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Facts
The assessee, a cooperative society, faced a disallowance of INR 72,30,560/- under Section 40A(3) for cash payments made during Assessment Year 2010-11 for goods supplied under a 'Sabarimala Contract'. The assessee argued business exigency due to suppliers insisting on immediate payment, urgent procurement needs, and the lack of RTGS/NEFT facilities at its cooperative bank, which necessitated withdrawing cash and depositing it directly into suppliers' bank accounts. The Assessing Officer and CIT(A) upheld the disallowance.
Held
The Tribunal noted that the genuineness of the transactions was not disputed and found a lack of factual findings by the lower authorities regarding business exigency. Considering the need for supporting documents to substantiate the business exigency claims, the Tribunal remitted the issue of disallowance under Section 40A(3) and the genuineness of purchase transactions back to the Assessing Officer for de novo adjudication.
Key Issues
Whether the disallowance under Section 40A(3) for cash payments was justified, considering claims of business exigency, suppliers' insistence on cash, and lack of modern banking facilities. Whether the payments fell under the exceptions provided by Rule 6DD.
Sections Cited
143(3), 147, 148, 250, 40A(3), Rule 6DD
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Date Conclusion of hearing : 21.08.2025 Pronouncement of order : 18.11.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
The present appeal preferred by the Assessee is directed against the order, dated 24/03/2025, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] whereby the Ld. CIT(A) had dismissed the appeal against the Assessment Order, dated 17/03/2014, passed under Section 143(3) read with Section 147 of the Income Tax Act, 1961 for the Assessment Year 2010-2011. 1.1. There is a delay of 69 days in filing the present appeal. In the application seeking condonation of delay it has been explained that the Accountants Manager who had been responsible for handling Assessment Year 2010-2011 income tax matters was on Medical Leave prior to being transferred from Head Office on 16/06/25. The new Accountant Manager assumed charge on 28/06/25 and thereafter, chartered accountant was contacted to prepare and file the present appeal. Accepting the explanation offered, we condone the delay of 69 days in filing the present appeal holding that the Assessee was prevented by sufficient cause from filing appeal before the Tribunal within the time prescribed. Accordingly, the delay of 69 days in filing the present appeal is condoned.
We now proceed to adjudicate the grounds raised by the Assessee which are as under:
“1. It is respectfully submitted that the order passed by the NFAC, Delhi u/s. 250 of the Income Tax Act, dismissing the appeal for Asst. Year 2010-11 is infirm and unsustainable in law.
2. The lower authorities erred in holding that the appellant's case is not falling within the purview of exceptions as per Rule 6DD of the Income Tax Rules, 1962, which recognizes exceptions where payment in cash is necessitated by business exigencies.
The lower authorities erred in upholding the disallowance under section 40A(3) of the Act in respect of payments totaling Rs. 72,30,560/ made directly into the bank accounts of suppliers, despite the same being compelled by business exigencies and practical limitations of the banking facilities available to the appellant.
4. The lower authorities erred in treating section 40A(3) as a rigid rule, overlooking that it is not intended to restrict legitimate business operations or compel impractical compliance at the cost of business efficacy.
5. The lower authorities erred in ignoring the nature of the appellant's business, which involved urgent procurement of essential supplies for Lord Ayyappa Temple during the peak season, necessitating swift and practical payment mechanisms.
The lower authorities ignored the fact that the transactions were genuine and duly recorded in the books of account.
2 Assessment Year 2010-2011 7. The learned first appellate authority erred in disregarding that the genuineness of the transactions was never in question, and that the essential purpose of section 40A(3) is to curb black money and undisclosed payments, not to penalize bona fide transactions.”
3. The relevant facts in brief are that the Assessee, a cooperative society engaged in the business of sale of motor pumps, agriculture equipment and food products, did not file return of income for the Assessment Year 2010-2011. Reassessment proceedings were initiated in the case of the Assessee by issuance of notice dated 25/10/2012 under Section 148 of the Act. In response to the aforesaid notice Assessee filed return of income on 17/01/2013 declaring ‘Nil’ income. During the assessment proceedings the Assessing Officer noted that payment aggregating of INR.72,30,560/- were made in cash during the relevant previous year. Therefore, the Assessee was asked to provide explanation for the same. In response the Assessee submitted that cash payments were made related to the purchase of goods in connection with ‘Sabarimala Contract’ since all the suppliers insisted the immediate payment/advance payment for the supply of commodities. The Assessee was maintaining credit facility account with Kannur District Co-Operative Bank Limited, Kannur, a banker with no RTGS facilities. Therefore, the Assessee approached State Bank of India for making the payments and the payments were made in cash directly into the bank account of supplier. The Assessing Officer was of the view that the aforesaid payments were made by the Assessee in violation of provisions contained in Section 40A(3) of the Act and therefore, Assessee was asked to show-cause as to why disallowance was not made for the same. In response, the Assessee submitted that the amounts were directly deposited to the bank account of the suppliers and genuineness of transactions was verifiable and no disallowance was warranted in the instant case. It was submitted that Assessee submitted was forced to transfer the money to the supplier in cash on account of business exigencies and 3 Assessment Year 2010-2011 therefore, as per the provisions contained in Section 40A(3) of the Act and Rule 6DD of the Income Tax Rules 1961 [for short ‘the IT Rules’], disallowance was not warranted in the facts and circumstances of the present case. However, the Assessing Officer was not convinced with the explanation/submissions of the Assessee and proceeded to disallow INR.72,30,560/- invoking Section 40A(3) of the Act. The aforesaid disallowance was confirmed by the Learned CIT(A) as the appeal preferred by the Assessee challenging the aforesaid disallowance was dismissed by the Learned CIT(A) vide Order, dated 24/03/2025, impugned by way of present appeal on the grounds reproduced in paragraph 2 above.
