INCOME TAX OFFICER, WARD-17(3), HYDERABAD vs. VALUE PHARMA RETAIL(HYD) PRIVATE LIMITED , HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A” : HYDERABAD (THROUGH VIDEO CONFERENCE)

BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER I.T.A. No. 2056/HYD/2018 Assessment Year: 2015-16 The Income Tax Officer, M/s.Value Pharma Retail Ward-17(3), Vs (Hyd) Private Limited, HYDERABAD HYDERABAD [PAN: AADCV5415G] (Appellant) (Respondent) For Revenue : Shri R.Dipak, DR For Assessee : NONE Date of Hearing : 19-04-2021 Date of Pronouncement : 26-08-2021 O R D E R PER S.S.GODARA, J.M. : This Revenue’s appeal for AY.2015-16 arises from the CIT(A)-5, Hyderabad’s order dated 14-08-2018 passed in case No.0268 / 2017-18 / CIT(A)-5, in proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, ‘the Act’]. Case called twice. None appeared for the assessee’s behest. It is accordingly proceeded ex-parte.

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“6. Decision: The appellant company is in a retail business of medicines and optical instruments and is having 50 medical shops in Hyderabad and Bangalore. The appellant company mainly purchases its medicines and optical instruments from two of its group concerns M/s Value Pharma Holistic Remedies Pvt. Ltd. (VPHRPL) and M/s Value Vision Opticals Pvt. Ltd. (WOPL). The appellant has a turnover of Rs. 17,40,23,492/-. The purchases made during the year were Rs. 13,70,09,209/- and there was an increase in the inventory by 2,00,62,812/-. Thus, the cost of sales was Rs. 11,69,46,397/-. Thus, there was a gross profit of 49% approximately on purchase value. The appellant made a total purchase from both the group companies of Rs. 12,07,28,583/- (Rs.7,39,39,580/- from VPHRPL and Rs. 4,67,89,003/- from WOPL) out of which the sum of Rs. 5,42,45,189/was made in cheque and Rs. 7,59,00,557/- was made in cash. The cash payment of Rs. 3,19,00,557/- was made to VPHRPL and Rs. 4,40,00,000/- was made to WOPL. The appellant thus made 88% of its purchases from the group concerns. The overall GP of the appellant was a healthy 49% on purchase value and 33% on sale value. The appellant in the Audit Report has mentioned that the payments to both the concerns were made in "cash". The appellant later on filed an audit report revising the payments regarding cash. The appellant including the above two concerns namely VPHRPL and WOPL are under the same management and promoters. The three concerns have the same promoter Mr.Shri Dilip Chakravarthy Byra. The appellant explained that the cash sales made at the counter of the appellant's 50 odd medical shops was directly utilised by the two group companies which were the supplier of the appellant in order to expedite the payments to their suppliers in term.

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Thus the cash generated out of over the counter sales made by the appellant in its outlets were directly paid/collected to/by the concerns VPHRPL and VVOPL. The appellant stated that the payment made was genuine, the identity of the purchase party was established and a bona fide expenditure was incurred by the appellant and there was no intention to evade any tax on account of the same. The appellant further stated that already a sizable gross profit has been declared by the appellant. The appellant had a total turnover of Rs. 17,40,23,492/- and the corresponding purchases was Rs. 11,69,46,397/-, thus a gross profit of Rs. 5,70,77,095/- implying a gross profit of 33% on sales in the business. The above included the purchases made from the sister concern being 90% of the total purchases including the quantum paid in cash of Rs. 7,59,00,557/-. Thus on a primary basis the gross profit declared by the appellant was healthy and also the AO has not objected to the book results or the issue regarding the arms length price vis-a-vis purchase from the group concerns of the appellant, which thus has been found to be in order. The AO also did not find that the price difference pertaining to the payments made in cash to the group concerns (of quantum of Rs.7,59,00,557/-) vis-a-vis the payments made in cheque (of quantum of Rs. 5,42,45,189/-) to those group concerns. The appellant further filed confirmations that the cash received on counter sales were directly allowed to be taken by the respective parties. The appellant stated that the cash realized by sales were directly remitted to VPHRPL and VVOPL against their outstanding balances. Thus, the conclusion prima facie can be drawn that the appellant was running a bona fide and a genuine business and reflecting proper book results and the purchases made from the group concerned were at arm's length irrespective of the mode of payment being cheque or cash. The provisions of section 40A(2)(b) have also not been invoked in the case of the said purchases from these two group concerns. The AO noted that the payment are made in cash and therefore the provisions of section 40A(3) of the Income Tax Act were applicable in this regard. The AO observed that section 40A(3) is very clear in this regard, wherein the payments made of more than Rs. 20,000/- was made by the appellant without any strong business obligation and exigency that warrants payment in cash as the other group concerns were both the suppliers of the sister concern and this concept of direct collection is not acceptable in the instant case and therefore the

