In a recent ruling, the Jaipur bench of the Income Tax Appellate Tribunal (ITAT) deleted the addition of ₹8.36 lakh made by the AO under Section 40A(3) of the Income Tax Act. The appeal was against the order by the Commissioner of Income Tax (Appeals)[CIT(A)], National Faceless Appeal Centre (NFAC) for the assessment year 2014-15.
The assessee, Surabi Agarwal, working in the real estate business, had filed her income tax return(ITR) for the AY 2014-15, declaring a total income of ₹6.64 lakhs under the head of “Business Income” and “other sources”. The case was then selected for scrutiny, and the Assessing Officer (AO) made an addition of ₹8.6 Lakhs to her income for cash payments made in violation of Section 40A(3) of the Act. These payments were linked to two immovable property purchases in which parts of the transactions were cash.
The AO, on assessing, stated that the cash transactions of ₹6.8 lakhs and ₹1.54 lakh exceeded the threshold limits provided under Section 40A(3), which will lead to disallowance. The assessee argued that she was eligible for presumptive taxation under Section 44AD, which overrides the provisions of Section 40A(3) of the Act. The assessee further contended that the payments were made in the preceding assessment year, i.e. AY 2013-14, invalidating the disallowance for AY 2014-15.
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The CIT(A) upheld the disallowance made by the AO under Section 40A(3) of the Income Tax Act and stated that the payments made by the assessee in cash for property purchases contradicted the provisions of Section 40A(3), which disallow the expenditures exceeding the prescribed limit if paid in cash, except in cases covered by the exceptions provided in Section 66D of the Act.
The Assessee claimed that the payments fell under the exceptions provided in Rule 6DD, arguing that they were made to identified sellers through registered sale deeds, ensuring the transactions’ genuineness. The CIT(A) rejected this argument, stating that Rule 6DD exceptions no longer apply to cases involving business expenses as the provisions for such were amended.
After hearing submissions from both sides, the ITAT observed that the transactions were adequately supported by registered sale deeds, establishing their authenticity. It observed that ₹6.8 Lakh was paid in the Financial Year 2012-13, which could not be disallowed in 2014-15 AY. The tribunal also held that additional payments were made in cash due to genuine business needs.
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The tribunal agreed that the payments fell under exceptions outlined in Rule 6DD and did not violate the provisions laid out in Section 40A(3). The tribunal observed that the assessee declared her income under Section 44D of the Income Tax Act and achieved a profit rate higher than the statutory requirement of 8%. This further reduced the scope for invoking Section 40A(3).
The ITAT consisting of Sudhir Pareek (Judicial Member) and Rathod Kamlesh Jayantbhai ( Accountant Member) upheld the decision relied upon by the authorised representative of the assessee in the case of Smt. Harshila Chordia vs Income Tax Officer, where the Rajasthan High Court highlighted the necessity of aligning the nature of payments with the legislative intent of Section 40A(3). As a result, the ITAT allowed the assessee’s appeal and deleted the ₹8.6 Lakh addition made by the AO.
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