The Ahmedabad Income Tax Appellate Tribunal (ITAT) deleted disallowance under section 40A(3) of the Income Tax Appellate Tribunal when assessee made payment in cash not directly to the seller.
M/s.Piprani Equipment P.Ltd, the assessee challenged the order passed by the Commissioner of Income Tax(Appeals)-9,(CIT(A)) under section 250(6) of the Income Tax Act, 1961.
The assessee company was engaged in the business of purchase and sale of used vehicles and construction equipment/machinery and old vehicles were purchased from individual persons who were working as small roadside contractors and were residents of distant and separate states.
The gross sales/receipts of the business were Rs.64,71,100/- and purchases were of Rs.72,20,414/-. Thus, the appellant company was not subjected to audit as per the provisions of section 44AB of the Income Tax Act.
The assessee company had obtained the tax audit report and furnished the same voluntarily. Based on the remarks made in the said tax audit report, the A.O. observed that the assessee had made payment in cash exceeding the limit specified under section 40(A)(3) of the Income Tax Act on the purchase of five old vehicles/JCB Machines on various.
The A.O. held that since the payments to these persons were made in cash and violation of the provisions of section 40A(3) of the Income Tax Act read with Rule 6DD of the Income Tax Rules,1962(Rules) the same was not allowable.
The CIT(A) confirmed the addition of Rs.37,01,314/- made by AO in his order under section 143(3) of the Income Tax Act,1961 by way of disallowance made under section 40(3) in respect of cash purchase of old vehicles from unknown sellers for the business of dealing of old vehicles, equipment and machinery.
The assessee had explained that he had purchased these vehicles through an agent, Shri Mohansingh Rawat, who was produced before the AO in remand proceedings, and the AO had examined him when the said person had confirmed having received cash from the assessee for making payment in cash for purchases made from these very persons.
The Tribunal observed that the sellers on affidavits stated that they did not have any bank account and had therefore insisted on receiving money in cash. It was evident that the situation envisaged in clause (k) of Rule 6DD is satisfied in the present case, and therefore, the assessee is entitled to be exempt from the rigours of section 40A(3) of the Income Tax Act.
A Coram comprising of Smt. Annapurna Gupta, Accountant Member observed that it has not been proved beyond doubt that the agent who received cash from the person selling vehicles was required to make payment in cash for goods or services on behalf of such person to a third party, which means that the CIT(A) has understood clause (k) to mean that the agent should be receiving cash from the sellers.
Further, the Tribunal held that the assessee has sufficiently demonstrated the existence of circumstance specified in clause (k) of Rule 6DD to be eligible for exemption from the rigours of section 40A(3) of the Act and deleted the disallowance made by invoking section 40A(3) of the Act.
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