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case does not fall under the category of exceptions to Rule 6DD of the Income Tax Act, 1961. Thus, the issues is to examined is what "cash" payments can be covered under the domain of section 40A(3) on the basis of the examination of the transaction under consideration in an exhaustive manner and not on a prima facie basis and whether Rule 6DD is exhaustive or not? The Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh vs Income Tax Officer, Ludhiana Etc vide judgement dated 7 August, 1991(191 ITR 667) Observed as under: "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 disclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. See: Mudiam Oil Company v. ITO, [1973] 92 ITR 519 A.P. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out

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of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of blackmoney 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. As to the second question it may be stated that the word 'expenditure' has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word 'expenditure' for the purpose of the Section. The expenditure for purchasing the stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits under section 280 on principles of commercial accounting. The payments made for purchases would also be covered by the word 'expenditure' and such payments can be disallowed if they are made in cash in the' sums exceeding the amount specified under section 40A(3). We have earlier observed that Rule 6DD has to be read along with Section 40A(3).The Rule also contemplates payments made for stock-in-trade and raw materials. This Rule is in accordance with the terms of Section 40A(3). The Rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore. attracted to payments made for acquiring stock-in-trade and other materials. This is also the view taken by several High Courts See’ Sajowanlal Jaiswal v. CIT, [1976] 103 ITR 706 Orissa; UP. Hardware Store v. CIT, [1976] 104 ITR 664 Allahabad; Ratan Udyog v. ITO, [1977] 109 ITR 1 Allahabad; P.R. Textiles v. CIT. Kerala, [19801 121ITR 237 Kerala; CIT, v. Kishan Chand Maheswari Dass. [1980] 121ITR 23! P & H; Kanti Lal Purshottam and Co. v. CIT, [1985] 155 ITR 519 Raj; CIT, v. New Light Tin Mfg. Co., [1980] 121 ITR 229 P & H; Fakri Automobiles v. CIT, [1986] 160 ITR 504 Raj; Venkata Satayanarayana Timber Depot v. ITR, [1987] 165 ITR 253 AP.; and Akash Films v. CIT, [1991] ITR 32 Karnataka. The decisions of the High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab & Haryana, Rajasthan and Patna are to the effect that the payments made for purchasing stock-in-trade or raw materials should also be regarded as expenditure for the purpose of Section 40A(3). The only discordant note struck on this aspect is by the Gauhati High Court in CIT v. Hardware Exchange, [1991] 190 ITR 61. The Gauhati High Court has observed that Section 40A(3) applies' only to payments made on account of 'expenditure incurred' and the payment made purchase of stock-in-trade cannot be termed as 'expenditure incurred since money does not go irretrievably in such cases. We are unable to agree with the view taken by the Gauhati High Court. "

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Thus from the above judgements, the purchases made by the appellant would come under the purview of section 40A(3) as held by the Hon'ble Apex Court, however the Hon'ble Apex Court further observes that the terms of section 40A(3) are not absolute and the appellant can prove the genuineness and bonafides of transactions, identity of the buyer to claim to be not to be considered within the rigours of section 40A(3). In the case of Walford Transport (Eastern India) Vs. CIT (1999) 240 ITR 902, it was observed "From a perusal of the decision of different High Courts referred to above, it clearly emerges that the purpose of section 40A(3) of the Act is not to penalized the assessee for making cash payment of an amount of Rs. 2,500/- or above. The purpose is only prevent and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade lox by showing fictitious of false transactions." The Gujarat High Court in the case of Anupam Tele Services Vs ITO in TA No. 556 of 2013 vide judgement dated 22.01.2014 for an issue under consideration for A.Y. 2006-07 which was subsequent to the amendment of Rule 6DD observed "It could be appreciated that Section 40A and in particular sub-clause (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum [in the present case twenty thousand rupees] must be made by way of account payee cheque drawn on a bank or account payee bank draft. As held by the Apex Court in case of Attar Singh Gurmukh Singh (Supra], " .. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of ride 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 avthority 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 are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bonafide 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

