assessee claimed the exception under Rule 6DD(j) as the payment was to a farmer and involved genuine difficulty.
Held
The Tribunal held that although Section 40A(3) was violated, the disallowance was saved by the exception under Rule 6DD(j). They noted that the payee's identity and the genuineness of the payment were not in doubt, and the fund movement demonstrated a pragmatic approach to the transaction.
Key Issues
Whether the disallowance under Section 40A(3) is sustainable when the payment was made to a farmer and the transaction falls under the exception provided in Rule 6DD(j), considering the factual matrix and judicial precedents.
Sections Cited
147, 144B, 40A(3), 131, 6DD(j)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI KESHAV DUBEY
Per Prashant Maharishi, Vice President
This appeal is filed by Maheshwara Reddy Venkatareddy Jonnala (the assessee/appellant) for the assessment year 2017-18 against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(Appeals)] dated 12.2.2025 wherein the appeal filed by the assessee on 9.5.2022 against the assessment order passed by the National Faceless Assessment Centre, Delhi [ld. AO] u/s. 147 r.w.s.
144B of the Income-tax Act, 1961 [the Act] dated 31.3.2022 was partly allowed.
The assessee is aggrieved now with only one issue of disallowance u/s. 40A(3) of Rs.33,77,400. This is the solitary ground in this appeal.
The brief facts of the case show that assessee filed his return of income belatedly on 3.2.2018 declaring total income of Rs.10,49,786. Assessee claims that he is engaged in trading in red chillies. The Jt.DIT (Inv.), Hubballi carried out an inspection on 14.2.2019 at the premises of one Cold Storage wherein statement of assessee and one Mr. Thimappa Jangali was recorded. It was found that assessee is carrying on the business of chilly stock trading without the permission of the owner at the premises of that Cold Storage. During the inspection it was revealed that Rs.33,77,400 were paid by assessee to Shri Thimappa Jangali by way of a cheque No.19851 dated 15.12.2018 vide which cash was withdrawn by Thimappa Jangali. This act of assessee was clear violation of the provisions of section 40A(3) of the Act.
The assessee in response to query raised mentioned that the above amount was paid against purchase of red chilly and Mr. Jangali is a farmer. The assessee contended that payment in cash is to the cultivator, grower or processor of agricultural produce is covered by the exception under Rule 6DD of the I.T. Rules. The ld. AO rejected the contention of the assessee as assessee did not furnish documentary evidences to show that recipient was a farmer. It was further noted at the time of recording of statement u/s. 131 that it was claimed by both the parties that both are engaged in trading of red chillies. Accordingly draft assessment order was passed disallowing the above sum.
Further as assessee did not furnish any documentary evidences that the recipient of the sum is a farmer, the above disallowance was made in reassessment order passed u/s. 147 r.w.s. 144B of the Act on 31.3.2022.
The assessee aggrieved with the same preferred appeal before the ld. CIT(A). The ld. CIT(A) decided ground No.3 of the appeal on this issue holding that as assessee did not submit any relevant documents to submit support his claim that payee was a farmer, the addition was confirmed. The assessee is aggrieved with the same.
The ld. AR submitted the facts and also stated that recipient has given a confirmation letter that he received the payment. Further the IDBI Bank has also given a certificate that identical amount was deposited on the same day in the account of the recipient. It was further stated that CBDT Circular No.220 dated 31.5.1977 clearly provides that if the assessee produces a letter with respect to the specific requirement of Rule 6DD(j), then disallowance u/s. 40A (3) of the Act is not warranted. It was the claim that for the previous year relevant to AY 2017-18, Rule 6DD(j) was in the statute book. He further stated by relying on the Circular 4 coordinate Benches have deleted the disallowance u/s. 40A (3) of the Act. He referred to the decisions of Hon’ble Gujarat High Court in 167 ITR 378, Calcutta High Court in 179 ITR 22 as well as Rajasthan High Court in 298 ITR 349. Accordingly, it was concluded that disallowance could not have been made.
The ld. DR vehemently submitted that the assessee has failed to show the evidence that recipient of the same is a farmer and therefore assessee is not entitled to the benefit of Circular No.220 dated 31.5.1977 and other decisions are distinguishable.
We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. In this case, facts show that assessee is an individual, who is carrying on trading of dry chillies in Agricultural Produce Market Committee, Byadgi. In fact he was employee at Siddhaligneshwara Cold Storage. The trading of dry chilly was carried out by the assessee without the knowledge of the owner of the cold storage. This fact was found during the course of inspection. During the inspection statement of assessee and Mr. Thimappa Jangali was recorded, who were found to be traders in Chilly.
It was found that the assessee has made payment of Rs.33,77,400 to Thimappa Jangali for purchase of dry Chillies by bearer Cheque No.19851 dated 27.5.2016 drawn on IDBI Bank Ltd., Ranebennur. The recipient of the above cheque withdrew cash from the bank a/c on the same date. A certificate by IDBI Bank dated 9.4.2025 was issued wherein the Bank has certified that a sum of Rs.33,77,400 was deposited in the loan account of the recipient on 27.5.2016 which was withdrawn by recipient from the same Branch of the same Bank of same amount at 12.05 PM and deposited in the bank account of recipient. The Bank has submitted that the transaction of the withdrawal from the bank account of the assessee and transaction of deposit in the same bank a/c of recipient took place within 2 minutes. The claim of assessee is that according to the provisions of Rule 6DD(j), if due to exceptional or unavoidable circumstances or such payment would have caused genuine difficulty to the payee, disallowance cannot be made if the evidence are furnished to the satisfaction of the AO about the genuineness of the payment and identity of the payee. In this case, the identity of the payee is not at all in doubt and genuineness of the payment is also not in doubt. There is a letter also produced where the seller has given the details about his address, etc. for the proper identification of the recipient. The instances listed in Circular No.220 dated 31.5.1977 are also not exhaustive. The above Circular has also been considered by the Hon’ble Gujarat High Court and Hon’ble Calcutta High Court and both the High Courts have held that AO should have taken a practical approach to the payment and strike a balance between the direction of the law and hardship to the assessee. It was further held that the AO should take a pragmatic view of the matter. In the present case, there is no dispute with respect to identity of the payee, amount paid, nature of payment and identity of the recipient of the sum. The fund movement also shows that assessee issued a bearer cheque to the recipient, who withdrew the cash from the bank a/c of assessee from IDBI Bank and immediately on withdrawal deposited the same in his loan a/c with IDBI Bank on the same date. Further the Bank has also certified that the time gap between the transaction of withdrawal from the bank a/c of the assessee and deposit in the loan a/c of the recipient is just 2 minutes. Therefore, though violation of section 40A (3) is established but disallowance is saved by the exception of Rule 6 DD (j) of The Income Tax Rules 1962. In view of the above facts, taking a pragmatic view and respectfully following the decision of Hon’ble High Courts cited before us and interpreting the Circular issued by the CBDT, after considering the exception of rule 6 DD (j), we hold that disallowance made by the ld. lower authorities of Rs.33,77,400 u/s. 40A(3) of the Act is not sustainable and hence the AO is directed to delete the same.
Thus, solitary ground in the appeal of assessee is allowed and consequently appeal is also allowed. Pronounced in the open court on this 9th day of July, 2025.