The purchases are genuine and I can name every payee. Does that answer a s.40A(3) disallowance?
No, not by itself. The Madras High Court upheld the disallowance where the assessees admitted paying cash for film exhibition rights and rested their case on the genuineness of the transactions and the identity of the payees. Where banking facilities were available and no clause of Rule 6DD was made out, the section applies.
Decided by the High Court (Madras High Court — T.S. Sivagnanam and Mrs. V. Bhavani Subbaroyan, JJ. (judgment delivered by Sivagnanam, J.)) on 2020-09-22, reported as (2020) 428 ITR 224 / 275 Taxman 599 (Mad.)(HC); [2020] 120 taxmann.com 25 (Mad.); Tax Case Appeal Nos. 645, 646 and 647 of 2019 with CMP No. 18806 of 2019. It bears on section 40A(3), section Rule 6DD, section 260A of the Income Tax Act 1961, in Deductions & Disallowances and Cash Transaction Limits matters.
This is the authority the department puts against the line of Tribunal orders that delete a s.40A(3) disallowance once genuineness and identity are shown. Its value, and its limit, lie in the same paragraphs: the Court read Attar Singh Gurmukh Singh and the Madras decision in Chrome Leather as resting on the old Rule 6DD(j), and held that once that clause had gone the genuineness of the transaction no longer carried the weight it did under it. So the decision fixes where the argument has to be run for a current year - on a clause of Rule 6DD as it now stands, or on the circumstances that made the prescribed mode impracticable - and it is authority about the post-deletion rule rather than a general statement that genuineness never matters.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The two appellants, exhibitors of films, paid cash for acquiring screening rights for assessment years 2014-15 and 2015-16. They admitted the cash payments and contended that the transactions were genuine and the payees identifiable, so no disallowance under s.40A(3) should follow. Senior counsel also submitted that only about 25 per cent of the payments were made in cash and the remaining 75 per cent through banking channels, and that more than twenty payees could be identified. The Assessing Officer disallowed the cash payments in assessments under s.143(3) dated 30 June 2016, the Commissioner (Appeals) confirmed the disallowance by order dated 28 September 2018 and the Tribunal confirmed it by a common order dated 25 April 2019. The registered offices of both firms are in Chennai.
The appeals were dismissed for want of a substantial question of law. Genuineness of the transaction and identification of the payee do not take a cash payment outside s.40A(3): the first proviso opens only through the cases and circumstances prescribed by Rule 6DD, and genuineness may be a factor in deciding whether a case falls within one of those circumstances and not otherwise. The assessees could not bring themselves within any clause of the rule, banking facilities plainly existed where they carried on business, the cash payments were periodical rather than exceptional, and no circumstance compelling urgent payment in cash was shown. The Court tied the conclusion to the years in issue: the old Rule 6DD(j), on which the earlier authorities relieving genuine transactions rested, stood deleted by assessment years 2014-15 and 2015-16.
The Court set out s.40A(3) with its first proviso and read the proviso as a window opening only through the cases and circumstances prescribed by Rule 6DD. Having gone through every clause of the rule, it held that neither assessee came within any of them. Commercial or business expediency has to be decided on the facts of each case, and genuineness may be one of the factors taken into account in deciding whether a case falls within a Rule 6DD circumstance, and not otherwise. The submission that most of the consideration had gone through the bank was turned against the assessees: it showed they were fully aware that a payment above Rs 20,000 in a day could not be made in cash. The ability to identify more than twenty payees was held not to be a mitigating factor under the first proviso; the test is not identification of the payee but whether the expense falls within one of the exceptional circumstances in the rule. Regularity told against them too - the cash payments were periodical, banking facilities plainly existed in the city where both firms had their registered offices, and in most of the decisions cited on either side the relief cases had involved a solitary payment or a few payments made in extraordinary circumstances. The Court then dealt with the Supreme Court's decision in Attar Singh Gurmukh Singh, which upheld the constitutional validity of s.40A(3) by reading it with Rule 6DD as it then stood, in particular the old clause (j), and with the Madras decision in Chrome Leather, which applied Attar Singh for an assessment year when that clause was still in existence. Because the years here fell after the deletion of that clause, the protection those decisions drew on was no longer available, and on that footing genuineness is hardly a matter which should weigh with the Assessing Officer. The Court added that under s.260A it does not sit as a third appellate authority reviewing concurrent findings.
However, the assessment years under consideration in these appeals are 2014-15 and 2015-16 when the said Rules stood deleted and therefore, the Revenue is right in contending that the genuinity of the transaction is hardly a matter, which should weigh in the minds of the Assessing officer while examining as to the whether the assessees had violated Section 40A(3) of the Act.
