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Facts
The assessee, a registered society, made cash payments of Rs.90,33,530/- during AY 2023-24 because its bank account was frozen due to internal disputes, and cheques were not honored until a Supreme Court order. The Centralized Processing Centre (CPC) disallowed this amount under Section 40A(3) based on the tax auditor's report, which was upheld by the CIT(A), despite the assessee's claim of genuine difficulty and objections.
Held
The Tribunal found that the genuineness of the transactions and identity of the payees were undisputed, and the CPC failed to properly consider the assessee's objections regarding exceptional circumstances covered under Rule 6DD. Following judicial precedents, the Tribunal ruled that the disallowance under Section 40A(3) was not sustainable and deleted the addition.
Key Issues
Whether cash payments made due to genuine difficulty (frozen bank account) fall under exceptions to Section 40A(3) read with Rule 6DD; and whether CPC can make adjustments under Section 143(1) without properly addressing assessee's objections.
Sections Cited
143(1), 143(1)(a), 40A(3), Rule 6DD, 250, 12A, 80G, 28
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Income Tax Appellate Tribunal, VISAKHAPATNAM “DIVISION” BENCH, VISAKHAPATNAM
Before: SHRI VIJAY PAL RAO, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
आदेश /O R D E R
PER SHRI S BALAKRISHNAN, ACCOUNTANT MEMBER:
This appeal is filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals), ADDL/JCIT (A) – 2, Mumbai vide DIN &Order No. ITBA/APL/S/250/2024-25/1073008634(1) dated 07.02.2025
I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES for the A.Y.2023-24 arising out of intimation passed under section 143(1) of the Income Tax Act, 1961 (in short ‘Act’) dated 18.11.2024.
Brief facts of the case are that, assessee is a Society registered under Societies Registration Act and has also registered under section 12A and 80G of the Act. During the impugned assessment year, the managing committee members had differences in administrating the Society and therefore approached the legal forums. The Hon’ble High Court of Andhra Pradesh appointed an Arbitrator till such time the case was settled. The Arbitrator, in-turn, appointed an administrator with necessary permissions to administrator the functions of the Society. The Centralized Processing Centre (hereinafter in short “CPC”) while processing the return of income under section 143(1) of the Act on 18.11.2024 disallowed a sum of Rs.90,33,530/- under section 40A(3) of the Act based on the disallowance cited in Form 3CD by the tax auditor. The CPC before disallowance, provided an opportunity to the assessee for submitting his objections. Assessee submitted its objections, however, it was not considered by the CPC while confirming the addition under section 40A(3) of the Act.
Aggrieved by the order of the CPC, assessee filed an appeal before Ld.CIT(A). Before Ld. CIT(A), assessee represented that the assessee was prevented by a genuine difficulty in operating the bank account of the assessee and due to these exceptional unavoidable circumstances cash payments have been made for a short period until the bank account was unfrozen by the order
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I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES of the Hon’ble Court. However, Ld. CIT(A) did not consider the submissions and by relying onthe disallowances pointed out by the Statutory Auditor in the Tax Audit Report confirmed the addition made by the CPC.
Aggrieved by the order of the Ld. CIT(A), assessee is in appeal before us by raising following grounds of appeal: - “1. The Ld. CIT(A), under the facts and circumstances of the case, erred in upholding the action of the ADIT, CPC Bangalore, in confirming the adjustments, pertaining to section 40A(3), made to the returned income, under section 143(1) of the Income Tax Act, dated 18.11.2024.
The Ld. CIT(A) ought to have held that the submissions and responses provided by the assessee, in reply to the proposed adjustments, as indicated in the intimation under section 143(1)(a) of the Income Tax Act, were not considered by the Assessing Officer and were ignored, therefore, such adjustments/addition cannot stand the test of judicial scrutiny.
The Ld. Addl./JCIT viewed the case from a narrow perspective, viewing from the angle that the assessee's case falls under section 143(1)(iv) of the Income Tax Act, and the adjustment made is automatic and requires no intervention.
