Section 40A(3) of the Income-tax Act, 1961—Business disallowance—Provisions of sec.40A(3) not attracted, since all the payments except two have been made by way of demand drafts only and not by way of cash.

Facts: Assessee is engaged in the business of quarrying, processing/selling exporting of a granite block and slabs and AO noticed that assessee has incurred certain expenses by way of cash and asked the assessee to explain as to why the payments have been made in violation of provisions of sec.40A(3). AO also noticed that assessee has not furnished any credible material evidencing these payments and treated these expenses as not genuine and disallowed the same u/s 37 and also invoked provision of sec. 40A(3). CIT(A) examined the profit and loss account of assessee and was convinced with the explanations of the assessee and accordingly he deleted the disallowance of Rs. 1,16,51,853/- and sustained addition with regard to two items which assessee was not able to explain. Being aggrieved, assessee went on appeal before Tribunal.

Held, that from the explanations and evidences furnished by assessee, we notice that provisions of sec.40A(3) are not attracted, since all the payments except two have been made by way of demand drafts only and not by way of cash. The two payments have also been stated as payment made to the Government in the treasury, which is covered by clause (b) of Rule 6DD. Since these are payments have been made to the Government, the genuineness of these expenses cannot be doubted with. There is one more reason for accepting the genuineness of expenses, i.e., The aggregate amount of royalty expenses claimed by the assessee is Rs. 2.58 crores, out of which the AO is doubting genuineness to the extent of Rs. 11.86 lakhs, that too only for the reason that they have been incurred by way of cash. However, we have seen that the assessee has either purchased demand drafts or remitted the amount into treasury. Hence we are of the view that the genuineness of these expenses cannot be doubted with. Accordingly, we set aside the order passed by Ld CIT(A) on this addition and direct the AO to delete the disallowance of Rs. 11.86 lakhs. In the result, the appeal of the assessee is partly allowed - KEMPSZ TRADING (P.) LTD. V/s DY. CIT - [2020] 182 ITD 236 (ITAT-BANGALORE)