Facts of the Case

The appellant, Star Realcon Pvt. Ltd., filed its return of income for AY 2013–14 declaring NIL income. The case was selected for scrutiny, and assessment was completed under Section 143(3) of the Income Tax Act, 1961.

During assessment, the Assessing Officer (AO) made additions including:

  • Disallowance of ₹20,00,000 paid in cash for purchase of land located in Ghaziabad (U.P.) and Bhiwadi (Rajasthan)
  • Disallowance under Section 14A amounting to ₹2,88,072

The cash payments were made in two tranches of ₹10,00,000 each as part of larger land transactions. The AO invoked Section 40A(3) for disallowance of such cash payments.

The appeal before CIT(A) was dismissed, and subsequently, the ITAT upheld the action but remanded the issue back to the AO for reconsideration.

Issues Involved

  1. Whether cash payments of ₹20,00,000 for land purchase attract disallowance under Section 40A(3) of the Income Tax Act, 1961.
  2. Whether payment made on a bank holiday (Sunday) qualifies for exception under Rule 6DD(j) of the Income Tax Rules, 1962.
  3. Whether such payments, when related to “non-current investment” and not claimed as expenditure, fall within the ambit of Section 40A(3).

Petitioner’s Arguments

  • The appellant contended that the cash payment was made due to business exigency, as the transaction had to be concluded urgently on a Sunday when banks were closed.
  • It relied upon Rule 6DD(j), which provides an exception where payments are made on a day when banks are closed due to holiday or strike.
  • It was argued that the disallowance under Section 40A(3) was unwarranted given the circumstances of urgency and bank closure.

Respondent’s Arguments

  • The Revenue supported the findings of the AO and CIT(A), asserting that:

Cash payments beyond prescribed limits violate Section 40A(3).

    • The appellant failed to substantiate the necessity and genuineness of such cash payments.
  • It was further emphasized that:
    • The appellant did not provide key documents such as agreement to sell or sale deeds before the Court.
    • Mere claim of urgency or bank holiday is insufficient without supporting evidence.

Court’s Findings / Order

The Delhi High Court held:

  • The ITAT had already remanded the matter to the AO, granting the appellant an opportunity to justify:
    • Why payment had to be made in cash
    • Why Section 40A(3) should not apply
  • The Court noted:
    • The land was reflected as non-current investment and not claimed as expenditure
    • The appellant failed to produce crucial documents such as sale deeds
  • The Court concluded:
    • No substantial question of law arises at this stage

Important Clarification

  • The judgment emphasizes that:
    • Mere claim of payment on a bank holiday does not automatically grant exemption under Rule 6DD
    • The burden lies on the assessee to prove business necessity and genuineness
  • Even when ITAT remands the matter, High Court will not interfere unless a substantial question of law arises
  • Documentation (sale deeds, agreements) plays a critical role in tax litigation

 Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:788-DB/RAS28022022ITA312022_190229.pdf

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