INCOME TAX ACT, 1961

Section 40A(3)

Disallowance under section 40A(3) - Cash payment exceeding prescribed limit - Conversion charges paid in cash due to non-operation of bank account because of order of attachment passed by ESI Department -

Assessee paid conversion charges to M/s SLM in cash in excess of prescribed limit. AO invoked section 40A(3) and made disallowance. Assessee's case was that banking facility was available but bank account could not be operated by the very bank themselves because of an order of attachment passed by ESI Department. M/s. SLM virtually came to assessee with the begging bowl and requested to effect payment in cash. Assessee having entered into agreement for coversion on job work basis was required to act as a prudent businessman, so that the job work was completed to his satisfaction with optimum quality and this led assessee to effect payments in cash. Revenue's case was that in order to avoid attachment of bank account, assessee effected payment in cash. Held: What was relevant to be seen insofar as section 40A(3) was conduct of assessee and not the payee. The question would be as to whether assessee had a reasonable cause to effect payment in cash. In assessee's case payee was identifiable and not a fictitious person. It would go to show bona fides of the transaction and this was what that was required to be considered from the angle of a commercially expedient and prudent business house. As assessee had a reasonable explanation, proviso under section 3A did get attracted and assessee was entitled to relief. Accordingly, disallowance could not be sustained.

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2005-10

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