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Facts
The assessee, engaged in the business of seafood export, claimed expenses for ice purchase amounting to Rs. 32,20,459. A significant portion, Rs. 30,72,259, was paid in cash, while Rs. 1,48,200 was paid by cheque. The Assessing Officer disallowed the cash component of Rs. 30,72,259, invoking Section 40A(3) of the Income Tax Act.
Held
The Tribunal held that the disallowance made by the Assessing Officer and confirmed by the CIT(A) was not sustainable. The cash payments for ice purchase did not exceed the prescribed monetary limit of Rs. 20,000 per person per day, and the AO had mechanically aggregated the total cash payments without examining individual transactions.
Key Issues
Whether the disallowance of cash payments for ice purchase under Section 40A(3) of the Income Tax Act is justified when individual transactions do not exceed the prescribed limit.
Sections Cited
Section 40A(3), Rule 6DD
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI ABY T VARKEY & SHRI S. R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM:
This appeal by the Assessee for Assessment Year (A.Y.) 2017-18 arises out of the order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [in short ld.CIT(A)] dated 29.11.2024 against an assessment framed by Assessing Officer [AO] u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’) on 17.12.2019.
At the outset, we find that there is a delay of 167 days in appeal filed by the assessee for which an affidavit and a petition for condonation of delay,
:-2-: ITA. No:2004/Chny/2025 setting out the reasons for such delay, has been filed. After considering the affidavit and the petition filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the assessee for adjudication.
The sole ground of appeal of the assessee is disallowance of Rs.30,72,259/- pertaining to the cash purchase of ice for preserving the sea food u/s.40A(3) of the Act stating that the same is not covered under Rule 6DD(f) of the Income Tax Rules, 1962.
4. The brief facts emanating from the records of the case are that the assessee is a company filed its return of income on 26.10.2017 and revised the same on 02.06.2018 admitting a total income of Rs.1,28,06,040/-. The case of the Assessee was selected for scrutiny assessment through CASS and accordingly the statutory notices were issued to the assessee. In the scrutiny assessment order, the AO has given a finding that the Assessee has spent Rs.32,20,459/- being Ice purchase and the payment for the same has been made by way of cash to the tune of Rs.30,72,259/- and only Rs.1,48,200/- has been paid by cheque. Therefore, the AO disallowed the said sum paid by cash as violation of the provisions of section 40A(3) of the Act r.w. Rule 6DD and passed an order u/s.143(3) of the Act on 17.12.2019 by holding as under:
5. DISALLOWANCE OF EXPENSES u/s. 40 A (3): 5.1. On perusal of the audited financials of the assessee, it is found that vide schedule 16, cost of material consumed, the assessee had claimed an amount of Rs.32,20,459/- being ice purchase. Vide Notice u/s. 142(1) of the Act dated 15.10.2019, the assessee was requested to provide details for the same. Vide letter dated 29.11.2019, the assessee submitted the details called for. On verification of the details submitted by the assessee, it is found that the assessee enclosed a ledger extract showing the following: Ice purchase Cash Rs.30,72,259/- Ice purchase Cheque Rs. 1,48,200/-
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5.2. There are no other details available in the records or any further details submitted by the assessee except one line entry as referred above. When the same was put forth before the assessee, the assessee vide letter dated 13.12.2019 submitted that "The details made for payments to ice purchase enclosed. As ice being supplied by small vendors cash payments were made. The same is allowed as per Rule 6DD of Income Tax act" The submission of the assessee has been considered carefully and the same is not accepted. The above negligence or violation of the assessee is in conformity with the Income Tax Rules namely Rule 6DD where exemption i.e. can payment in cash only for fish or fish products as per clause 6DD (e) (iii) and as per clause 6DD(f) where the payment is made for the purchase of the products manufactured of processed without the aid of power in a cottage industry, to the producer of such products. 5.3. From the above, it is crystal clear that it is obvious that the assessee violated the provisions of section 40A(3) read with rule 6DD and accordingly. the expenses in the nature of cash purchase of ice in excess of the threshold limit of Rs 20,000/- to the extent of Rs. 30,72,259/- is hereby disallowed u/s. 40 A (3) of the Act and added back to the total income of the assessee under the head 'Income from Business or Profession” for the Financial Year 2016-17 relevant to the Assessment Year 2017-18. Addition: Rs.30.72.259/-.
