Bombay HC admits Revenue Appeal against ITAT Order Deleting Cash Expense Disallowance u/s 40A(3) [Read Order]
The Revenue had disallowed certain cash payments exceeding ₹20,000 made by the assessee to its creditors, invoking Section 40A(3), which restricts deduction for expenditure made otherwise than by account payee cheque or bank draft
The Bombay High Court has admitted an appeal filed by the Principal Commissioner of Income Tax-4, Pune, challenging the Income Tax Appellate Tribunal (ITAT), Pune’s decision deleting the disallowance made under Section 40A(3) of the Income Tax Act, 1961, in the case of Laukik Paper Industries Pvt. Ltd. for the Assessment Year 2006-07.
The Revenue had disallowed certain cash payments exceeding ₹20,000 made by the assessee to its creditors, invoking Section 40A(3), which restricts deduction for expenditure made otherwise than by account payee cheque or bank draft. The CIT(A) had partly reduced the disallowance on a percentage basis, while the ITAT, Pune deleted the addition entirely.
Aggrieved, the Revenue preferred an appeal before the Bombay High Court, contending that the ITAT wrongly relied upon the Madhya Pradesh High Court ruling in CIT v. Purshottam Lal Tamrakar Unchehra, despite differing factual circumstances.
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Appearing for the appellant, Mr. Akhileshwar Sharma argued that the ITAT erred in granting relief by relying on a judgment that was distinguishable on facts. In Purshottam Lal Tamrakar, the Court had applied a net profit rate on the assessee’s entire business turnover. However, in Laukik Paper Industries’ case, the disallowance arose from direct evidence of cash payments exceeding statutory limits, supported by bank account statements and statements of key group personnel.
The Revenue contended that once such cash payments were established, the ITAT had no legal basis to delete the disallowance, and the CIT(A) had also erred in granting partial relief on an arbitrary percentage basis.
The Income Tax Act has several provisions that restrict receipt or payment made in cash by a person subject to a certain threshold limit. These restrictions have been introduced to move towards a cashless economy and to reduce the generation and circulation of black money.
Disallowance of cash payments [Section 40A(3)]
Section 40A(3) provides that if the payment or aggregate of payments for an expenditure to a person in a day exceeds Rs. 10,000 and it is made by any mode other than account payee cheque or bank draft or electronic clearing system through a bank account or prescribed electronic modes, no deduction shall be allowed for such expenditure. However, where payment is made for plying, hiring, or leasing goods carriages, the ceiling of Rs. 35,000 shall be considered instead of Rs. 10,000.
The provision of Section 40A(3) does not apply to payments made by commission agents for
goods received by them for sale on a commission or consignment basis because such payment is not an expenditure deductible in computing the taxable income of the commission agent.
However, if the commission agent purchases goods on his own account and not on a commission basis, the requirement of payment in a specified mode applies to such purchases.
Further, where the taxpayer had claimed a deduction in respect of expenditure in any of the earlier years and subsequently makes payment thereof, otherwise than by an account payee cheque or bank draft, in excess of Rs. 10,000, in that situation, the payment so made is deemed to be the business income of the previous year in which payment is made.
The division bench comprising Justice M.S. Sonak and Justice Advait M. Sethna admitted the appeal on two substantial questions of law. The first was whether the ITAT was correct in deleting the disallowance under Section 40A(3) based on a precedent with different factual footing. The second was whether such deletion was justified when the assessee had admittedly made cash payments above ₹20,000, clearly violating the statutory bar.
The Court directed the Revenue to take necessary steps for serving the respondent company and file an affidavit of service.
The appeal stands admitted, and further proceedings will determine whether Laukik Paper Industries is entitled to relief from disallowance under Section 40A(3) or whether the Revenue’s stand is to be upheld.
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