The Ld. CIT(A) erred in not acknowledging that the assessee society was compelled to make cash payments between 16.05.202z and 03.08.2022 due to the bank account being blocked by the bankers. It was only when the matter was escalated to the Hon'ble Supreme Court that the bank was directed to permit the assessee to operate the account.
The Ld. CIT(A) did not consider the assessee's submission that the cash payments necessitated due to compelling circumstances as assessee engaged in heal sector. Given these circumstances, the CIT(A) should not have disregarded the claim in light of the provisions of section 40A (3) of the Income Tax Act, instead the LD CIT(A) summarily concluded that assessee case has to be reviewed from the perspective of 143(1) alone since the tax auditor has disallowed the claim u/s 40A (3).
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I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES 6. The A.O. failed to appreciate that the law does not compel anybody to do the impossible when particularly patients needs is to be attended immediately and compliance to law are pitted against each other. 7. For these and other reasons that may be urged at the time of hearing, the appellant prays that the orders passed u/s 250 of the Income Tax Act be set aside and the additions made by the Assessing Officer be deleted.”
The only issue emanating from the above grounds is with respect to disallowances made under section 40A(3) of the Act by the CPC while processing the intimation under section 143(1) of the Act.
On this issue, Ld. Authorised Representative [hereinafter “Ld.AR”] submitted that due to difference of opinion between the Managing Committee, payments were made in cash for running the hospital for a short period from 16.05.2022 to 03.08.2022. He further submitted that this is covered by the exceptions kept under Rule 6DD of the I.T. Rules. He further submitted that the ICICI Bank failed to honour the cheques issued by the administrator of the assessee-society. The Hon’ble Supreme Court directed the ICICI to accept and honour the cheques issued by the administrator vide its order in SLP No.13362/2022 dated 03.08.2022. He further submitted that since the bank refused to pass the cheques issued by the Society,the Society was compelled to make essential payments amounting to Rs.90 lakhs for the day-to-day activities. It was also further submitted that genuineness of the payments and identity of Page. No 4
I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES the persons to whom it was paid were never disputed by the revenue. He relied on the decisions on the following cases: - i. Kalpesh Synthetics Pvt. Ltd., v. Dy.CIT in dated 27.04.2022. ii. Geo Connect Ltd. v. Dy.CIT[2023] 149 taxmann.com 456 (Delhi – Trib) iii. Attar Singh Gurmukh Singh v. ITO [1991] 59 taxmann.com 11 (SC).
Per contra, Ld. Departmental Representative [hereinafter in short “Ld.DR”] fully supported the orders of the Revenue Authorities and argued that it is not covered under the exemptions prescribed under Rule 6DD of the I.T.Rules and hence CPC has disallowed the same based on the Tax Audit Report furnished by the assessee. She therefore prayed that order of the Ld.CIT(A) be upheld.
We have heard both the sides and perused the material available on record. It is an undisputed fact that Society was engaged in legal issues arising out of difference of opinion between the committee members wherein the operations were restored w.e.f. 03.08.2022 following the directions of Hon’ble Supreme Court of India. However, we find that initially the Hon’ble High Court of Andhra Pradesh appointed an Arbitrator and due to pre-occupancy, he appointed an administrator to carryout the smooth functioning of the society on a day-to-day basis. This decision was challenged by the committee members before the Single Bench Judge who stayed the directions by the Hon’ble High
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I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES Court of Andhra Pradesh. Subsequently, the matter was carried before the Hon’ble Supreme Court the Hon’ble Supreme Court vide its order dated 03.08.2022 vacated the stay and directed the bank to honour the cheques issued by the administrator. During the interim period between the date of filing Special Leave Petition on 16.05.2022 till the date the Hon’ble Supreme Court on 03.08.2022 directed, the Society was compelled to make various payments in cash amounting to Rs.90,33,530/-. The only contention of the Ld.AR is that this is covered under the exceptions prescribed under Rule 6DD of the I.T. Rules. Further it was also contended by the Ld.AR that the CPC is not empowered to make such adjustments which are disputable and without considering the objections from the assessee for the proposed adjustments. The CPC ought to have disposed off the objections raised by the assessee, before confirming the additions.
