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2011 (10) TMI 639 - AT - Income TaxDisallowance made under section 40A(3) - Rule 6DD applicability - - Held that - The provisions of section 40A(3) says that if the cash payment exceeds Rs. 20, 000/- and they do not fall under the exceptional clause of Rule 6DD then addition @ 20% of such cash payment has to be made. However the background of the case has to be seen and it should be enquired whether there is any real difficulty with the assessee to make payment in cash. In the present case it is seen that assessee was forced to make cash payment as agriculturists were not ready to accept the cheques as many other purchasers were available in the market and willing to pay in cash. Being a prudent businessman the assessee thought it proper to make cash payment so that their agreement of purchase of land may not be cancelled or agriculturists may refuse to sell the land to assessee the next day. In view of these facts and circumstances we are of the view that case of the assessee falls under the exceptional clause of Rule 6DD of IT Rules.
Issues Involved:
1. Confirmation of addition made by AO under Section 40A(3) for assessment years 2006-07 and 2007-08. Detailed Analysis: Issue 1: Confirmation of Addition Made by AO under Section 40A(3) - Background and Context: - The assessee, a colonizer and developer, engaged in buying agricultural land and converting it for residential and commercial purposes, filed returns for the assessment years 2006-07 and 2007-08. Upon scrutiny, the AO observed that the assessee made substantial cash payments to farmers for land purchases, which were subject to disallowance under Section 40A(3) of the Income Tax Act, 1961. - AO's Observations: - The AO noted cash payments of Rs. 1,47,85,550/- for 2006-07 and Rs. 2,47,76,880/- for 2007-08. - The AO issued a show-cause notice to the assessee, questioning why 20% of these payments should not be added to the total income under Section 40A(3). - The assessee provided explanations citing various sub-clauses of Rule 6DD, arguing that the payments were made under exceptional circumstances. - Rejection of Assessee's Explanations by AO: - The AO found the explanations unsatisfactory, particularly noting the lack of documentary proof regarding the Managing Director acting as an agent, the availability of banking services in the villages, and the absence of evidence for payments made after banking hours. - Consequently, the AO disallowed 20% of the cash payments, resulting in additions of Rs. 29,57,110/- and Rs. 49,15,376/- for the respective years. - CIT (A)'s Confirmation: - On appeal, the CIT (A) upheld the AO's findings, emphasizing that the payments did not fall under the exceptions provided in Rule 6DD. - The CIT (A) noted that the villages were near Jaipur city and had banking facilities, and the payments made after banking hours were not substantiated with compelling evidence. - Assessee's Arguments Before ITAT: - The assessee argued that the cash payments were genuine, necessary due to business expediency, and covered under Rule 6DD exceptions. - Detailed submissions and case laws were presented to support the claim that the payments were made under exceptional circumstances, including the lack of banking facilities and the need to make payments after banking hours. - ITAT's Analysis and Decision: - The ITAT reviewed the submissions, payment vouchers, and relevant case laws. - The ITAT found that the AO and CIT (A) did not adequately verify the availability of banking facilities in the villages or the timings of the payments. - The ITAT noted that the payments were made to villagers in areas not served by banks, and some payments were made after banking hours, as evidenced by the vouchers. - The ITAT acknowledged the practical difficulties faced by the assessee in making payments by cheque, especially when dealing with farmers who insisted on cash payments due to previous cheque dishonors. - The ITAT concluded that the assessee's case fell under the exceptional circumstances of Rule 6DD, and the stringent provisions of Section 40A(3) should not apply. - Conclusion: - The ITAT allowed the appeals, deleting the additions made under Section 40A(3) for both assessment years, recognizing the genuine business exigencies and practical difficulties faced by the assessee. Final Judgment: - The appeal for assessment year 2006-07 is allowed in part, and the appeal for assessment year 2007-08 is allowed in full. The order was pronounced in the open court on 21.10.2011.
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