JUDGMENT (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI)

Appeal is admitted for consideration of following substantial question of law :

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Section 40A(3) applies to the payment of Rs. 33,10,194/= deposited by the Appellant in the bank account of Tata Tele Services Limited ?”

We have heard learned counsel for final disposal of the appeal. Brief facts are as under :

The issue pertains to A.Y 200607. The appellant-assessee is involved in the business of distribution of mobile and recharge vouchers of Tata Teleservices Limited. They are the authorized channel partners of the Company. They would make payment to the company for purchase of recharge vouchers. The assessee made such payment through account payee cheques till 22nd August 2005, when a circular was issued by Tata Teleservices Limited requiring the appellant to deposit cash at the company’s office at Surat.

During scrutiny assessment, the Assessing Officer noticed that the assessee had made a total payment of Rs. 33,10,194/= during the year under consideration to Tata Teleservices Limited by cash on different dates and such payment exceeded Rs. 20,000/= each. He also noticed that similar payments exceeding Rs. 20,000/= in cash were made to one Rajvi Enterprises totalling Rs. 1,37,368/= and one payment to Messrs. R.D Infotech of Rs. 31,350/=.

Prima facie believing that such cash payments exceeding Rs. 20,000/= would be hit by section 40A(3) of the Incometax Act, 1961 {“Act” for short}, the Assessing Officer issued a notice to the assessee why such expenses should not be disallowed.

In response to such notice, the assessee contended that it was purchasing recharge vouchers from Tata Teleservices Limited. The said company issued a Circular dated 22nd August 2005 and instructed the assessee to deposit cash at its office at Surat. Yet another letter was written on 1st September 2005 instructing the assessee to deposit cash and not make payments by cheque or demand draft. The reason why Tata Teleservices Limited were not accepting payment by Banker’s cheque or Demand Draft was that the assessee had an account with a Cooperative Bank. It was assured that the cash payment would be deposited in the Bank on behalf of the assessee. It was pointed out that not only the present assessee but all the channel partners/distributors of Tata Teleservices Limited in Gujarat were required to make such cash payments. It was pointed out that if the assessee continued to make payment through Cheque or Demand Draft, they would get the recharge vouchers only after 45 days which would effect their business. It was contended that the intention of Section 40A(3) is to prevent deduction on bogus payments. The assessee had made cash deposits with a reputed public limited company, which they were liable to do as per the terms and condition of agreement with the company which they had followed.

The Assessing Officer, however, was not convinced by such reply and held that the payments in cash exceeding Rs. 20,000/= violate the provision of Section 40A(3) of the Act and disallowed 20% of Rs. 34,78,912/= and thus, added back a sum of Rs. 6,95,782/= to the total income of the assessee. The assessee carried the matter in appeal. CIT [A], by his order dated 12th November 2009, reversed the decision of the Assessing Officer. He held and observed as under :

6. I have gone through the submission of the appellant and the observations of the Assessing Officer. The fact of cash payment is not disputed. It is a fact that Tata Tele Services Limited had intimated that the DD/Payee Order issued by the assessee’s banker namely Saraswat Cooperative Bank Limited would be accepted as a cheque and effect delivery after the cheques are cleared which will take 4/5 days. This delay might adversely affect the business of the assessee. The a is a Distributor of Tata Tele Services Limited and can obtain the recharge facilities only afte

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