Aggrieved by the order of the AO, the assessee challenged the disallowance before the ld.CIT(A).
On perusal of the submissions and documents furnished the ld.CIT(A) confirmed the order of the AO by passing an order dated 29.11.2024 by holding as under :
6.4 The above submission filed by the appellant has been carefully perused and considered. It is an admitted fact that during the relevant previous year, appellant has made purchase of ice in cash of Rs 30,72,259/-. Therefore it was required on the part of the appellant to provide details and sufficient documentary evidences to establish on record that provision u/s 40A(3) of the LT. Act is not attracted in its case. It is acceptable that the appellant company is engaged in the business of export of sea foods to different countries and the company has to purchase ice for preserving the fish or fisheries products in good, conditions. Therefore, the AO could not have any objections for purchase of ice. But here the question is that whether the cash purchases made by the appellant is falling within the purview of provision u/s 40A(3) read with rule 6DD of the I.T. Rules, this is irrespective of the fact that such expenditure claimed by the appellant is incurred wholly and exclusively for the purpose of the business and incidental to it. Provision u/s 40A(3) of the I.T. Act has put restrictions on cash purchases beyond certain limits provided in the section with the exceptions given in Rule 6DD of the I.T. Rules. Therefore the onus lie on the appellant to provide required details and authentic documentary evidences to establish on record that the case of the appellant is covered either by provision u/s 40A(3) or exceptions given in rule 6DD of I.T. Rules. The appellant failed to provide any details or documentary evidences either during the course of assessment proceedings or even at the appellate stage to establish on record that :-4-: ITA. No:2004/Chny/2025 the case of the appellant is either not falling within the provision of sec 40A(3) of the I.T. Act or covered by any of the exceptions given in Rule 6DD of the I.T. Rules. It was required on the part of the appellant to provide party wise details with particulars like name and address, PAN, date of purchase, quantity, rate, value, transportation receipt etc. along with date wise details of cash paid, the appellant was also required to provide cash book/purchase register, stock register etc. in support. It was also required on the part of the appellant to explain the circumstances having regard to nature and extent of banking facility available, consideration of business expediency and other relevant factors. In the written submission made appellant has contended that its case is covered by sub-clause(f) of rule 6DD of I.T. Rules. It is however found from case record that the appellant has not proved with sufficient documentary evidence that the ice purchased was processed or manufactured without the aid of power in cottage industry. Considering the above facts of the case and in law I concur with the view of the AO that the amount of cash purchase of Rs.32,20,459/- is disallowable u/s 40A(3) of the I.T. Act. The action of AO is therefore justified and hence the same is upheld. The ground raised by the appellant is accordingly dismissed. 6.5 In the fourth ground of appeal appellant contended that sufficient opportunities have not been offered by the AO. It is however noted from the impugned assessment order that notice u/s 143(2) of the I.T. Act was issued on 28.08.2018. Subsequently notice u/s 142(1) of the I.T. Act on15.10.2019 and in response to the notices issued, appellant has filed written submission which has been considered by AO before finalisation of assessment. Therefore, it cannot be said that no sufficient opportunity was offered to the appellant. It is worth mentioning that even during the course of appellate proceedings sufficient and reasonable opportunities of being heard were offered to the appellant however the appellant could not provide any further details or additional evidence to justify the claim. The ground raised by the appellant is therefore dismissed.
7. Aggrieved by the order of the ld.CIT(A), the assessee challenged the same in appeal before us.
The ld.AR for the assessee submitted that both the AO as well as ld.CIT(A) have erred in disallowing the expenditure, which has been expended by the assessee towards purchase of ice to the tune of Rs.30,72,259/- without considering the submissions and ledger extract, which clearly demonstrates that there is no violation of section 40A(3) of the Act. The ld.AR further contended that though the ledger extracts were furnished before the ld.CIT(A), the disallowance has been confirmed by the ld.CIT(A) for want of documentary evidence.
