SIVAKARTHIKEYAN TRANSPORTS,KARUR vs. INCOME TAX OFFICER, WARD - 2 KARUR, KARUR

Brief facts of the case are that the assessee is an AOP, carrying on the business of lorry transports having own vehicles and also hired the vehicles for hire charges, filed its return of income for the A.Y. 2014- 15 on 07/11/2014 by declaring total income of Rs.5,50,000/-. The 3 -: assessee’s Case was selected for scrutiny under CASS and the assessment was concluded on 26/12/2016 by disallowing an expenditure of Hire charges of Rs.9,03,290/-, Repairs and maintenance of Rs.25,03,866/- and Over dimensional charges of Rs.3,08,761/-, altogether to the tune of Rs.37,15,915/- for the reason that these payments have made in cash in violation of Section 40A(3) of the Act and brought to tax. Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld.CIT(A), NFAC, Delhi.

The ld.CIT(A), NFAC by considering the submissions of the assessee and by going through the records, relief has been given to assessee by allowing certain expenditure by holding as under in his order dated 19/07/2023. 1) Hire charges of Rs.9,03,290/- The Ld.CIT(A) has deleted the addition of Rs.4,92,674/- as the freight charges paid in cash was below the limit of Rs.35,000/- to per person and per day as per Section 40A(3) of the Act, as against the limit considered by the AO of Rs.20,000/- and sustained the addition of Rs.4,10,616/-. 2) Repairs and maintenance of Rs.25,03,866/- 4 -: The addition of Rs.25,03,866/- has been sustained, as these payments are made in cash in violation of Sec.40A(3) of the Act. 3) Over dimensional charges(ODC) of Rs.3,08,761/-: This addition of Rs.3,08,761/- was also confirmed by the Ld.CIT(A), stating that the assessee has not produced any proof for this expenditure. Aggrieved by the order of the Ld.CIT(A), NFAC, Delhi, the assessee preferred an appeal before us.

The Ld.AR argued that both the lower authorities have erred in passing the order by disallowing these expenditure as violation of section 40A(3) of the Act is contrary to the law as there is a proviso, which gives exceptions of cash payment beyond the limit fixed under section 40A(3). The Ld.AR drew our attention to the decision of the Hon’ble High court of Madras in the case of N.Mohammed ali Vs. ITO [2016] 65 Taxmann.com 189(Mad), even though the decision was held in favour of revenue in respect of section 40A(3), their lordships has discussed the question of business expediency to make the payment in cash. The relevant extract is given below: “18. Question No.4:- The fourth question revolves around business expediency. This question has arisen for consideration in view of the proviso to sub-section (3) of section 40A. At this stage it would be "Where 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 drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. Proviso to (3A) reads as follows: Provided that no disallowance shall be made and no payment shall be deemed to be profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft. exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors;’'

As seen from the proviso, the question in relation to sub-section (3) has to be examined with reference to the three things indicated in the proviso. They are (1) the nature and extent of banking facilities (2) considerations of business expediency and (3) other relevant factors.

In other words, under sub-section (3), where an assessee incurs an expenditure which involves payment of more than Rs.20,000/- to a single person on a single day, he is not entitled to any deduction in respect of such expenditure. The rule under sub section (3) is not very rigid. It admits of three exceptions, which are narrated in the proviso. If an assessee could prove that having regard to the nature and extent of banking facilities, or having regard to the consideration regarding business expediency or having regard to the other relevant factors, it would not be possible for him to make payments by way of cheque or demand draft, the assessee would, still, be entitled to deduction. Therefore, it is for the assessee to prove the existence of (1) nature and extent of banking facility that compelled him to make payment in cash (2) consideration of business expediency that compelled him to make Payments in cash and (3) any other relevant factors that would justify such a payment.”

Per contra the Ld.DR relied on the order of the Ld.CIT(A) and stated that as per the ledger accounts furnished by the assessee, it is evident that these cash payments are made in excess of the limits prescribed under section 40A(3) of the Act and prayed for dismissing the appeal of the assessee.

Firstly, the payment of Hire charges made in cash beyond the prescribed limit was only Rs.4,10,616/-. Considering the peculiar facts and circumstances of the case and nature of business carried on by the assessee, the amount spent in cash of Rs.4.10 lakhs is only 0.67% of the revenue declared by the assessee. The assessee’s claim of such expenditure as business expediency and following the hon’ble Madras High court’s observation in the case N.Mohammed ali Vs. ITO (Supra) with regard to exception for cash payment on account of business expediency, we are inclined to delete the addition of Rs.4,10,616/- and allow the appeal of the assessee in this ground.

In respect of expenditure spent in cash for Repairs and maintenance of Rs.25,03,866/-, the assessee has explained the requirement of cash during the movement of cargo for long distance destinations and also heavy lorries and thereby the cash payments have been made to drivers and cleaners in excess of limit prescribed under section 40A(3) of the Act. Again considering the peculiar facts and circumstances of the case and the cash payments are made to 10 -: drivers and cleaners to be spent for repairs and maintenance of vehicles during the movement of cargo and considering them as agents of the assessee and relying on the decision of the Hon’ble Gujarat High court in the case of Anupam Tele Services Vs.ITO (supra), we are deleting the disallowance of impugned expenditure of Rs.25,03,866/- and allow the appeal of the assessee.

Next issue before us was to adjudicate was Rs.3,08,761/- paid in cash in excess of Rs.20,000/- per transaction towards over dimensional Consignments (ODC). We note that these expenses have been made by the assessee in cash for transporting cargo of over dimension of the consignment as well as the weight of the consignment exceeds the limit allowed under the permit granted by the RTO and the limits laid down under the Motor Vehicle Act, 1988 and the rules made thereunder. Since, these amounts are paid to the Government authorities and also considering the fact that these payments are made by the drivers / cleaners during the movement of lorries with cargo for different destinations, we are of the considered view that the disallowance is not warranted u/s.40A(3) of the Act and hence we direct the AO to delete the same and allow the appeal of the assessee in this ground also.