BRIEF FACTS OF THE CASE1
- For Assessment Year 2014–15, the taxpayer, Sabha Chand, engaged in the retail sale of liquor, reported turnover of INR 6.56 crores with a net profit of 0.85%. During the year, the taxpayer purchased liquor worth INR 3.96 crores from M/s. Ganga Wines, Narnaul, making payments in cash. Tax was collected at source (TCS) on such purchases, and the vendor's PAN and other details were available on record.
- During the assessment proceedings, the Assessing Officer (AO) disallowed INR 3.91 crores u/s 40A(3) of the Income-tax Act, 1961 (“the Act”), on the ground that the taxpayer had made cash payments exceeding the prescribed threshold. The taxpayer argued that cash payments were necessitated due to business exigencies, as the vendor refused to release stock without immediate payment. However, the AO made the addition of INR 3.91 crores u/s 40A(3) of the Act. Further, the Commissioner of Income Tax (Appeals) upheld the disallowance, following which the matter was taken to the Delhi Income Tax Appellate Tribunal (“ITAT”).
OBSERVATIONS OF ITAT
- The ITAT observed that the objective of Section 40A(3) of the Act is to curb tax evasion by limiting cash payments above INR 10,000, but the provision cannot be read in isolation and must be interpreted along with the exceptions under Rule 6DD of the Income-tax Rules, 1962. Referring to CBDT Circular No. 220 (31 May 1977), the Tribunal emphasised that the list of exceptions under Rule 6DD is not exhaustive but illustrative, and that considerations of business exigency and commercial realities must be given due weightage.
- The Tribunal also relied on judicial precedents, particularly the Supreme Court decision in Attar Singh Gurmukh Singh v. ITO (191 ITR 667), which held that provisions of section 40A(3) of the Act are not absolute and genuine transactions compelled by commercial circumstances are not intended to be disallowed.
- On facts, the Tribunal noted that the vendor was identifiable, the payments were subject to TCS, and the AO had verified the genuineness of transactions directly from the vendor's books by issuing a notice u/s 133(6) of the Act. Thereby, the purchases themselves were never doubted.
- Accordingly, the ITAT concluded that the cash payments were made under genuine business compulsion, were verifiable, and did not involve any unaccounted money. It therefore directed deletion of the addition made u/s 40A(3) of the Act.
AURTUS COMMENTS
- This ruling reinforces that Section 40A(3) of the Act must be applied in substance and not mechanically. The Tribunal has reiterated that Rule 6DD exceptions are illustrative, not exhaustive, and genuine transactions dictated by business exigencies should not be penalised.
- The case provides comfort to businesses operating in industries where cash transactions may be commercially unavoidable. So long as the payee is identifiable, the transactions are verifiable, and the purchases are genuine, disallowance u/s 40A(3) of the Act should not be sustained.
Footnote
1. Sabha Chand [TS-1093-ITAT-2025(DEL)]
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