2019 (4) TMI 1907 - AT - Income Tax

Disallowance u/s 40A(3) - cash payments made for purchasing film rights for exhibiting in their theatres - whether the assessee had brought in sufficient evidence to show that there was indeed an exceptional circumstance warranting the payments in cash? - HELD THAT - The answer is a firm No. It might be true that exceptions mentioned in Rule 6DD are not exhaustive and there could be other extraordinary circumstances where business expediency required payments in cash. However in my opinion once an assessee say that its case fall within the proviso it needs to prove it by strict evidence and not on the basis of preponderance of probability. Assessees were not able to bring out any records to prove the existence of any extraordinary circumstance requiring them to effect payments in cash - lower authorities were justified in making the disallowance u/s.40A(3) - Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Business expediency as a justification for cash payments.
3. Applicability of Rule 6DD exemptions.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3):
The primary issue revolves around the disallowance made by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act, 1961. The AO disallowed cash payments made by the assessees, M/s. Lena Talkies and M/s. Vadiganathan Talkies, for purchasing film rights, stating that these payments violated Section 40A(3). The disallowances amounted to Rs. 16,00,000 for AY 2014-15 and Rs. 26,95,000 for AY 2015-16 for Lena Talkies, and Rs. 11,45,000 for Vaduganathan Talkies.

2. Business Expediency as a Justification for Cash Payments:
The assessees argued that cash payments were made due to business expediency, as agreements with producers were often reached just before the film's release, necessitating immediate payments. They contended that banking facilities like NEFT/RTGS had time restrictions, making them unsuitable for urgent transactions. However, the AO and CIT(A) found these reasons insufficient, noting that the assessees failed to demonstrate any exceptional circumstances warranting cash payments. The CIT(A) emphasized that the genuineness of payments was irrelevant under Section 40A(3).

3. Applicability of Rule 6DD Exemptions:
The assessees also argued that their case fell within the proviso to Section 40A(3) and Rule 6DD exemptions, which allow for cash payments under certain conditions. They cited business expediency and provided lists of payees and agreements to substantiate their claims. However, the CIT(A) and the Tribunal found that the assessees did not provide sufficient evidence to prove the existence of extraordinary circumstances justifying cash payments. The Tribunal noted that the exemptions in Rule 6DD were not exhaustive but required strict evidence, which the assessees failed to provide.

Conclusion:
The Tribunal upheld the disallowances made by the AO under Section 40A(3), concluding that the assessees did not demonstrate any exceptional circumstances warranting cash payments. The Tribunal also found that the decisions cited by the assessees were based on different fact situations and were not applicable to the present case. Consequently, the appeals of the assessees were dismissed.