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.

Disallowance on account of cash payment exceeding Rs. 20,000 would be eligible for sec. 80-IB relief

Where assessee paid cash for certain expenses in excess of limit prescribed under Section 40A(3) and, consequently, it was added back to income of assessee, it would be treated as income from undertaking and, thus, would be eligible for deduction under section 80-IB.

Facts

a)    Assessee, eligible for deduction under section 80-IB, made payment in cash for certain expenses in violation of section 40A(3). Consequently, the Assessing Officer (AO) disallowed said payments.

b)    Assessee filed an unsuccessful appeal before the CIT(A). The contention of the assessee was that, though the expenses were disallowed under Sec. 40A(3) and would be added back to gross total income, deduction under section 80-IB was allowable on same.

c)    Aggrieved by the order of the CIT(A), assessee filed the instant appeal before the tribunal.

No concealment penalty if assessee opts to take route of presumptive taxation to escape sec. 40A(3) disallowance

Where at time of initiating penalty proceedings AO did not have any material on record showing that payments made by assessee were bogus, he could not have concluded that assessee had provided inaccurate particulars and levy penalty merely on basis of assessee's offer to be taxed on presumptive basis,

Facts

a)The assessee, a construction company, had issued large number of bearer cheques to small suppliers for delivering building material at construction site.

b)The AO disallowed said payments by invoking Section 40A(3). In response, assessee had shown its income on presumptive basis under Section 44AD to stay away from unnecessary litigation. The AO accepted the contention of assessee and completed the assessment by applying presumptive taxation.

c)After completing the assessment, the AO passed a penalty order under section 271(1)(C) and it was affirmed by the CIT (A). The Tribunal, however, set aside penalty order passed by CIT (A).The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Since at time of initiating penalty proceedings the AO did not have any material on record to show that payments made to suppliers were bogus, he could not have concluded that assessee had provided inaccurate particulars in its return merely on basis of assessee's offer to be taxed on estimate basis,

2)Moreover, the course of action suggested by the Assessing Officer was, in fact, accepted by the assessee as reasonable. Thus, the imposition of penalty was not justified. Therefore, there was no infirmity in the impugned order of the Tribunal. - Vatika Construction (P.) Ltd v. [2014] 45 taxmann.com 471 (Delhi)

Sum paid in cash of smaller denomination in lieu of currency of higher denomination is out of ambit of sec. 40A(3)

No element of expenditure was involved when sums were paid by assessee-company to its managing director for conversion of currency in small denomination into currency of higher denomination, and, thus, provisions of section 40A(3) were not applicable.

Facts:

a)  The assessee-company paid sums to its Managing Director (‘MD’) for conversion of currency in smaller denomination to currency of higher denomination and certain sum was advanced to him for incurring of expenditure on behalf of assessee-company.

b)  The Assessing Officer was of the view that the provisions of section 40A(3) were attracted as the sums paid were in cash, and, accordingly, disallowed the same. On appeal, the CIT (A) deleted the disallowance.

c)  The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

On sums paid for conversion of money:

1)    It could not be disputed that there was no element of expenditure involved and there was no outgo of funds of the assessee-company, inasmuch as whatever amount was paid to the MD, was returned by him; only difference being in the size of denomination of the currency given and returned.

2)    Thus, the provisions of section 40A(3) were not attracted to this amount.

On sums paid as advances:

3)    At the point of time, when advance was given for incurring the expenditure, there was no outgo of funds of the assessee-company, and the actual outgo took place only when expenditure was actually incurred by MD or such other person to whom he passed on such sums for incurring expenditure on behalf of the assessee-company;

4)    In the instant case, the process prior to actual incurring of expenditure was also recorded in the form of advances given, etc. The money did not go out of the coffers of the assessee-company unless and until the amount of such advance was spent towards any expenditure on behalf of the assessee-company;

5)    It was only the outgo of funds in the form of expenditure exceeding Rs. 20,000 in cash at a time, out of the coffers of the company, that would attracted the provisions of section 40A(3). Thus, the CIT (A) was justified in deleting the disallowance under section 40A(3).- ACIT v. Dodla Dairy Ltd [2014] 42 taxmann.com 407 (Hyderabad - Trib.)