:-5-: ITA. No:2004/Chny/2025 9. Further, the ld.AR drew our attention to the ledger account of the expenditure and argued that the ledger account of the expenditure is clearly demonstrated that the cash payment for each transaction per person and per day has not exceeded Rs.20,000/-. Therefore, the expenditure made by the assessee is well within the monetary value fixed under the provisions of section 40A(3) of the Act for the impugned A.Y. 2017-18. In view of the above arguments, the ld.AR prayed for setting aside the order of the ld.CIT(A) by deleting the disallowance of expenditure u/s.40A(3) of the Act made by the AO.
Per contra, the ld.DR relied on the orders of the authorities and submitted that no details were furnished before the authorities by the assessee and hence prayed for confirming the disallowance.
We have heard the rival arguments perused the material on record and gone through the orders of the authorities along with the documents furnished before us. The issue before us for adjudication is whether the disallowance of Rs.30,72,259/- made by the Assessing Officer under section 40A(3) of the Income Tax Act, 1961, on account of cash purchase of ice, is sustainable in law and on facts for the Assessment Year 2017-18. The assessee is engaged in the business of sea food, for which ice is an essential and unavoidable input for preservation of fish. During the year under consideration, the assessee incurred total expenditure of Rs.32,20,459/- towards purchase of ice, out of which Rs.30,72,259/- was paid in cash and the balance amount was paid through banking channels. The Assessing Officer disallowed the entire cash component on the ground that the payments were hit by the provisions of section 40A(3) of the Act and were not covered by the exceptions provided under Rule 6DD of the Income Tax Rules, 1962.
On careful examination of section 40A(3) of the Act, it is evident that the said provision does not impose an absolute prohibition on cash payments. The disallowance is attracted only where payment exceeding the prescribed monetary limit is made to a person in a single day otherwise than by an account
:-6-: ITA. No:2004/Chny/2025 payee cheque, account payee bank draft or prescribed electronic modes. For the AY under consideration, the monetary threshold prescribed u/s.40A(3) of the Act was Rs.20,000/- per person per day.
The assessee’s consistent stand before us is that there is no violation of the monetary limit prescribed u/s.40A(3) of the Act. The ld.AR has placed reliance on the ledger extracts, which, according to him, clearly demonstrate that the cash payments made for purchase of ice were split across different vendors and that each individual payment per person per day did not exceed Rs.20,000/-. This factual assertion has not been controverted by the Revenue by bringing any contrary material on record.
We find merit in the submission of the assessee. The AO, while making the disallowance, has merely aggregated the total cash payments made during the year and applied section 40A(3) mechanically, without examining whether the individual payments exceeded the threshold limit prescribed under the Act. Such an approach is not in accordance with the statutory mandate, as section 40A(3) operates transaction-wise and not on the basis of aggregate expenditure incurred during the year. As regards the observation of the ld.CIT(A) that the assessee failed to furnish sufficient documentary evidence, we note that the ledger extracts were admittedly placed on record. The authorities below have not pointed out any specific instance where the payment to a single party on a single day exceeded the prescribed limit of Rs.20,000/-. In the absence of such a finding, the mere fact that the payments were made in cash cannot, by itself, justify disallowance u/s.40A(3) of the Act.
Further, it is also relevant to note that the nature of the assessee’s business requires prompt and frequent purchases of ice, often from small vendors where cash transactions are commercially expedient. While we are not resting our decision solely on business expediency or Rule 6DD, this factual backdrop lends support to the assessee’s claim that the payments were genuine and incurred wholly and exclusively for business purposes.
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In view of the above discussion and in the present facts and circumstances of the case, we hold that the disallowance of Rs.30,72,259/- made u/s.40A(3) of the Act is not sustainable, as the cash payments made by the assessee do not exceed the monetary limit prescribed under the Act per person per day. Consequently, the orders of the AO and the ld.CIT(A) on this issue are set aside.
Therefore, the sole ground raised by the assessee is allowed, and the disallowance of Rs.30,72,259/- made u/s.40A(3) of the Act is hereby deleted.
In the result, the appeal of the Assessee is allowed.
Order pronounced in the open court on 05th January, 2026 at Chennai.
Sd/- Sd/- (एबी टी वक� ) (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) (ABY T VARKEY) लेखासद�/Accountant Member �ाियक सद�/Judicial Member