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Facts
The assessee, a liquor contractor in its first year of trade, made substantial cash payments totaling Rs. 3,11,58,000/- for liquor purchases. These payments were necessitated by urgent business requirements, the supplier's refusal to accept non-cash payments without a bank account, and the need to secure immediate license allotment and pay excise duties. The Assessing Officer disallowed this expenditure under Section 40A(3), but the CIT(A) subsequently deleted the addition.
Held
The Tribunal upheld the CIT(A)'s decision, concluding that the cash payments were made due to genuine business difficulties and did not indicate tax evasion, as evidenced by Form 26AS. Relying on judicial precedents, including a High Court ruling affirming exigencies requiring cash payments for business operations, the Tribunal found the CIT(A)'s order to be well-reasoned and dismissed the Revenue's appeal.
Key Issues
Whether the CIT(A) was justified in deleting the disallowance under Section 40A(3) for cash payments, considering the assessee's genuine business difficulties and the absence of tax evasion.
Sections Cited
40A(3), 6DD
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Income Tax Appellate Tribunal, CHANDIGARH BENCH, ‘A’, CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
Order Per Krinwant Sahay, AM: Appeal in this case has been filed by the Revenue against the order dated 12.09.2023 of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi.
Grounds of appeal are as under: -
1. 1. Whether on the facts and in the circumstances of the case, the CITIA) has erred in deleting the 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 2 addition of Rs.3,11,58,000/- made on account of disallowance of expenditure in cash in violation of section 40A(3) of the I.T. Act, 1961 by ignoring the fact that the AO had rightly made the addition on the facts having sufficient reasons and material available on record.
2. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs.3,11,58,000/-, when none of the exceptions laid down under Rule 6DD of the Income Tax Rules is involved in the assessee case.
3. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition made of Rs.3,11,58,000/-u/s 40A(3) of IT Act, 1961 by holding that the cash payments were made as the appellant faced genuine difficulties, were not found made only on one or two occasions but repeatedly many times as well as the fact is that the assessee had made almost 50% of total purchases during the year in cash in violation of Section 40A(3) of IT Act, resulting into defeating the basic purpose of insertion of section 40A(3) of IT Act, 1961.
Although the Revenue has taken three grounds of appeal but the only issue involved is a deletion of addition made by the AO of Rs. 3,11,58,000/- disallowing the expenditure in cash in violation of section 40A(3) of the Income Tax Act, 1961 (in short 'the Act').
665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 3 4. The Ld. CIT(A) has given a very detailed findings on this issue in the appellate order which is as under:-
On the only issue at hand i.e., addition u/s 40A(3) of the Act, Hon'ble ITAT has restored the matter back to CIT(A) directing to adjudicate the issue afresh in accordance with law after examining and considering all facts and jurisprudence relating to the issue. The matter was referred back by Hon'ble ITAT because the CIT (A) had not considered the submission of the appellant and confirmed the addition by passing a non-speaking order. The main contention of the appellant are as under: - As Para 3.1 and 3.2 of the order, the AO has confirmed the genuineness of the purchases as the same is supported by Form 26AS. The payments were made to M/s Piccadily Agro Industries for purchase of liquor as the appellant had to procure liquor immediately for allotment of license and had to pay Rs.5.94 Cr. plus Rs. 1.67 Cr to the Haryana State Excise for license fees and excise duty i.e. more than Rs. 2 lakhs per day. Which means even 4-5 days, delay 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 4 could have affected the business operations of the assessee badly. The Assessee being in the first year of trade had no such credibility with the suppliers and therefore had to work on whims and wills of supplier to avoid the cost burden and to earn some profit as delay in procurement would have adverse effect on business. The supplier has refused to supply the goods, unless the amount is received by him in his bank account. Further assessee had deposited every payment to M/s Piccadily Agro Industries Ltd. in its Bank Account. Relied on various decisions wherein the courts have held that in cases of genuine difficulties faced by the appellant, provisions of Section 40A(3) are not applicable. Disallowance of the entire cash purchase results in abnormal trading profit for the assessee which it could never earn. There had never been any tax evasion with these transactions. The primary objective of enacting Section 40A(3) was to put a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and the provision 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 5 was directly related to curb the evasion of tax Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. The appellant also relied on CBDT Circular No. 6P dated 06/07/1968 reiterated this view that the provision is designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and the reasonableness of the payment. 6.1 It is necessary to mention here that CIT(A) has confirmed the addition on the basis of Remand Report dated 28/08/2019 of the AD. In the Remand Report, the AO has submitted as under:- “The assessee had claimed expenditure of Rs.6,37,87,630/- as purchases in the trading account and did not produce books of account but aggregate of payments made for purchases through cheque/DD comes to Rs. 3,26,29,600/- as against the total purchase of Rs. 6,37,87,600/- Further, it was also noticed that there were no sundry creditors in the balance sheet, therefore, it confirms the fact that the assessee had made all the purchases in cash during 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 6 the year himself. Therefore, the balance amount of Rs. 3.11,58,000/- was added to the returned income of the assessee treating the same to have been paid through cash by the assessee in violation to the provisions of Section 40A(3).” In the Remand Report the AO has simply repeated the facts mentioned in the assessment order without making any further enquiries or examining the issue in the light of submissions made by the appellant before the CIT (A). Further the CIT (A) has also not considered the submissions of the appellant which have been considered now as per the directions of Hon'ble Tribunal. In view of the above facts of the case I am of the opinion that the cash payments were made as the appellant faced genuine difficulties. Further, the payments have been declared for tax which is supported by Form 26AS. Accordingly. the addition made by AO of Rs.3,11,58,000/- made u/s 40A(3) of the Act is deleted and the ground of appeal is 'Allowed".