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Handle my notice → Ask a CA on WhatsAppNo, not by itself. The Madras High Court upheld the disallowance where the assessees admitted paying cash for film exhibition rights and rested their case on the genuineness of the transactions and the identity of the payees. Where banking facilities were available and no clause of Rule 6DD was made out, the section applies. This was decided by the High Court (Madras High Court — T.S. Sivagnanam and Mrs. V. Bhavani Subbaroyan, JJ. (judgment delivered by Sivagnanam, J.)) and bears on section 40A(3), section Rule 6DD, section 260A of the Income Tax Act 1961. It is reported as (2020) 428 ITR 224 / 275 Taxman 599 (Mad.)(HC); [2020] 120 taxmann.com 25 (Mad.); Tax Case Appeal Nos. 645, 646 and 647 of 2019 with CMP No. 18806 of 2019. This is the authority the department puts against the line of Tribunal orders that delete a s.40A(3) disallowance once genuineness and identity are shown. Its value, and its limit, lie in the same paragraphs: the Court read Attar Singh Gurmukh Singh and the Madras decision in Chrome Leather as resting on the old Rule 6DD(j), and held that once that clause had gone the genuineness of the transaction no longer carried the weight it did under it. So the decision fixes where the argument has to be run for a current year - on a clause of Rule 6DD as it now stands, or on the circumstances that made the prescribed mode impracticable - and it is authority about the post-deletion rule rather than a general statement that genuineness never matters. If it applies to you, the first step is this: Identify, clause by clause, which limb of Rule 6DD you are within, and plead it in the reply to the show-cause notice rather than at appeal.
The two appellants, exhibitors of films, paid cash for acquiring screening rights for assessment years 2014-15 and 2015-16. They admitted the cash payments and contended that the transactions were genuine and the payees identifiable, so no disallowance under s.40A(3) should follow. Senior counsel also submitted that only about 25 per cent of the payments were made in cash and the remaining 75 per cent through banking channels, and that more than twenty payees could be identified. The Assessing Officer disallowed the cash payments in assessments under s.143(3) dated 30 June 2016, the Commissioner (Appeals) confirmed the disallowance by order dated 28 September 2018 and the Tribunal confirmed it by a common order dated 25 April 2019. The registered offices of both firms are in Chennai. The matter was decided on 2020-09-22 by the High Court (Madras High Court — T.S. Sivagnanam and Mrs. V. Bhavani Subbaroyan, JJ. (judgment delivered by Sivagnanam, J.)). On those facts the High Court held as follows. The appeals were dismissed for want of a substantial question of law. Genuineness of the transaction and identification of the payee do not take a cash payment outside s.40A(3): the first proviso opens only through the cases and circumstances prescribed by Rule 6DD, and genuineness may be a factor in deciding whether a case falls within one of those circumstances and not otherwise. The assessees could not bring themselves within any clause of the rule, banking facilities plainly existed where they carried on business, the cash payments were periodical rather than exceptional, and no circumstance compelling urgent payment in cash was shown. The Court tied the conclusion to the years in issue: the old Rule 6DD(j), on which the earlier authorities relieving genuine transactions rested, stood deleted by assessment years 2014-15 and 2015-16.
The Court set out s.40A(3) with its first proviso and read the proviso as a window opening only through the cases and circumstances prescribed by Rule 6DD. Having gone through every clause of the rule, it held that neither assessee came within any of them. Commercial or business expediency has to be decided on the facts of each case, and genuineness may be one of the factors taken into account in deciding whether a case falls within a Rule 6DD circumstance, and not otherwise. The submission that most of the consideration had gone through the bank was turned against the assessees: it showed they were fully aware that a payment above Rs 20,000 in a day could not be made in cash. The ability to identify more than twenty payees was held not to be a mitigating factor under the first proviso; the test is not identification of the payee but whether the expense falls within one of the exceptional circumstances in the rule. Regularity told against them too - the cash payments were periodical, banking facilities plainly existed in the city where both firms had their registered offices, and in most of the decisions cited on either side the relief cases had involved a solitary payment or a few payments made in extraordinary circumstances. The Court then dealt with the Supreme Court's decision in Attar Singh Gurmukh Singh, which upheld the constitutional validity of s.40A(3) by reading it with Rule 6DD as it then stood, in particular the old clause (j), and with the Madras decision in Chrome Leather, which applied Attar Singh for an assessment year when that clause was still in existence. Because the years here fell after the deletion of that clause, the protection those decisions drew on was no longer available, and on that footing genuineness is hardly a matter which should weigh with the Assessing Officer. The Court added that under s.260A it does not sit as a third appellate authority reviewing concurrent findings. In the words reproduced by the source cited on this page: "However, the assessment years under consideration in these appeals are 2014-15 and 2015-16 when the said Rules stood deleted and therefore, the Revenue is right in contending that the genuinity of the transaction is hardly a matter, which should weigh in the minds of the Assessing officer while examining as to the whether the assessees had violated Section 40A(3) of the Act."
