Cash payments to liquor dealers to maintain su􀁹icient quantity of stock doesn't call for sec. 40A(3) disallowance

Facts:

a) Assessee engaged in the business of country liquor had made cash purchases from two parties 'A' and 'P'.

b) Since, the payments for the purchases were exceeding Rs. 20,000, Assessing Officer (AO) disallowed said payments by invoking provisions of section 40A(3).

c) Commissioner (Appeals) confirmed the action of the AO and upheld the disallowance. Aggrieved assessee filed the instant appeal before the tribunal. 

The tribunal held in favour of assessee as under:

1) The primary object of enacting section 40A(3) is two folds, firstly, putting a check on trading transactions with an intent to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community.

2) Apparently, this provision is directly related to curbing of the evasion of tax and inculcating the banking habits in business community.

3) In the instant case, assessee was the only authorized dealer in the area for the supply of country liquor to authorized Excise vendors. He was to keep sufficient stock of country liquor as prescribed by the Excise Department and in case stock fell short of the prescribed limit, the department used to impose penalty.

4) To avoid such circumstances, assessee avoided the process of depositing the cash in his bank account and therea􀁺er issued demand drafts. It was also important to note that the vendors were not accepting the account-payee cheque’s of the assessee as it would take couple of day time in clearance.

5) Therefore, the transactions were free from vice of any device of evasion of tax. Further, AO had also verified the transactions from the vendors by issuing notice under section 133(6). Thus, no disallowance under section 40(A)(3) could be made- [2016] 70 taxmann.com 319 (Kolkata - Trib.)