Law:

Section:

Section 40A(3) of the Income-tax Act, 1961 - Business disallowance - Cash payments exceeding Rs. 2,500 - Assessee had claimed deduction of payments made by bearer cheques or cash to its constituents on account of publicity, advertisement and packing charges - ITO disallowed claim on grounds that (i) expenses incurred were not proved genuine, and (ii) payments contravened provisions of section 40A(3) - Whether Tribunal was justified in confirming disallowance of impugned payments even though payments were accepted as genuine - Held, yes Facts The assessee had claimed deductions of certain payments made to its constituents. These payments represented publicity and advertisement charges and packing charges. The ITO disallowed the claim on the ground that (1) the expenses incurred were not proved to be genuine, and that (2) in any event the payments were made in cash in contravention of the provisions contained in section 40A(3). On appeal, the Commissioner (Appeals) after scrutiny of the assessee's explanation accepted some payments as falling within clause (j) of rule 6DD, but held that the remaining payments could not be allowed. On further appeal, the Tribunal while accepting that the payments were genuine, upheld the disallowance of the expenses as deduction. On reference : Held The explanation that the parties had insisted on payment in cash and expressed unwillingness to render services otherwise was merely a unilateral statement of the assessee. No evidence to corroborate this explanation had been placed before the tax authorities. In the absence of any corroborative evidence, it was not possible to say that the tax authorities were in error in drawing an adverse inference. The object of enacting section 40A(3) was to ensure that payments in respect of which deductions were claimed by the taxpayers, were genuinely made and accommodation payments were not claimed as deductions. In the present case, the payments made were fairly considerable. The assessee was not new either to the business or to the provisions of the Act. It was not possible to accept that the assessee like the one in the present case accepted the risk and responsibility to make the payments…

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