5. During the proceedings before us, ld. Counsel for the Assessee relied on the order of the CIT(A) and he also brought it on record different case laws one of them is by the Hon'ble Jurisdictional High Court of Punjab & Haryana in the case of ‘Commissioner of Income Tax vs Brij Mohan 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 7 Singh & Co’, IT case No.39 of 1993 dt. Dec. 7, 1993,[(1993) 61 CCH 0-945 PHCC]. wherein it has been held as under; - “The provisions of s.40A(3) are to be read along with r. 6DD framed under the Act, dealing with the subject of payments made by the assessee in cash and not by cheques or drafts more than the prescribed amount. In the facts of the present case, it was observed that it would be impracticable to carry on such business through cheque payments. In fact, there might be a serious impediment in ensuring proper distribution of butter and other dairy products. The only answer is the credit facility which was not granted in this case except on a deposit of Rs. 3.00,000 or a bank guarantee. It was observed that such was a question of fact and not a question of law. The Tribunal accepted the material produced by the assessee in support of its contention while holding that the assessee did not have any bank account at the place where purchases were made. Similar finding was recorded with respect to the seller of liquor. One of the conditions of the circular No. 220 dt. 31st May, 1977, thus, stood complied with, to enable the assessee to claim deduction of the expenditure. Further the appeal of the assessee was accepted that the actual amount for which purchases of liquor under the permits granted by the Excise & Taxation Department were to be made, were to be known only at the time of actual purchase. Thus, at that relevant time, it was not possible to obtain bank drafts to 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 8 make the purchases. Furthermore, the present is a case where identity of the payee has been successfully established, i.e. the liquor to be purchased by the assessee, a liquor contractor from the distillery could only be made on issuing of permits, identifying the distillery. The object of provisions of s. 404 is to curb flow of black money and not to put an impediment over the trade and business- Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251: (1991) 191 ITR 667 (SC): JT 1991 (3) SC 352 and CIT vs. Union Agencies (1987) 59 CTR (Del) 16: (1987) 166 ITR 529 (Del) relied on: C Sawaran Singh Balbir Singh (1981) 20 CTR (P&H) 131: (1982) 136 ITR 595 (P&H) followed”
6. Per contra, the ld. DR argued vehemently that the order of the Ld. CIT(A) is not a reasoned order.
7. We have considered the findings given by the AO in the assessment order and by the Ld. CIT(A) in the appellate order as well as the order of the Tribunal on this issue while remanding back to the file of the CIT(A). We have also considered the order of the CIT(A) in the second round based on the remand report given by the Assessing Officer. We have also gone through the order of the Hon'ble Jurisdictional High Court in the case of ‘Commissioner of 665-Chd-2023 Jasvir Singh, Distt .Kurukshetra 9 Income Tax vs Brij Mohan Singh & Co’ (supra), wherein the Hon'ble Jurisdictional High Court has clearly held that in some cases while the exigencies required payments in cash by the Assessee in order to run the business cannot be denied. Having gone through the other case laws brought on record by the ld. Counsel for the Assessee and the findings given by the Ld. CIT(A) in his appellate order, we find that the order of the CIT(A) on this issue is a well-reasoned order and, therefore, we do not find any reason to make any interference in it. Accordingly, Revenue’s appeal on this issue is dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced on 11.08.2025.