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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 ride. 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. " It was because of these considerations that this Court in case of Hynoup Foods Private Limited [Supra] observed that the genuineness of the payment and the identity of the payee are the first and foremost requirements to invoke the exceptions carved out in rule 6DD(j) of the Income-tax Rules, 1962. In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the Appellate Commissioner. The Tribunal also did not disturb such facts but relied solely on Rule 6DD (j) of the Rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of Rule 6DD, consequences envisaged in Section 40A(3) of the Act must follow. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons [a] The paramount consideration of Section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh [Supra], section 40A(3) of the Act does not eliminate considerations of business expediencies. [b] In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow - [i] the principal company, to which the assessee was a distributor, insisted that cheque payment from a cooperative bank would not do, since the realization takes a longer time; [ii] the assessee was, therefore, required to make cash payments only; [iii] Tata Teleservices Limited assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee; [iv] It is not disputed that the Tata Teleservices Limited did not act on such promise;

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[v] if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. We would find that the payments between the assessee and the Tata Teleservices Limited were genuine. The Tata Teleservices Limited had insisted that such payments be made in cash, which Tata Teleservices Limited in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of section 40A(3) of the Act must be lifted. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. Income-Tax Officer, reported in [2008] 298 ITR 349 (Raj) had observed that the exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally. Before closing, we may clarify that the above observations would apply only to the cash payments made by the assessee to the Tata Teleservices Limited. No such peculiar facts arise in case of payments made to the other two agencies viz., Rajvi Enterprise and R.D lnfocom. Learned counsel for the appellant also clarified that this appeal is confined to only the payments made to Tata Te\eservices Limited and no others. In the result, the question is answered in favour of the appellant assessee and against the Revenue. Judgment of the Tribunal is reversed. Tax Appeal is allowed. Order accordingly." In the case of appellant, the payment made to the group concerns is not douted, implying that the identity of the recipient is proved and also they have taken into account the transactions of sale to appellant and the receipt in cash in the books of accounts and the same has been disclosed to the department in the Income Tax Returns. The transaction between the appellant and the group concerns of the purchases made in cash and in cheque are at the same prices and the provisions of section 40A(2)(b) have not been invoked in the case of the said purchases. Thus, it can be concluded that the purchases are made at fair market value and the identity of the supplier is not doubted therefore, the said transactions are genuine and also the appellant has reflected a healthy gross profit of 33%% with regard to the business. The appellant has further flied the requirement of receipt on counter sales to be collected by the supplier as under:

VALUE VISION OPTICALS PVT. LTD

The Income Tax Officer,

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……………..Sir, Sub: Submission of clarification letter for cash counter sales received from Value Pharma Retail Private limited during the FY 2014-15 – Reg. Ref: PAN: AADCV2130Q The Value Viosion optical Private Limited is a group company of Value Pharma Retain Private limited, Value Pharma Holistic Remedies Private Limited and is into the business of whole sale trading of pharmaceuticals. During the Financial Year 2014-15 our company has Supplied Opticlas, Frames, lenses and contact lenses etc to Value Pharma Retail Private limited and we were allowed to receive the counter collections directly to Our account for settlement of amounts receivables from value Value Pharma Retail Private limited. Accordingly we have received cash collections to Our account directly. We are herewith enclosing ledger account copy of Value Pharma Retail Private limited in our books. We request you to consider the above clarification for the purpose of Scrutiny Assessment of Value Pharma Retail Private limited. VALUE PHARMA HOLISTIC REMEDIES PRIVATE LIMITED

The Income Tax Officer

·········· Sir,

Sub: Submission of clarification letter for cash counter sales received from Value Pharma Retail Private limited durinq the FY 2014-15 - Reg. Ref: PAN: AADCV2130Q The Value Pharma Holistic Remedies Private Limited is a group company of Value Pharma Retail Private limited, Value Vision optical Private Limited and is into the business of whole sale trading of pharmaceuticals. During the Financial Year 2014-15 our company has supplied medicines, food items, general items etc. to Value Pharma Retail Private limited and We were allowed to receive the counter collections directly to our account for settlement of amounts receivables from value Value Pharma Retail Private limited. Accordingly We have received cash collections to our account directly. We are herewith enclosing ledger account copy of Value Pharma Retail Private limited in Our books. We request you to consider the above clarification for the purpose of Scrutiny Assessment of Value Pharma Retail Private limited.

