ITAT disallows Cash expense made exceeding stipulated amount even if reason is business expediency

The issue raised in this appeal with Income Tax Appellant Tribunal (ITAT) is against the confirmation of two disallowances made by the Assessing Officer (AO) u/s 40A(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’).

Briefly stated, the facts of the case are that the assessee is a Builder and Developer engaged in civil construction and also rendering allied legal and technical services. A return was filed declaring a total income of Rs.1,10,61,126/-. During the course of assessment proceedings, the AO observed that the assessee made certain payments through bearer cheques amounting to Rs.24,65,500/- which were in violation of section 40A(3) of the Act. On being called upon to put forth its stand, the assessee submitted that all the payments were made to Kharjul family members through bearer cheques during the course of carrying out its business activity. Commercial expediency was stated to be the reason for making payments through bearer cheques. The AO discussed one by one all the payments by observing that such amounts were paid through bearer cheques while certain other payments to all such persons were also made through account payee cheques. Not accepting the assessee’s commercial expediency, the AO made disallowance u/s.40A(3) amounting to Rs.24,65,500/-. The ld. CIT(A) countenanced the disallowance.

ITAT Analysis

Payments hit by section 40A(3) were made because of business expediency

It is found as an admitted position that payments totalling Rs.24,65,500/- were made to Kharjul family members against which deduction was claimed in the Profit and loss account. The case of the assessee is that these payments were made because of business expediency and hence, disallowance should not be made. The assessee also harped on the genuineness of the transactions so as to escape the disallowance. However, one thing has been admitted that the payments were made through bearer cheques which are otherwise hit by section 40A(3) and further none of the payments fall under any of the relevant exemption clause of Rule 6DD.

Tribunal is bound by the judgment of the Hon’ble jurisdictional High Court

On an overview of the view canvassed by various Hon’ble High Courts on the point – some deleting the disallowance on the basis of the genuineness of the transactions while others sustaining the disallowance – what matters for the Tribunal is to follow the binding precedent, being, the judgment of Hon’ble jurisdictional High Court. That being the position, the Pune Tribunal is bound by the judgment of the Hon’ble jurisdictional High Court in Madhav Govind Dulshete (supra) sustaining the disallowance in case of cash payments exceeding the stipulated limit notwithstanding the fact that the transactions were genuine and the parties were identifiable. Respectfully following the judgment, we uphold the disallowance sustained in the first appeal. This ground fails.

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