Cash payments over ₹10,000 disallowed under Income Tax Act, despite bank deposit

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Case Name: 

Commissioner of Income Tax Vs Venkatadhri Constructions (High Court of Madras)

TC(A). Nos. 122 of 2003 and 1430 and 1431 of 2005

Date: 29th June 2012

Key Takeaways:

1. Cash payments exceeding ₹10,000 are generally disallowed under Section 40A(3), even if deposited directly into the payee's bank account.

2. Exceptional circumstances for allowing such payments must fall under Rule 6DD of the Income Tax Rules.

3. Mere deposit of cash into a supplier's account doesn't exempt the payment from Section 40A(3) scrutiny.

4. The court emphasized the importance of following the letter of the law in tax matters.

Issue:

Whether cash payments exceeding ₹10,000 made directly into a supplier's bank account violate Section 40A(3) of the Income Tax Act and should be disallowed as a deduction?

Facts:

1. Venkatadhri Constructions (the assessee) made cash payments exceeding ₹10,000 for business expenditures.

2. Some of these payments were deposited directly into the suppliers' bank accounts.

3. The Assessing Authority initially disallowed ₹3,80,083 under Section 40A(3) for the assessment year 1993-94.

4. The Commissioner of Income Tax (Appeals) partially allowed the assessee's appeal, accepting that ₹3,26,813 paid directly into accounts shouldn't be disallowed.

5. The Income Tax Appellate Tribunal confirmed the CIT(A)'s order without providing detailed reasoning.

6. The Revenue appealed to the High Court against this decision.

Arguments:

Assessee's Arguments:

1. The payee had regular accounts with the assessee for cement supply.

2. Cash payments were deposited directly into the supplier's account.

3. Direct deposit into the supplier's account should exempt the payment from Section 40A(3) scrutiny.

Revenue's Arguments:

1. Section 40A(3) applies to all cash payments exceeding ₹10,000, regardless of how they're made.

2. The assessee didn't provide evidence of exceptional circumstances as required by Rule 6DD.

3. Mere deposit into a bank account doesn't change the nature of the cash payment.

Key Legal Precedents:

While no specific case laws were cited, the court relied heavily on:

1. Section 40A(3) of the Income Tax Act

2. Rule 6DD of the Income Tax Rules

3. CBDT Circular No.1 dated 11.1.1979

Judgement:

1. The High Court allowed the Revenue's appeal and set aside the Tribunal's order.

2. The court held that unless there are exceptional and unavoidable circumstances falling under Rule 6DD, cash payments exceeding ₹10,000 would not escape the rigors of Section 40A(3).

3. The mere fact that the amount was deposited into the supplier's account doesn't exempt it from Section 40A(3).

4. The court emphasized that depositing cash into a bank doesn't make the case "any shade better than a cash payment" for the purpose of Section 40A(3).

FAQs:

1. Q: Does Section 40A(3) apply to all cash payments over ₹10,000?

  A: Yes, unless they fall under the exceptions specified in Rule 6DD of the Income Tax Rules.

2. Q: Can I avoid Section 40A(3) by depositing cash directly into my supplier's account?

  A: No, the court ruled that this doesn't exempt the payment from Section 40A(3) scrutiny.

3. Q: What are the exceptions to Section 40A(3)?

  A: Exceptions are specified in Rule 6DD and include considerations like banking facility availability and business expediency.

4. Q: Why did the court overturn the Tribunal's decision?

  A: The court found that the Tribunal didn't provide adequate reasoning and failed to consider the strict application of Section 40A(3).

5. Q: What's the main takeaway for businesses from this judgment?

  A: Businesses should avoid cash payments exceeding ₹10,000 and use crossed cheques or bank drafts to ensure deductibility of expenses.

1. The Revenue has filed the above appeals as against the order of the Income Tax Appellate Tribunal for the assessment years 1993-94 and 1995-96. The T.C.(A).No. 122 of 2003 was admitted on the following substantial question of law:-

"Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment of cash amounting to Rs.3,80,083/- by the assessee to the supplier's bank account is not a violation of the provisions of Section 40A(3)?"

The T.C.(A).Nos. 1430 and 1431 of 2005 were admitted on the following substantial question of law:-

"Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment of cash amounting to Rs.3,14,600/- by the assessee to the supplier's bank account is not a violation of the provisions of Section 40A(3)?"

