Court Upholds Direct Bank Deposits, Rejects Tax Disallowance Under Section 40A(3)

Case Name**: COMMISSIONER OF INCOME TAX VS SMT. SHELLY PASSI

**Key Takeaways**:

1. Direct deposits into a supplier's bank account do not violate Section 40A(3) of the Income Tax Act.

2. The relationship between principal and agent can affect the applicability of Section 40A(3).

3. The High Court emphasized the importance of proving perversity or error in the ITAT's findings to overturn them.

**Issue**: 

Was the Income Tax Appellate Tribunal correct in deleting the addition of ₹60,19,000/- made by the Assessing Officer under Section 40A(3) of the Income Tax Act, 1961?

**Facts**:

1. The assessee e-filed a return of income on 28.9.2008, declaring an income of ₹1,54,390/- 

2. The Assessing Officer found that the assessee had made cash payments amounting to ₹60,19,000/- for purchase of goods from Reliance Communication Infrastructure Limited (RCIL) 

3. The Assessing Officer disallowed this amount, considering it a violation of Section 40A(3) of the Act read with Rule 6DD of the Income Tax Rules, 1962 

4. The Commissioner of Income Tax (Appeals) dismissed the assessee's appeal 

5. The Income Tax Appellate Tribunal partly allowed the assessee's second appeal 

**Arguments**:

Revenue's Arguments:

1. The assessee violated Section 40A(3) of the Act by making cash payments exceeding ₹20,000 

2. The Tribunal erroneously accepted the assessee's plea 

Assessee's Arguments:

1. The money was directly deposited in RCIL's bank account 

2. The assessee was only an agent of RCIL, so disallowance shouldn't apply 

**Key Legal Precedents**:

1. Commissioner of Income Tax v. SAS Educational Society, (2009) 319 ITR 65: The revenue relied on this case, arguing that any cash payment exceeding ₹20,000 was inadmissible under Section 40A(3) 

**Judgement**:

The High Court dismissed the revenue's appeal, upholding the ITAT's decision. Key points:

1. The Tribunal's finding that ₹60,19,000/- was directly deposited in RCIL's bank account was not shown to be perverse or erroneous 

2. The Tribunal considered that the assessee was only an agent of RCIL, making disallowance inapplicable 

3. The Court found that the SAS Educational Society case was not applicable to the current situation 

**FAQs**:

1. Q: What is Section 40A(3) of the Income Tax Act?

  A: Section 40A(3) generally disallows deductions for expenses paid in cash above a certain limit (₹20,000 in this case).

2. Q: Why did the Court dismiss the revenue's appeal?

  A: The Court found no perversity or error in the ITAT's findings and determined that the precedent cited by the revenue wasn't applicable to this case.

3. Q: What was the significance of the assessee being an agent of RCIL?

  A: The agent-principal relationship was considered by the Tribunal as a factor making the disallowance under Section 40A(3) inapplicable to the assessee.

4. Q: Does this judgment mean all direct bank deposits are exempt from Section 40A(3)?

  A: Not necessarily. The Court's decision was based on the specific facts of this case, including the agent-principal relationship and the direct deposit into the supplier's account.

5. Q: What should taxpayers take away from this judgment?

  A: While direct bank deposits may provide some protection against Section 40A(3) disallowances, each case will be judged on its specific facts and circumstances.

1. This appeal has been preferred by the revenue under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 11.5.2012, Annexure 3 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh (for brevity, “the Tribunal”) in ITA No.1151/CHANDI/2011 for the assessment year 2008-09, claiming following substantial questions of law:-

i) Whether on facts and in the circumstances of the case, the ITAT was correct in law in deleting the addition of 60,19,000/- made by AO and sustained by the Commissioner of Income Tax (Appeals) under Section 40A (3) of the Income tax Act ignoring the fact that books of accounts were deliberately fabricated to show payments within the permissible limits and the issue of principal agent was never represented before AO or CIT(A)?

ii)Whether on facts and in the circumstances of the case, the Hon'ble ITAT has ignored the contents of affidavit filed by assessee and reproduced by AO on page 7-8 of assessment order, where the assessee has not taken any stand in regard to principal and agent relationship and thus did not follow the ratio of decision of Hon'ble Punjab and Haryana High Court in the case of SAS Education Society 319 ITR 65 (Punjab and Haryana)?

iii)Whether on facts and in the circumstances of the case, the Hon'ble ITAT has ignored the finding given on page 3 of the CIT(A) order that the assessee had complete knowledge of law that provisions of Section 40A(3) of the Act are applicable and the assessee deliberately fabricated books of account to show payment less than Rs.20,000/-?”

2. Briefly the facts as narrated in the appeal may be noticed. Return of income in this case was e-filed on 28.9.2008 declaring income of `1,54,390/- which was subsequently processed under Section 143(1) of the Act on 21.3.2010. During the course of assessment proceedings, the Assessing Officer found that the assessee had made cash payments amounting to `60,19,000/- for purchase of goods from Reliance Communication Infrastructure Limited (RCIL) in the year under assessment in violation of Section 40A(3) of the Act read with Rule 6DD of the Income Tax Rules, 1962 (for brevity, “the Rules”). As the assessee could not prove the genuineness of the purchase of goods from RCIL as such, the whole amount of ` 60,19,000/- was disallowed and assessed to tax vide order dated 22.11.2010, Annexure I. The Assessing Officer also disallowed a sum of ` 3,50,000/- received by the assessee as gift and added to income of the assessee. The Assessing Officer also made an addition of `1,24,300/- on account of capital introduced by the assessee and `27,121/- on account of miscellaneous expenses. Penalty proceedings under Section 271(1)(c ) of the Act were also initiated for furnishing inaccurate particulars of income. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 30.9.2011, Annexure 2, the CIT(A) dismissed the appeal. The assessee filed second appeal before the Tribunal. Vide order dated 11.5.2012, Annexure A.3, the Tribunal partly allowed the appeal. Hence the present appeal by the revenue.

3. Learned counsel for the revenue submitted that the assessee had violated the provisions of Section 40A(3) of the Act and therefore the addition of ` 60,19,000/- made by the Assessing officer was wrongly deleted by the Tribunal. Relying upon the judgment of this Court in Commissioner of Income Tax v. SAS Educational Society, (2009) 319 ITR 65, it was submitted that the Tribunal had erroneously accepted the plea of the assessee whereas in view of the express provisions of section 40A(3) of the Act, any amount paid in cash in excess of 20,000/- was inadmissible.

4. After giving thoughtful consideration to the submissions made by learned counsel for the appellant, we do not find any merit in

this appeal.

5. The Tribunal while accepting the plea of the assessee had categorically held that the money amounting to ` 60,19,000/- was directly deposited in the bank account of RCIL. Reference was also made to the paper book which had been filed before the Tribunal. Another factor which was considered by the Tribunal was that the assessee was only an agent of RCIL and therefore question of any disallowance in the hands of the assessee was not attracted. The aforesaid findings have not been shown to be perverse or erroneous in any manner.

6. The judgment on which reliance has been placed was on individual fact situation involved therein. In that case, this Court came to the conclusion that the Tribunal before providing further opportunity,was required to record a finding that there was denial of opportunity to the concerned party. That is not the situation here. Thus, the judgment is of no assistance to the appellant.

7. No question of law much less substantial question of law arises in this appeal and accordingly, the same is dismissed.

(Ajay Kumar Mittal)

Judge

October 06, 2012 (Gurmeet Singh Sandhawalia)

'gs' Judge