We have heard both the sides and have perused the material on record.
We find that the Assessing Officer had observed that the Assessee had failed to point out business exigency for making payment in cash to the suppliers. However, while doing so the Assessing Officer has not disputed the submission of the Assessee that the Assessee was holding cash credit facility account with Kannur District Co- Operative Bank Limited which did not have RTGS facility or internet banking.
6. Before the Learned CIT(A) the Assessee explained that the Assessee was required to make payment towards purchase of foods supplies like jiggery, kishmish etc. in cash since the suppliers insisted for the same. On perusal of the order passed by the CIT(A) we find that the CIT(A) has noted that the Assessee had placed supply orders 3-4 months in advance and therefore, there was no business exigency.
During the course of hearing, it was submitted on behalf of the Assessee that there was no dispute as to the genuineness of the transactions and that the Assessing Officer/CIT(A) had failed to take note of the fact that the communication for remitting payment and 4 Assessment Year 2010-2011 the invoice were raised together by the suppliers. Placing reliance upon the written submission, the Learned Authorised Representative for the Assessee had submitted that for the Assessment Year 2010- 11, the Assessee was awarded a contract for supply of groceries to the Sabarimala Temple. This contract required timely and large-scale delivery of essential items, particularly during the peak pilgrimage seasons. The Assessee was informed at short notice to make emergency deliveries, necessitating immediate procurement of significant quantities of grocery items. The Assessee sourced these items primarily from suppliers in Tamil Nadu and Maharashtra. These suppliers maintained a strict commercial policy goods would be dispatched only upon receipt of payment. No credit was extended, and dispatches were strictly against confirmed payments. The Assessee operated its business banking exclusively through Kannur District Co-operative Bank, which had sanctioned a cash credit facility. As a condition for availing this facility, the bank required that all business transactions be routed through it, using only its banking infrastructure. However, at the relevant time Kannur District Co-operative Bank did not provide RTGS, NEFT, or other modern fund transfer facilities. Faced with this limitation, the Assessee had to withdraw cash from its account with the co- operative bank and deposit the same in the suppliers' bank account, in order to ensure uninterrupted supply of goods and fulfilment of its contractual obligations. This situation clearly constituted a business exigency, driven by urgent operational requirements and systemic banking constraints, compelling the Assessee to adopt this mode of payment. It was further submitted that the Learned CIT(A) had dismissed the appeal primarily on the ground that as per letters issued by the suppliers the Assessee had placed supply orders at least 3-4 months in advance. It is correct that the Assessee entered into framework agreements or general arrangements with its key suppliers well in advance-particularly to avoid the impact of price 5 Assessment Year 2010-2011 fluctuations as the order to supply to Sabarimala is fixed for a Mandalam-Makaravilakku and Meda Vishu Festival. However, the actual supply orders were placed only as and when specific requirements arose, often at short notice and in response to real- time demands communicated by the Devaswom authorities. These urgent requirements would typically arise during the peak pilgrimage season, and the suppliers, especially those located in Tamil Nadu and Maharashtra, insisted that goods would only be dispatched upon receipt of payment. As such, the need for prompt payment was triggered not by the date of the general agreement, but by the specific and immediate demand for supply, which arose unpredictably and necessitated swift execution. On the basis of aforesaid it was submitted that the authorities below failed to appreciate the factual background and made the disallowance by incorrectly invoking the provisions contained in Section 40A(3) of the Act.
Per Contra, the Learned Departmental Representative doubted the genuineness of the communications received contending that all communications placed on record by the Assessee were from same supplier. Further, the Learned Departmental Representative vehemently contended that the Assessee had failed to file any supporting documents to corroborate the aforesaid submissions now being made before this Tribunal.
We note the Assessment Order is silent on this aspect of genuineness of purchase transactions under consideration even through the aforesaid contention was raised by the Assessee before the Assessing Officer during the assessment proceedings. Further, a perusal of orders passed by the Assessing Officer and CIT(A) shows that there are no factual findings in respect of averments/submission made by the Assessee on business exigency. At the same time we do find some merit in submissions advanced in behalf of the 6 Assessment Year 2010-2011 Revenue that the Assessee has failed to place on record supporting documents to support the submission now being made before this Tribunal. Accordingly, keeping in view the overall facts and circumstances of the present case, we deem it appropriate and in the interest of justice to remit the issue of disallowance under Section 40A(3) of the Act as well as the connected issue of genuineness of the purchase transactions back to the file of the Assessing Officer for denovo adjudication. Since we have remitted the issue back to the file of the Assessing Officer, all the rights and contention of the parties are left open. In terms of aforesaid, Ground No. 2 & 3 raised by the Assessee are allowed for statistical purposes while all the other grounds are dismissed as infructuous at this stage as we have remitted the issue back to the file of the Assessing Officer.
In result, in terms of Paragraph 9 above, the appeal preferred by the Assessee is treated as partly allowed.