2. The assessee herein admittedly made cash payment exceeding Rs.10,000/- in respect of certain business expenditure incurred by him. On the proposal to apply Section 40A(3) of the Income Tax Act, the assessee furnished the details which are extracted in the assessment order itself. The assessee contended that the payee was having regular accounts with the assessee as regards the supply of cement and that in some of the cases, cash payments were deposited by the assessee directly into the account of the supplier. Apart from this, the assessee also pointed out to the payment to labour. Thus, on a consideration of the facts, the Assessing Authority granted the relief in respect of those cases where payment in cash was made. However, as regards the payment made by way of advance for purchase of cement and credited to the account of the vendor, the Assessing Authority rejected the assessee's plea. Thus, out of cash payment of Rs.4,44,803/-, the Assessing Authority held that a sum of Rs.64,720/- alone would not fall for consideration under Section 40A(3) of the Act and balance sum of Rs.3,80,083/- was liable to be disallowed under Section 40A(3) of the Act. The facts thus stated above related to assessment year 1993-94. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who accepted the assessee's plea that since the amount of Rs.3,26,813/- was directly paid into the account, the same was not liable to be considered as covered by Section 40A(3) for disallowance. The Commissioner of Income Tax (Appeals) also granted further relief on payment of Rs.25,000/- and odd. Thus, partly allowed the appeal.

3. Aggrieved by this, the Revenue went on appeal before the Income Tax Appellate Tribunal, who confirmed the assessee's case in a single line that after hearing the parties and on going through the order of the Commissioner of Income Tax (Appeals)'s, the order could not found fault with. We may record herein that absolutely there is no recording of the reasons independently by the Tribunal as a finding fact body by considering the provisions under Section 40A(3) of the Act to the facts of the case. Aggrieved by the view of the Tribunal, the Revenue has come on appeal before this Court.

4. Section 40A(3) as it existed relevant to the assessment year under consideration reads thus, Section 40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969), as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction:

Provided further that no disallowance under this sub section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, 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.

5. A reading of the above said section would point out that whenever the assessee incurred expenditure in respect of which payment is made in cash in excess of Rs.10,000/-, the expenditure should not be allowed as a deduction. The proviso to sub section (3) of Section 10A carries out the exception that before rejecting such claim for deduction, the officer shall take into account the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors.

6. Rule 6DD of the Income Tax Rules specify circumstances under which the payment for a sum exceeding Rs.10,000/- may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. In fact on a representation made by a Trade, the Central Board of Direct Taxes has also issued circular No.1 dated 11.1.1979, wherein in considering difficulties in clearance of cheques issued on banks, the Central Board of Direct Taxes stated that,

"............... Accordingly, any payment for business expenditure made during the period when the cheque clearing operations are suspended or other similar circumstance as aforesaid exists, will not be covered by the provisions of Section 40A(3) of the Income Tax Act provided the assessee furnishes evidence to the satisfaction of the Income Tax Officer as to the genuineness of the payment and the identity of the payee. "

7. Thus, except on those circumstances, narrated under Rule 6DD of the Income Tax Rules and as given under 40A(3) of the Income Tax Act, unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs.10,000/- by cash would not escape the rigour of Section 40A(3) of the Income Tax Act.

8. As far as the present case is concerned, none of the circumstances were narrated by the assessee either before the Assessing Officer or before the Appellate Authority concerned in support of the contention that the claim for allowance should not be disallowed. The mere circumstance, that the amount had been remitted to the account of the payee, would not be a good ground to accept the case of the assessee that Section 40A(3) of the Act will not applied to the case.

9. In the light of the provisions as it stood, there being no exceptional circumstances for remitting the amount to the credit of payee's amount, we do not find any good ground to uphold the order of the Tribunal. It may be pointed out that the deposit of the amount to the bank does not make the case any shade better than a cash payment for the purpose of condoning the conduct of the assessee. Consequently, the order of the Tribunal is set aside and the Tax Case (Appeal) No. 122 of 2003 is allowed. No costs.

10. The facts in respect of other cases are not different from what had been noted above since the questions of law raised on other Tax Case (Appeals) are identical. Accordingly, the orders of the Tribunal passed in other two Tax Case (Appeals) are set aside and we allow Tax Case (Appeal) Nos. 1430 and 1431 of 2005. No costs.

(C.V.,J) (K.R.C.B.,J)

29.06.2012

Index : Yes/No

Internet : Yes/No

CHITRA VENKATARAMAN,J

and

K.RAVICHANDRABAABU,J

To

1. Commissioner of Income Tax , Madurai

2. The Income Tax Appellate Tribunal, B Bench, Chennai

3. The Income Tax Appellate Tribunal, C Bench, Chennai

29.06.2012