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Facts
The assessee, a liquor trader, made cash purchases from M/s. Ganga Wines amounting to Rs.3,96,80,635/-. The Assessing Officer made an addition of Rs.3,91,03,198/- on account of these cash payments, disallowing the deduction under Section 40A(3) of the Income Tax Act.
Held
The Tribunal held that Section 40A(3) must be read with Rule 6DD and that genuine and bona fide transactions should not be excluded. It was found that the identity of the vendor was established and the cash payments were made due to business expediency, as the seller was not allowing stock lifting without payment.
Key Issues
Whether cash purchases made by the assessee are eligible for deduction under Section 40A(3) of the Income Tax Act, considering the exceptions under Rule 6DD and business expediency.
Sections Cited
40A(3), 6DD
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Income Tax Appellate Tribunal, DELHI BENCH “G”, DELHI
Before: SHRI VIKAS AWASTHY & SHRI M. BALAGANESH
Assessee by : Ms. Rano Jain, Ms Sakashi Rustagi, Advocates & Ms. Mansi Jain, Chartered Accountant Department by : Shri Mahesh Kumar, CIT(DR) सुनवाई क� ितिथ/ Date of hearing : 19/05/2025 घोषणा क� ितिथ/ Date of pronouncement : : 14/08/2025 आदेश/ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 16.09.2022, for Assessment Year 2014-15.
Ms. Rano Jain, appearing on behalf of the assessee submitted at the outset that she is not pressing ground no. 3 and 4 of appeal. Thus, the solitary issue that arises for adjudication in this appeal is in ground no. 2 of appeal. She submitted that the assessee has assailed addition of Rs.3,91,03,198/- u/s. 40A(3) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’). Narrating facts of the case, she (A.Y. 2014-15) submitted that the assessee is engaged in retail sale of liquor. During the period relevant to assessment year under appeal, the total turnover of the assessee is Rs.6,56,16,760/- with a net profit of Rs.5,58,454/- i.e. 0.85%. During the course of assessment proceedings, the Assessing Officer (AO) made addition of Rs.3,91,03,198/- on account of cash purchases of liquor from M/s. Ganga Wines Narnaul. She submitted that payment in cash was made on account of business expediency. The nature of assessee’s business is such that substantial trading is done in cash. The assessee was forced to pay cash for purchase of liquor as the seller was not ready to give credit facility and goods were only allowed to be lifted after payment. On certain occasions the bill was issued by the seller but the assessee was not allowed to lift the goods before payment. Under such circumstances the assessee had no other option to make payment immediately in cash. The ld. Counsel further referred to CBDT Circular No. 220 [F.No.206/17/76-IT(A)] dated 31.05.1977, wherein at point no. 4 and 5 it is clarified that all the circumstances in which the conditions laid down in Rules 6DD(i) of the Income Tax Rules, 1962, would be applicable cannot be spelt out, however, some of them which would seem to meet requirements of the said Rule have been listed. The ld. Counsel thus, prayed for deleting additions made u/s. 40A(3) of the Act.
Per contra, Shri Manish Gupta, representing the department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The ld. DR submitted that the case of the assessee does not fall within the exceptions provided under Rules 6DD of the Income Tax Rules, 1962. He further submitted that the assessee has been changing its stance before different authorities.
