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Facts
The assessee, an individual engaged in buying and selling firewood, filed a return for AY 2018-19. The Assessing Officer (AO) disallowed Rs. 77,94,984/- under Section 40A(3) of the Income Tax Act for cash payments made to suppliers, holding that these were made to circumvent disallowance and violated Rule 6DD.
Held
The Tribunal held that the AO cannot make a disallowance under Section 40A(3) without establishing that payments were made in violation of the provisions or that ledger entries were artificially split. Since it was admitted that no payment exceeded Rs. 10,000/- per person per day as per ledger copies, the disallowance was not sustained.
Key Issues
Whether the disallowance made by the AO under Section 40A(3) r.w. Rule 6DD for cash payments exceeding Rs. 10,000/- per day per person is sustainable when the ledger accounts do not reflect such individual payments exceeding the limit, and whether the exception under Rule 6DD is applicable.
Sections Cited
40A(3), Rule 6DD
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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI GEORGE GEORGE KAND MS. PADMAVATHY.S
S.A No.133/Chny/2025 धििाजरण वर्ज /Assessment Year: 2018-19 Kuppusamy Thankaraj, The Income Tax Officer, No.4, SKC Road, Vs. Circle-1, Second Street, Erode. Erode – 638 009. PAN: ABSPT 0240L (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) Mr. S.Sridhar, Advocate (Erode) अपीलार्थी की ओर से/ Appellant by : प्रत्यर्थी की ओर से /Respondent by : Ms. Gouthami Manivasagam, Addl. CIT सुिवाई की तारीख/Date of Hearing : 08.01.2026 घोर्णा की तारीख /Date of Pronouncement : 13.01.2026 आदेश / O R D E R PER PADMAVATHY.S, A.M: This appeal and stay application by the assessee are against the order of the Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre (NFAC), Delhi, (in short "CIT(A)") passed u/s. 250 of the Income Tax Act, 1961 ( in short "the Act") dated 31.10.2025 for Assessment Year (AY) 2018- 19. The assessee raised the following grounds of appeal:
1. The Impugned Order is bad and erroneous in law.
2. The learned First Appellate Authority erred in not considering the explanations and submissions of the appellant in proper perspective.
SA No.133/Chny/2025 Kuppusamy Thankaraj :- 2 -: 3. The learned First Appellate Authority erred in not considering the material fact of the prevailing practise in and around Erode all the times with respect to the purchase of firewood from the unorganised sector.
4. The learned First Appellate Authority erred in not considering the fact that the firewood, being a forest produce, was purchased from the unorganised sector, which consisted of cultivator or grower covered by Rule 6DD (e) and/or from the agents, covered by Rule 6DD (k).”
The assessee is an individual and engaged in the business of buying and selling firewood. The assessee filed a return of income for A.Y 2018-19 on 10.10.2018 admitting a total income of Rs. 25,60,990/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The A.O called on the assessee to furnish various details from time to time. From the details submitted by the assessee, the A.O noticed that the assessee has made payments towards purchases in cash (to 98 parties out of total 430 parties). The A.O further noticed that the entire payment to these parties has been made only in cash and that all the payments were made to the tune of Rs. 10,000/- per day in a gap of few days in between. The A.O accordingly called on the assessee to furnish the purchase bills and other details along with the reason as to why the payments were made only through cash. The assessee submitted that the purchases are made through two types of suppliers one is regular supplier and the other is market supplier. The assessee further submitted that the market suppliers are random suppliers for cash or for short period of credit and that the suppliers are individual agriculturists or lorry driver or firewood brokers. The assessee accordingly submitted that the details called for by the A.O require some time to be produced. The A.O did not accept the submissions of the assessee and also the ledger account of the parties where the payments are not exceeding SA No.133/Chny/2025 Kuppusamy Thankaraj :- 3 -: Rs.10,000/- per day per suppliers were also rejected. The A.O was of the view that the assessee has paid lump sum to the suppliers in cash and has accounted the same in such a manner that each payment does not exceed Rs. 10,000/- per day. Accordingly, the A.O held that the books of accounts are not reliable and that there is a violation of Rule 6DD r.w.s. 40A(3) of the Act. The A.O considered the purchases made from parties to whom the assessee has made only cash payments to make a disallowance of Rs. 77,94,984/- u/s. 40A(3) of the Act. Aggrieved, the assessee filed further appeal before the CIT(A). Before the CIT(A), the assessee raised a contention that the purchase of firewood would fall within the category of purchases that is exempt from applicability of Rule 6DD and therefore the disallowance made by the A.O cannot be sustained. The CIT(A) dismissed the contentions of the assessee by holding that: “4.4.4 It may be noted that the such exception is available under rule 6DD(e) only in cases where the payment for the purchase of above products is made to the cultivator, grower or producer of such articles, produce or products. From the detailed submission of appellant explaining the nature and manner of purchase it is clear that the appellant is buying the firewood not from the producers/grower/cultivator but from traders, lorry drivers or brokers who act as middlemen in the said transaction. The appellant has also vide annexure-E of reply dated 24.02.2021 to the AO has submitted the images of the firewood market from where the said purchases are claimed. The appellant has quoted the above referred judgement of Hon'ble ITAT, Chennai wherein purchase of firewood in cash was treated as exception covered under rule 6DD(e). However, in that case the issue as to where the purchases were sourced from was not examined. But in the present case, it is clear from various submission of the appellate as well as the photographic evidence of firewood market submitted by the appellant himself that the purchases in question were sourced from middlemen, trader, lorry drivers and other casual sellers or brokers and thus the payment was not made to cultivator, grower or producer of such products, which is the mandatory requirement for rule 6DD(e) to come into play. As the purchases were sourced, as per appellant's own admission from middlemen, traders, lorry drivers and brokers and not from the actual SA No.133/Chny/2025 Kuppusamy Thankaraj :- 4 -: cultivator, grower or producer of firewood the exception given under rule 6DD(e) is not applicable in the appellant's case. In view of the above, there is no reason to interfere with the disallowance of Rs.77,94,984/-made by the AO u/s 40A(3). These grounds of appeal are accordingly dismissed.”