The Hon’ble Supreme Court of India in the case of Attar Singh Gurmukh Singh v. Income-tax Officer [1991] 191 ITR 667 (SC) held as follows: -
“Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together; it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors
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I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40(3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business. As regards the second condition, the word 'expenditure' has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. Il means all outgoings are brought under the word 'expenditure' for the purpose of the section. The expenditure for purchasing the stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits under section 28 on principles of commercial accounting. The payments made for purchases would also be covered by the word 'expenditure' and such payments can be disallowed if they are made in cash in the sums exceeding the amount specified under section 40(3). As stated above rule 6DD has to be read along with section 40A(3). The rule also contemplates payments made for stock-in-trade and raw materials. This rule is in accordance with the terms of section 40A(3). The rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials.”
The Hon’ble High Court of Rajasthan in the case of Smt. Harshila Chordia v. Income-tax Officer [2008] 298 ITR 349 (Rajasthan) deleted the disallowances made under section 40A(3) of the Act by observing as follows: -
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I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES “Section 40A(3) of the Income-tax Act, 1961 - Business disallowance - Cash payment exceeding prescribed limits - Where genuineness of transaction and identity of payee were established and explanation of assessee for making cash remittances was acceptable in the light of modus operandi of assessee's business, payments in cash could not be disallowed.”
Further, the Co-ordinate Bench of Raipur in the case of Harshdeep Singh Juneja v. Dy. CIT [2023] 153 taxmann.com 303 (Raipur-Trib.) deleted the additions made by the CPC under section 40A(3) of the Act without considering the assessee’s objections for the proposed adjustments, relevant para is extracted below: -
“Be that as it may, now when the assessee had come forth with a specific objection which did clearly fit within the exception provided under rule 6DD(b), then, it was obligatory on the CPC, Bengaluru to have either accepted the said explanation; or in case the same was to be rejected, then provided certain cogent reasons for doing so. In case, the response/objections of the assessee as provided in the 2nd proviso to section 143(1)(a) are taken as an idle formality; or an eye wash, as had been done in the present case before us, then the said mechanism provided for making an adjustment u/s. 143(1)(a) would be rendered as unworkable. The Legislature while enlarging the provisions of section 143(1)(a) of the Act had set out the aforesaid manner and methodology which is to be ritually followed before making any adjustment. This Court is unable to persuade to subscribe to the manner in which the objections/response filed by the assessee to the proposed adjustment had been brushed aside; or in fact dispensed with by the CPC, Bengaluru had rendered the entire mechanism provided u/s.143(1)(a) as redundant and otiose.”
In the instant case, the genuineness of the transactions and identity of the payee was not disputed by the revenue. Further the CPC has not disposed of the objections raised by the assessee in response to the notice issued for the Page. No 8
I.T.A.No.213/VIZ/2025 NRI ACADEMY OF SCIENCES proposed adjustments. Therefore, we are of the considered view that respectfully following the above judicial precedents, additions made under section 40A(3) of the Act is not sustainable and hence deleted. We therefore allow the grounds raised by the assessee.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 10th October, 2025.
Sd/- Sd/- (धिजय पाल राि) (एस बालाकृष्णन) (VIJAY PAL RAO) (S. BALAKRISHNAN) उपाध्यक्ष/VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER Dated:10.10..2025 Giridhar, Sr.PS आदेशकीप्रनतनलनपअग्रेनर्त/ Copy of the order forwarded to:- 1. निर्धाररती/ The Assessee : NRI ACADEMY OF SCIENCES 60-3-1/44 YK Buildings Bus Route No. 5 Ramachandra Nagar Vijayawada, Currency Nagar S.O. Vijayawada (Urban) Krishna – 520008, Andhra Pradesh 2. रधजस्व/ The Revenue : Income Tax Officer – Exemption Vijayawada 3. The Principal Commissioner of Income Tax 4. नवभधगीयप्रनतनिनर्, आयकरअपीलीयअनर्करण, नवशधखधपटणम /DR,ITAT, Visakhapatnam 5. The Commissioner of Income Tax 6. गधर्ाफ़धईल / Guard file आदेशधिुसधर / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam
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