Cash Expense: Disallowance u/s 40A(3) justified where assessee paid contractor on principal to principal basis

The brief facts of the case is that the assessee paid Rs. 20.05 lakh to contractors towards weekly bill of labor. The assessee contended that the payment was covered under Rule 6DD(k) being payment made to an agent. The AO rejected this contention, which got affirmed in the first appeal.

ITAT was of the view that the assessee made payment to contractors and such payments were as such recorded as expenditure in the books of account of the assessee. In such circumstances, it cannot be said that the contractors were agents of the assessee for the provision of labor.

Had the payments been made by the assessee to contractor and then, in turn, to the laborers and the transaction of payments to laborers had been considered as expenditure of the assessee, then the case would have been covered by clause (k) of Rule 6DD. Here is a case in which the assessee paid to the contractors on principal-to-principal basis and no agency of any sort was involved in this transaction.

Therefore, ITAT held that the authorities below were justified in coming to the conclusion that clause (k) of Rule 6DD was not attracted. If Rule 6DD is taken out of purview, then the payment is otherwise in violation of section 40A(3) of the Act.

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