It was decided by the High Court on 2020-09-22 and is reported as (2020) 428 ITR 224 / 275 Taxman 599 (Mad.)(HC); [2020] 120 taxmann.com 25 (Mad.); Tax Case Appeal Nos. 645, 646 and 647 of 2019 with CMP No. 18806 of 2019. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 40A(3), section Rule 6DD, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed for want of a substantial question of law. Genuineness of the transaction and identification of the payee do not take a cash payment outside s.40A(3): the first proviso opens only through the cases and circumstances prescribed by Rule 6DD, and genuineness may be a factor in deciding whether a case falls within one of those circumstances and not otherwise. The assessees could not bring themselves within any clause of the rule, banking facilities plainly existed where they carried on business, the cash payments were periodical rather than exceptional, and no circumstance compelling urgent payment in cash was shown. The Court tied the conclusion to the years in issue: the old Rule 6DD(j), on which the earlier authorities relieving genuine transactions rested, stood deleted by assessment years 2014-15 and 2015-16. It arises in Deductions & Disallowances and Cash Transaction Limits matters, on section 40A(3), section Rule 6DD, section 260A of the Income Tax Act 1961, and was decided by Madras High Court — T.S. Sivagnanam and Mrs. V. Bhavani Subbaroyan, JJ. (judgment delivered by Sivagnanam, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Record why payment in the prescribed mode was not possible on the day - banking hours, distance to the branch, the payee's refusal - with contemporaneous material. Expect the fact that most of the consideration went through the bank to be used against you, as it was here, to show that banking facilities were available and that the assessee knew the limit. If your year is one in which the old Rule 6DD(j) was still in force, say so: the Court confined Attar Singh Gurmukh Singh and Chrome Leather to that regime rather than departing from them. Do not build the reply on the genuineness of the transaction alone; on this authority genuineness matters only in deciding whether a Rule 6DD circumstance is made out.
Validity check could not be completed. Three later decisions were read in full and none applies, follows or affirms this judgment. In Vikrant Happy Homes (P.) Ltd. v. ITO [2022] 138 taxmann.com 559 (Pune)(Trib.), 11 January 2022, and Shree Buildcon & Associates v. JCIT [2022] 140 taxmann.com 130 / 195 ITD 671 (Pune)(Trib.), 10 May 2022, this judgment is named only inside a list of High Courts that have confirmed a disallowance notwithstanding genuineness; each Bench then decided by following its own jurisdictional High Court in Madhav Govind Dulshete v. ITO [2018] 99 taxmann.com 56 / 259 Taxman 149 (Bom.), which is the only decision either recorded as distinguished or followed. Naming in a list is not an application. The one substantial later treatment runs the other way: in CIT v. Ayshwarya Sea Food (P.) Ltd. [2021] 130 taxmann.com 487 / [2022] 441 ITR 171 (Mad.), 2 August 2021, a Division Bench of the same Court presided over by the judge who wrote this judgment distinguished it at para 11, holding that the facts there were entirely different and that this case was decided against the assessees because they had failed to bring themselves within any exception in Rule 6DD. That confirms what the judgment turns on, but distinguishing is not applying, so the entry stays unverified. No reversal and no leave petition is disclosed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full and the facts, the reasoning and the quoted sentence now come from its numbered paragraphs. Two corrections matter to anyone who has relied on this entry before. The sentence formerly quoted here, that only 25 per cent of the payments were in cash and the rest through banking channels, is senior counsel's submission recorded at paras 5 and 15, and the Court used it against the assessees on the footing that it showed they knew a cash payment above the limit could not be made; it was never a finding in their favour. And the decision does not hold genuineness irrelevant in every case: para 14 says genuineness may be a factor in deciding whether a case falls within one of the circumstances in Rule 6DD, and not otherwise. Two assessees were before the Court, Vaduganathan Talkies for assessment year 2014-15 and Lena Talkies for 2014-15 and 2015-16. The judgment does not decide what happens where a single payment is made in circumstances of genuine urgency, which is the fact pattern the Court said the relief cases had involved; it decides a case of periodical cash payments. It does not set out the deleted text of the old Rule 6DD(j) or the date of its deletion, so the year from which the reasoning bites has to be checked against the rule itself. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed for want of a substantial question of law. Genuineness of the transaction and identification of the payee do not take a cash payment outside s.40A(3): the first proviso opens only through the cases and circumstances prescribed by Rule 6DD, and genuineness may be a factor in deciding whether a case falls within one of those circumstances and not otherwise. The assessees could not bring themselves within any clause of the rule, banking facilities plainly existed where they carried on business, the cash payments were periodical rather than exceptional, and no circumstance compelling urgent payment in cash was shown. The Court tied the conclusion to the years in issue: the old Rule 6DD(j), on which the earlier authorities relieving genuine transactions rested, stood deleted by assessment years 2014-15 and 2015-16.
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