INCOME TAX ACT, 1961

Section 40A(3)

Business disallowance under section 40A(3) - Cash payment in excess of prescribed limit - Genuine purchases made from sister concern -

Assessee company was in a retail business of medicines and optical instruments and was having 50 medical shops in Hyderabad and Bangalore. It mainly purchased its medicines and optical instruments from two of its group concerns Value Pharma Holistic Remedies (P) Ltd. (VPHRPL) and Value Vision Opticals (P) Ltd. (WOPL). AO noticed cash payment made by assessee towards said purchases. Accordingly, AO invoked section 40A(3) and made disallowance. Assessee explained that cash sales made at the counter of assessee's 50 odd medical shops was directly utilized by two group companies which were the supplier of assessee in order to expedite payments to their suppliers in term.Held: Assessee had a total turnover of Rs. 17,40,23,492 and corresponding purchases was Rs. 11,69,46,397, thus a gross profit of Rs. 5,70,77,095 implying a gross profit of 33% on sales in the business. The above included purchases made from sister concern being 90% of the total purchases including quantum paid in cash of Rs. 7,59,00,557. Thus on a primary basis, the gross profit declared by assessee was healthy and also AO had not objected to the book results or the issue regarding arms length price vis-a-vis purchase from group concerns of assessee which thus had been found to be in order. AO also did not find that price difference pertaining to payments made in cash to the group concerns (of quantum of Rs. 7,59,00,557) vis-a-vis payments made in cheque (of quantum of Rs. 5,42,45,189) to those group concerns. Assessee further filed confirmations that cash received on counter sales were directly allowed to be taken by respective parties. Assessee stated that the cash realized by sales were directly remitted to VPHRPL and VVOPL against their outstanding balances. Thus, the conclusion prima facie could be drawn that assessee was running a bona fide and a genuine business and reflecting proper book results and purchases made from the group concerned were at arm's length irrespective of the mode of payment being cheque or cash. Section 40A(2)(b) was also not invoked as regards purchases from these two group concerns. Such overwhelming genuine payments ought not to be disallowed in light of the restrictive interpretation of rule 6DD which is not self-exhaustive. Therefore, disallowance was deleted.

Relied:Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC) : 1991 TaxPub(DT) 1528 (SC), Anupam Tele Services v. ITO (2014) 366 ITR 122 (Guj) : 2014 TaxPub(DT) 1537 (Guj-HC) and CIT v. K.Y. Pilliah (1967) 63 ITR 411 (SC) : 1967 TaxPub(DT) 232 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

INCOME TAX (APPELLATE TRIBUNAL) ACT, 1961

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