No Addition u/s 40A (3) without Doubt of Genuineness of Payment: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, has recently, in an appeal filed before it, held no addition under section 40A (3) is leviable, without there being doubt of the genuineness of payment.

The aforesaid observation was made by the Kolkata ITAT, when an appeal was preferred before it by the assessee, as directed against the order passed by the National Faceless Appeal Centre, Delhi, (CIT(A)), dated 23/12/2021, for Assessment Year 2017-18, as against the assessment order passed under Section 143(3) of the Income Tax Act, 1961, Hooghly, dated 07/11/2019.

The brief facts of the case were that the assessee was a proprietor of M/s. K D Pharma, which was engaged in the business of distribution of wholesale lines of medicines.

The Assessee had filed its return of income on 31/07/17, reporting total income at Rs.50,94,820/-. During the course of assessment proceedings under Section 143(3) of the Act, the AO passed an order by making additions which are in contest by this appeal.

In respect of disallowance made under Section 40A (3) of the Income Tax Ac,t of Rs.1,22,97,460/- on account of payments made to M/s. K D Enterprises (stockist of drugs and medicine), by depositing cash in the bank account of the supplier, it was submitted that M/s. K D Enterprises was the stockiest of drugs and medicines from whom the assessee had made purchases of Rs.2,46,96,376/- out of its total purchases for the year of Rs.31,23,68,302/-.

It was also stated that owing to business expediency and compelling requirements from the seller to make payments in cash over the counter for certain products of specific companies which required advance payments before leaving the goods from the go-down, the assessee had to make payments in cash for such supplies and that the assessee deposited directly into the bank account of M/s K D Enterprises, for the purchase price which has been disallowed by the  AO by invoking the provisions of Section 40A(3).

Hearing the opposing contentions of both sides as presented by Shri U. Dasgupta, the assessee’s Advocate and by Shri P.P. Barman, the Addl. CIT on behalf of the Revenue, as well as perusing the materials available on record, the ITAT observed:

“We find force from the decision of the Hon’ble High Court of Punjab & Haryana in the case of CIT v. Smt. Shelly Passi, wherein the Hon’ble Court upheld the view of the Tribunal in not applying Section 40A (3) of the Income Tax Act to the cash payments when ultimately such amounts were deposited in the bank of the payee.”

“ Also, the Co-ordinate Bench of ITAT Bangalore in the case of Sri Renukeshwara Rice Mills V ITO, had held that cash payment in the bank account of the payee is sufficient to get exemptions in terms of Rule 6DD inasmuch as it is ensured that payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transactions is traceable thereby fulfilling the criterion of introduction of Section 40A(3) of the Income Tax Act”, the Coram of Rajpal Yadav, the Vice- President and Girish Agrawal, the Accountant Member added.

Thus, the ITAT finally held:

“Accordingly, considering the above facts and judicial precedents and the material placed on record discussed above, we allow the ground of appeal and direct for deletion of addition of Rs.1,22,97,460/-, made under Section 40A (3) of the Income Tax Act.”

To Read the full text of the Order CLICK HERE

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