Both sides heard, orders of the authorities below examined. The short issue in appeal before us is the addition made u/s. 40A(3) of the Act. The assessee is a trader (A.Y. 2014-15) of liquor, the assessee has made cash purchases to the tune of Rs.3,96,80,635/- from M/s. Ganga Wines, Narnaul. On the said purchases TCS Rs.3,96,806/- was collected. The contention of the assessee is that the cash purchases were made on account of business exigencies as the seller was not allowing the assesee to lift the stock without payment. As per section 40A(3) of the Act where the assessee incurs any expenditure in respect of which payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque or account payee bank draft or through electronic clearing system or through other electronic mode exceed Rs.10,000/- no deduction shall be allowed in respect of such expenditure. However, Rule 6DD of the Income Tax Rules, 1962 carves out certain exceptions where no disallowance under section 40A(3) of the Act shall be made where payments in excess of Rs.10,000/- are made in cash. The CBDT in its Circular No.220 dated 31.05.1977 (supra) clarified that the exceptions listed in Rules 6DD of the Income Tax Rules, 1962 are not exhaustive but are illustrative. The aforesaid circular was explained by Hon’ble Punjab & Haryana High Court in the case of CIT vs. Avtar Singh & Sons, 194 ITR 80. The Hon’ble High court observed: “5. In clarification of the provisions of section 40A(3) and clause (j) of rule 6DD, the CBDT issued 'Circular No. 220, dated 31 -5-1977 (see Taxman’s Direct Taxes Circulars, Vol. 1,1988 edn., p. 428-29) where in paragraph 4 thereof it was stated that though all the circumstances in which the conditions laid down in rule6DD(j) would be applicable, cannot be spelt out, some of them which would seem to meet the requirements of the said rule are: "(a )the purchaser is new to the seller; or (b)the transactions are made at a place where either the purchaser or the seller does not have a bank account; or (c)the transactions and payments are made on a bank holiday; or (A.Y. 2014-15) (d)the seller is refusing to accept the payment by way of crossed cheque/ draft and the purchaser's business interest would suffer due to non availability of goods otherwise than from this particular seller; or (e)the seller, acting as a commission agent, is required to pay cash in turn to persons, from whom he has purchased the goods; or (f)specific discount is given by the seller for payment to be made by way of cash." The said circular was noticed and considered in Navsari Waste Cotton Products v. CIT [1987] 163 ITR 378 (Guj.), where it was held that it would appear from clauses (i) to ( v) of paragraph 4 of the said circular that if the identity of the seller is known, it would be possible for the department to cross check if the payment in question was actually made in cash to the seller from whom goods were purchased and the requirement of rule 6DD(j) would stand satisfied if a letter is produced in respect of each transaction falling within the categories illustrated in paragraph 4 from the seller giving full particulars of his address, sales tax number, if any, for purposes of proper identification, to enable the ITO to satisfy himself about the genuineness of the transaction. It was further added that the circumstances indicated in paragraph 4 of the circular were merely illustrative and not exhaustive; but the underlying idea was that if the seller's identity can be established, it would be possible for the ITO to cross check whether the transaction had, in fact, taken place as stated and was of a genuine nature.
6. A similar view is expressed by the Calcutta High Court in Giridharilal Goenka v. CIT [1989] 179 ITR 122 where it was observed that, "The circular of the Board is not exhaustive, it is only illustrative and the Assessing Officer has to take into account the surrounding, circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee". It was also held that the ITO should take a practical approach to the problem and strike a balance between the direction of law and hardship to the assessee. [Emphasized by us] 5. Section 40A(3) of the Act aims to curb tax evasion by limiting cash transactions for business expenses by requiring payments to be made by account payee (A.Y. 2014-15) instrument or direct bank transfer through electronic clearing system where payments are in excess of Rs.10,000/-. Where the payee is identifiable and the department is in a position to cross verify the cash payment made by the assessee, disallowance u/s. 40A(3) of the is unwarranted. In the instant case, cash payment made by assessee to liquor vendor is subject to TCS. Thus, PAN and other vital details of the vendor are available to the Department. The ld. Counsel for the assessee has pointed that the AO had issued notice u/s.133(6) of the Act to M/s. Ganga Wines, Narnaul on 09.12.2016 (at page 19 of the paper book). In reply to said notice, Ganga Wines furnished complete ledger accounts of assessee in its books for FY 2013-14 (at pages 20 to 27 of the paper book). Thus, identity of the vendor and genuineness of the transaction was established. No money has flown out to the unaccounted stream. The nature of assessee’s business is such were prompt payments by the vendor was forced before lifting of stocks of liquor. Even otherwise, the purchases made by the assessee from Ganga Wines, Narnaul has not been doubted by the AO.
The Hon’ble Apex court in the case of Attar Singh Gurmukh Singh vs. ITO 191 ITR 667 in a situation where there was contravention of provisions of section 40A(3) r.w.r 6DD of the Act, held: “In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or 'crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide (A.Y. 2014-15) transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. (Mudiam Oil Company v. ITO [1973] 92 ITR 519 (AP)). If the payment is made by a crossed cheque drawn on a bank or crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute, the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.” [Emphasized by us] In the instant case, identity of the person to whom money is paid by assessee is not in dispute.
Considering entire facts of the case and the decisions referred above, cash payments made by assessee to Ganga Wines during the relevant period are allowed. The addition made u/s. 40A(3) of the Act is directed to be deleted. Thus, ground no. 2 of appeal is allowed.
The ld. Counsel for the assessee has stated at Bat that she is not pressing ground no. 3 and 4 of appeal. In light of the statement made by ld. Counsel for the assessee, ground no. 3 and 4 of appeal are dismissed.