Recently in Ellora Paper Mills Ltd v. CIT, the Bombay High Court held that the assessee cannot avail the benefit of Section 40A(3) of the Income Tax Act in respect of Cash payments made in a Village which does not have Banking Facility without proving the genuineness of the transaction.
The appellant-assessee has a factory in the same village. There are no banking facilities in the village Devada. During the assessment year under consideration, assessee made cash payments above Rs. 10,000 to contractors and labourers etc. Appellants claimed that the payments are covered by section 40A(3) of the Income Tax Act. As per the said provision, no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A 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 ten thousand rupees in the cases and circumstances specified under the provision.
The Assessing Officer, however, rejected the claim and held that disallowance under section 40A can be applied since the assessee has failed to prove the genuineness of the payments by submitting related bills/vouchers.
The department was of the view that payments made in cash by the appellant -assessee to persons residing in village Devada were exempted from complying with Section 40A(3) of the Act by virtue of Rule 6DD(h) of the Rules. However, the payments which were made to transporters, contractors etc. who had business establishments at places outside the village Devada where banking facilities were available, were not entitled to the benefits of Rule 6DD(h) of the Rules.
On appeal, both the CIT(A) and the Tribunal upheld the above view.
Aggrieved by the orders, the assessee approached the High Court contending that the authorieties above have incorrectly invoked Rule 6DD(j) of the Rules to disallow the benefits of payments made in excess of Rs.10,000/- in cash. This for the reason that Rule 6DD(j) is a residuary clause and would only apply when the payments made in cash are not covered by the earlier clauses.
It was noted that the payments in excess of Rs.10,000/-, otherwise then by way of a crossed cheque drawn on a bank or by a crossed bank draft can be allowed if the conditions prescribed under Rule 66D are satisfied.
The bench observed that “In terms of Rule 6DD(h) of the Rules, a person who 00-makes the payment in a village, which does not have the facility of banking, to a person who ordinarily resides therein or is carrying on business therein, will be allowed the benefit of deduction even when the expenditure is not paid by a crossed cheque drawn on a bank or by a crossed bank draft. However, it is for the assessee who seeks to claim the benefit of the second proviso of Section 40A(3) of the Act and Rule 6DD of the Rules to establish that its case falls within the precincts of Rule 6DD(h) of the Rules. Admittedly, the appellant-assessee has led no evidence before the Authorities under the Act to show that the transporters, contractors and suppliers of rice straw to whom the payment is made in cash, were carrying on business in village Devada.”
The bench found that in order to avail the benefit of the said section, the Assessee has to furnish evidence so as to satisfy the Assessing Officer about the genuineness of the payments and the identity of the payee. In this case, since the assessee failed to do so, cannot the benefit of the provision.
Read the full text of the Judgment below.