Seller Of Agricultural Land Insisting Cash Payment; No Disallowance Can Be Made Under Section 40A (3) Of IT Act: ITAT

The Bench of Saktijit Dey (Judicial Member) and Pradip Kumar Kedia (Accountant Member) observed that considerations of business expediency and other relevant factors, which provide an exception to Section 40A(3), have not been diluted even after the amendment of Rule 6DD(j) of the Income Tax Rules, 1962.

Hence, the ITAT held that where the seller of the agricultural land made a pre-condition for registration of the sale deed by insisting that the payment be made in cash, the assessee was forced to make the payment in cash due to business expediency and hence, no disallowance under Section 40A(3) could be made.

The assessee M/s. Geo Connect Ltd. is in the real estate business, who purchased an agricultural land from a senior citizen. The assessee issued bearer cheques for an amount of over one crore rupees towards the sale consideration of the said land.

In the course of the assessment proceeding, the Assessing Officer (AO) observed that the assessee made the said payments for purchase of agricultural land otherwise than by way of account payee cheques or bank drafts, in violation of Section 40A(3) of the Income Tax Act, 1961 read with Rule 6DD of the Income Tax Rules, 1962. Accordingly, the AO disallowed the expenses incurred by the assessee under Section 40A (3) of the Income Tax Act. The Commissioner of Income Tax (Appeals)(CIT (A)) upheld the order passed by the AO. Against this, the assessee filed an appeal before the ITAT.

The assessee M/s. Geo Connect Ltd. submitted before the ITAT that the payments were made towards purchase of agricultural land and that the seller of the agricultural land insisted that the entire consideration be paid in cash. Hence, the assessee averred that it had no other alternative but to make the payment through bearer cheques.

The assessee added that the object of Section 40A(3) is to ensure that no fictitious amount is claimed as expenditure by the bearer and that the intention of the legislature is not to restrict the genuine business activity.

Contending that the primary object of Section 40A(3) is to curb tax evasion and not to obstruct genuine transactions, the assessee argued that where the bearer is able to establish the identity of the recipient and the genuineness of the payment or transaction, cash payments cannot be disallowed under Section 40A(3).

Section 40A(3) of the Income Tax Act provides that any expenditure exceeding ten thousand rupees made other than by way of account payee cheque or bank draft, would not be allowed as deduction.

The first proviso to Section 40A(3) provides that no disallowance under Section 40A(3) should be made in certain prescribed cases and circumstances, having regard to the nature and extent of the banking facilities available as well as the consideration of business expedience and other relevant factors. Further, Rule 6DD of the Income Tax Rules prescribes the exceptions under which Section 40A(3) would not apply.

The ITAT observed that the assessee had contended before the AO that the seller of the agricultural land put a pre-condition for registration of the sale deed by insisting that the entire consideration be paid in cash before the registration.

Perusing the bank statements, the ITAT noted that the sale consideration was paid to the seller through bearer cheques, which were withdrawn on the same day and that on the very same day, the sale deed was registered in favour of the assessee. Hence, the Tribunal ruled that the assessee had established the genuineness of the transaction between the parties, the payment made by the assessee as well as the purpose of the said payment.

The Tribunal referred to the provisions of Rule 6DD (j), as it stood prior to its amendment, which provides that Section 40A(3) of the Income Tax Act would not apply where the assessee satisfies the Income Tax Officer that the payment could not be made as prescribed under Section 40A(3) due to the exceptional or unavoidable circumstances, or because the payment in the prescribed manner was not practicable, or, having regard to the nature of the transaction, it would have caused genuine difficulty to the payee.

The ITAT ruled that in view of the provisions of Section 40A(3) read with Rule 6DD, no disallowance under Section 40A(3) can be made if the transaction for which the payment was made was genuine and due to the business expediency and other compelling factors the said payment was required to be made in cash.

Further, the ITAT observed that the Supreme Court in Attar Singh Gurmukh Singh versus ITO (1991), while upholding the constitutional validity of Section 40A(3), had held that the said provision is not intended to restrict the business activity and that the restrictions provided therein are only intended to curb the opportunities to use or create black money and hence, the said restrictions should not be regarded as curtailing the freedom of trade or business. Thus, the Apex Court ruled that considerations of business expediency and other relevant factors are not excluded from the ambit of section 40A(3), and that it is open to the assessee to satisfy the AO that the payment in the manner as prescribed under Section 40A(3) was not practicable or would have caused genuine difficulty to the payee.

The Tribunal noted that in the case of A. Daga Royal Arts versus ITO (2018), the Jaipur bench of the ITAT ruled that the legal proposition laid down by the Supreme Court regarding the consideration of business expediency and other relevant factors, has not been diluted in any way even after the amendment of Rule 6DD(j). Further, the Tribunal in A. Daga Royal Arts (2018) held that there has been no change in the provisions of Section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned and that the rules framed by way of delegated legislation cannot override the substantive legislation in form of Section 40A(3), which has not changed its character.

While observing that the genuineness of the payment made by the assessee was not doubted and that the recipient of the amount made a pre-condition for registration of the sale deed by insisting that the payment be made in cash, the ITAT ruled that the assessee was forced to make the payment in cash due to business expediency and hence, no disallowance under Section 40A(3) could be made.

Reiterating that no disallowances under Section 40A(3) can be made where the seller of the agricultural land insisted on payment in cash, the ITAT allowed the appeal and deleted the disallowances made by the AO.

Case Title: M/s. Geo Connect Ltd. versus DCIT

Dated: 29.08.2022 (ITAT Delhi)

Representative for the Assessee/ Appellant: Mr. Rohit Jain, Advocate; Ms. Manisha Sharma, Advocate

Representative for the Revenue / Respondent: Ms. Anupama Singla, Sr. DR

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