The Ld. Authorized Representative (AR) of the assessee submitted that to payments made to the parties towards whom the disallowance is made does not exceed Rs. 10,000/- per day per person and therefore invoking section 40A(3) of the Act r.w Rule 6DD is not applicable. The Ld. AR further submitted that when the payments are within the limit as prescribed under Rule 6DD, the A.O is not correct in making the disallowance under section 40A(3) of the Act and the action of the A.O is based on assumptions and surmises that the assessee had made lump sum payments in cash. The Ld. AR also raised the alternate contention that the payment towards purchase of firewood would fall within the exceptions under Rule 6DD even if the same is purchased through agents/middlemen.
The Ld. Departmental Representative (DR), on the other hand, submitted that the overall turnover of the assessee goes to prove that the assessee is a bulk purchaser of firewood and therefore the contentions that firewood would purchase from market using cash from random parties is not correct. The ld. DR further submitted that the assessee did not make any single payment to the impugned suppliers via banking channel and the split of payments are made through artificial entries to circumvent section 40A(3) r.w. Rule 6DD which is correctly identified by the A.O. The Ld. DR also submitted that in unorganized sector the payments towards purchases would not be staggered as reflected in the ledger account and therefore the A.O is correct in holding that the assessee would have made lump sum payments and SA No.133/Chny/2025 Kuppusamy Thankaraj :- 5 -: has split the payments for accounting purposes only. With regard to the alternate contention of the assessee that exception under Rule 6DD is applicable, the ld. DR submitted that unless the firewood was purchased from the cultivator or grower the exception is not applicable and in assessee's case it is an admitted fact that the purchases are made from lorry drivers, brokers, random market suppliers. Accordingly, the ld. DR supported the orders of the lower authorities.
We have heard the parties, and perused the material available on record. The A.O during the course of hearing called on the assessee to furnish various details including the details of purchases. The assessee has submitted the ledger accounts of the parties and based on the same the A.O noticed that the assessee has made only cash payments to certain parties towards purchases. Though the A.O noticed the fact that each payment did not exceed Rs. 10,000/- per day per person as per the ledger account, the A.O held that such ledger accounts are not reliable. The AO held that no prudent supplier would accept the staggered payments more so when he is not the regular supplier to the assessee. Accordingly, the A.O invoked the provision of Section 40A(3) of the Act r/w. Rule 6DD to make a disallowance of Rs. 77,94,984/-. On further appeal, the CIT(A) confirmed the addition rejecting the alternate plea of the assessee the payment would fall within the exception category as per Rule 6DD. From the perusal of the orders of the lower authorities, we notice that as per the ledger submitted by the assessee each payment is not more than Rs. 10,000/- per day per supplier and this fact is not being disputed by the revenue. However, the provisions of Section 40A(3) r/w Rule 6DD is invoked on the ground that the payments ought to have been made on lump sum basis which is split within the limits of Section 40A(3) of SA No.133/Chny/2025 Kuppusamy Thankaraj :- 6 -: the Act to avoid disallowance and that the ledger accounts reflecting the payments were not reliable. In this regard, it is relevant to notice that the lower authorities have not brought any evidence on record to substantiate the contention that the assessee has made lump sum payment and has accounted the same in a manner to circumvent disallowance u/s. 40A(3) of the Act. As per the provisions of Section 40A(3) of the Act, the disallowance can be made only when the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque exceeding Rs. 10,000/-. In the given case, it is an admitted fact that as per the ledger copies, the assessee has not made any payment exceeding Rs.10,000/- in a day per person. In the facts and circumstances of the case, we are of the considered view that the A.O cannot make a disallowance u/s. 40A(3) of the Act without establishing the fact that the assessee has made payments in violation of the provisions of Section 40A(3) r/w. Rule 6DD and that the ledger entries are arficially split to circumvent the said provisions. Therefore, we hold that the disallowance made by the A.O cannot be sustained and accordingly direct the A.O to delete the disallowance.
SA No.133/Chny/2025: 6. Since, we have allowed the appeal of the assessee, the stay application filed by the assessee has become infructuous. Accordingly the same is dismissed as infructuous.
Order pronounced on 13th day of January, 2026 at Chennai. (जॉजज जॉजज के) (पदमावती यस) (Padmavathy.S) (George George K) लेखा सदस्य /Accountant Member उपाध्यक्ष / Vice President चेन्नई/Chennai, ददनाांक/Dated: 13th January, 2026. EDN, Sr. P.S