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Facts
The assessee, Thomson Granites Pvt. Ltd., challenged the disallowance of cash payments for fuel expenditure (Rs. 4.44 crores) and directors' remuneration (Rs. 72 lakhs) under Section 40A(3) and Section 40(a)(ia) of the Income Tax Act for AY 2014-15. The CIT(A) had confirmed these additions, although clarifying Section 40(a)(ia) was not applicable for remuneration.
Held
The Tribunal ruled that Section 40A(3) is not absolute and must be read with Rule 6DD, providing exceptions where the genuineness of the expenditure is not in doubt. Citing judicial precedents and the tax-neutral nature of director's remuneration (as directors offered it as income), the Tribunal held that the disallowance was not justified, directing the AO to allow the deduction.
Key Issues
Whether disallowance under Section 40A(3) for cash payments of fuel expenditure and directors' remuneration is justified when the genuineness of the expenditure is not in question, considering Rule 6DD and relevant case law.
Sections Cited
40A(3), 40(a)(ia), Rule 6DD
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI PRAKASH CHAND YADAV, JM
O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the order of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 09.02.2024 for Assessment Year (AY) 2014-15.
Brief facts of the case are that that appellant is a company engaged in the business of mining. The return of income for AY 2914-15 was filed on 29.11.2014 declaring income of Rs. Thomson Granites Pvt. Ltd. 6,11,35,670/-. Against the said return of income, the assessment was completed by the by the ACIT, Circle – 1(1), Thrissur (hereinafter called "the AO") at a total income of Rs. 11,55,53,760/-. While doing so the AO disallowed the expenditure incurred in cash on fuel or Rs. 4,44,47,632/- u/s. 40A(3) of the Income Tax Act, 1961 (the Act) and remuneration to the Directors of Rs. 72,00,000/- invoking provisions of section 40(a)(ia) & 40A(3) of the Act.
Being aggrieved by the assessment order, an appeal was filed before the CIT(A) contending that provisions of section 40A(3) of the Act has no application, inasmuch as, the genuineness of the transactions were not in doubt and the cash payments were made on account of business exigencies. The appellant also relied on the following judgements: -
i) CIT v. Suresh Kumar Agarwal [2001] 117 Taxman 2 (All) ii) Ramadity Investments v. CIT [2004] 138 Taxman 231 (Del) iii) K. Abdu & Co. v. ITO [2008] 170 Taxman 297 (Ker)
However, the CIT(A) confirmed the additions, while holding that section 40(a)(ia) had no application in respect of Directors’ remuneration.
Being aggrieved, the appellant is in appeal before us in the present appeal.
The learned A.R. submits that provisions of section 40A(3) of the Act has no application in respect of fuel expenditure as well as Thomson Granites Pvt. Ltd. remuneration paid to the Directors as the genuineness of the expenditure was noi in question. In this connection he relied on the decisions of Suresh Kumar Agarwal (supra) and the judgement of the Hon'ble Rajasthan High Court in the case of Smt. Harshila Chordia v. ITO [2008] 298 ITR 349 (Raj) and Hon'ble Supreme Court in the case of Attar Singh Gurmukh Sinch v. ITO 191 ITR 667.
On the other hand the learned Sr. DR seriously opposed the submissions of the learned A.R. and submits that fuel expenditures were incurred by paying cash to the sister concern only. She further submits that as regards remuneration to Directors, there was no justification for making payment in cash. Thus, she submits that no interference in the impugned order is called for.
We have heard the rival contentions of both the parties and perused the material available on record. The only issue that arises for our consideration in the present appeal is whether the AO was justified in disallowing the deduction claimed in respect of expenditure on fuel and remuneration to the Directors payment of which is no made by cross cheques or bank drafts. Provisions of section 40A(3) of the Act empowers the AO to disallow any deduction claim as expenditure in respect of which the payment was not made by cross cheques of bank drafts. We perused the provisions of section 40A(3) of the Act. In our considered opinion the provisions of section 40A(3) are not absolute, as evident from rule 6DD of Income Tax Rules. These provisions of section 40A(3)
Thomson Granites Pvt. Ltd. cannot be read in isolation. This section must be read along with rule 6DD enumerating the exception circumstances under which the provisions of section 40A(3) has no application, which included, inter alia, payments made to the agencies for procuring material could not be disallowed. The press note dated 02.05.1969 issued by the Ministry of Finance clarified that the provisions of section 40A(3) has no application in respect of payments made to agents who solely acting as commission agent. The dealers of petroleum products only acts only as commission agents of petroleum companies.. The relevant part of the note is extracted as under: - “6DD.9-1 Payment to arhatiyas, clarifications –Press note, dated 2.5.1969 provides that provisions do not apply to payments made by commission agents (arhatiyas) for goods received by them for sale on commission or consignment basis. For the same reason, the requirement does not also apply to advance payments made by the commission agent to the party concerned against supply of goods. However, where a commission agent (arhatiya) purchases goods on his own account, and not on commission basis, the requirement will apply in that case.
Further, we find that the genuineness of the expenditure is not in question and, therefore, the ratio of the judgements of the Hon'ble Andhra Pradesh High Court in the case of Sri Laxmi Satyanarayana Oil Mill v. CIT and Smt. Harshila Chordia (supra) and Suresh Kumar Agarwal are clearly applicable where in the Hon'ble High Courts took the view that when the genuineness of the expenditure is not in question, provisions of section 40A(3) has no application.
Thomson Granites Pvt. Ltd. Similarly with regard to the Directors’ remuneration, The Directors have offered the remuneration in their respective hands and it is tax neutral transaction and the payees are identified and genuineness of the expenditure is also not in doubt. Therefore, the reasoning adopted by the us in respect of expenditure incurred on fuel, equally hold, good in respect of Directors’ remuneration. In the light of the above legal discussion we are of the considered opinion that having due regard to the circumstances under which the cash payments exceeding Rs. 20,000/- were made, the claim for allowance on expenditure is not hit by section 40A(3) of the Act. Accordingly the AO is directed to allow the deduction.
In the result, the appeal filed by the assessee stands allowed.