No Disallowance u/s 40A(3) If Cash Payments Were Necessary to Run Business of Assessee | ITAT

Case Details: Munish Arora vs. ACIT [2024] 169 taxmann.com 458 (Chandigarh-Trib.)[09-10-2024]

Judiciary and Counsel Details

• A.D. Jain, Vice President & Krinwant Sahay, Accountant Member
• Tej Mohan Singh, Adv. for the Appellant.
• Smt. Kusum Bansal, CIT DR for the Respondent.

Facts of the Case

The assessee was engaged in the business of event management. During the relevant year, it made certain payments in cash exceeding limits specified under section 40A(3) to three different parties. The Assessing Officer (AO) disallowed the same on grounds that same was over limits specified under section 40A(3).

On appeal, the CIT(A) upheld the order of the AO, contending that the assessee had failed to establish the identity of the payees and the genuineness of these transactions nor the business expediency with regard to said payments was established. Aggrieved by the order, an appeal was filed to the Chandigarh Tribunal.

ITAT Held

The Tribunal held that it was found that neither the AO in his assessment order nor the CIT(A) doubted the payments made to three persons. They disallowed it because the amount was in excess of section 40A(3) limits. The assessee filed details of different items for which payments were made to these people. In fact, the assessee was running the business of event management and, therefore, during the celebration of an event, cash payment was a must for items like taxi or vehicle, fuel charges, meals for workers, petrol for generator, engine oil for genset, cameras, its rolls and photo development, truck repair and challan, sound repair, communications, i.e., fax, courier, mobile etc.

After reviewing the findings of the AO and CIT(A) on this issue, along with the submissions made by the department, and after considering the arguments of both the assessee and the AO, it was observed that payments exceeding the limit prescribed under section 40A(3) should be assessed in light of the business needs of the assessee. If such expenses are essential for the operation of the business, and the AO does not question the identity of the payee or the authenticity of the transactions, disallowance in these cases is unnecessary.

In the instant case, the assessee was in the business of event management, and the excess, as shown by the assessee, may be necessary to run the show. Therefore, in that situation, the addition made by the Assessing Officer and sustained by the Commissioner (Appeals) on this account cannot be sustained. Accordingly, the assessee’s appeal on this issue was allowed.

List of Cases Referred to

• ‘Goenka Agencies v. CIT’ [2003] 184 CTR 104 (para 12)
• CIT v. Sun Engineering Works (P.) Ltd. [1992] 64 Taxman 442/198 ITR 297 (SC) (para 16).