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The appellant further filed the MODs with both the suppliers as under: Memorandum of Understanding This memorandum of understanding is made and executed on this the day of 1st March of 2014 in Hyderabad in between Value Pharma Retail (Hyd) Pvt. Ltd., and Value Pharma Holistic Remedies Pvt. Ltd Value Pharma Retail (Hyd) Put. Ltd has retail pharmacy out lets and purchases all its required drugs/Medicines/General items from Value Pharma holistic Remedies Put Ltd., Value Pharma holistic Remedies Put. Ltd., is a wholesaler in Pharmacy and sells drugs/ Medicines/ General items to retailers against cash purchase. Hereby both parties agreed that the Value Pharma Retail (Hyd) Put. Ltd will access the authorized person of Pharma holistic Remedies Put. to all of its retail stores to collect the cash collections and Pharma holistic Remedies Put. will provide its authorized person and sends daily to retail stores of Value Pharma Retail (Hyd) Put. Ltd., to collect the cash and remit the same against purchases account and will finalize the books from time to time. Memorandum of Understanding This memorandum of understanding is made and executed on this the day of 1st March of 2014 in Hyderabad in between Value Pharma Retail (Hyd) Pvt. Ltd., and Value Pharma Holistic Remedies Pvt. Ltd., Value Pharma Retail (Hyd) Put. Ltd., has retail pharmacy out lets and purchases all its required drugs/ Medicines/ General items from Value Pharma holistic Remedies Put. Ltd., Value Pharma holistic Remedies Put Ltd is a wholesaler in Pharmacy and sells drugs/ Medicines/ General items to retailers against cash purchase. Hereby both parties agreed that 'the Value Pharma Retail (Hyd) Put. Ltd., will access the authorized person of Pharma holistic Remedies Put. to all of its retail stores to collect the cash collections and Pharma holistic Remedies Put. will provide its authorized person and sends daily to retail stores of Value Pharma Retail (Hyd) Put. Lid., to collect the cash and remit the same against purchases account and will finalize the books from time to time. The MODs is between both the suppliers and the appellant for the collection of over the counter sales made by the appellant to be directly collected by the supplier party.

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Terms of Repayment Repayable on Demand Nature of Security Cash Credit availed from Bank of Baroda, Punjagutta Branch, Hyderabad, against primary security of Hypothecation of all Stocks and Receivables and Collateral Security of Property Belonging to Sri. Pavani Byra, Flat No. 202, Safa Apartment, RNo. 11-5-397, Red Hills, Hyderabad and Open Plot No. 74 admeasuring 400 Sq.Yards Situated at Tanashah Nagar Residential Complex, Survey No 4, Pokalwad a Village, Manikonda Jagir Grampanchayath, Rajendra Nagar Mandai, Ranga REddy District and also personal Gurantee of Directors (Sri. Diteep Chakravarthy Byra and Pavani Chilikuri

From the above it can be observed that VPHRPL works on a gross profit margin of approximately 5 to 6 percent, wherein after that the interest cost is approximately 2.04% and a net profit of 0.44%. Thus, the group company of appellant works on a thin margin and the interest cost is substantial and any saving of interest by directly

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depositing the cash so received, substantially reduces the interest burden of the supplier group company. The interest cost is almost five times the net profit of the company so any reduction of the interest cost will drastically improve the profits of the supplier company VPHRPL, similarly in the case of VVOPL it is seen

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Terms of Repayment Repayable on Demand Nature of Security Cash Credit availed from Bank of Baroda, Punjagutta Branch, against primary security of Hypothecation of all Stocks and Receivables and also persoan1 Guranlee of Directors (Sri. Dileep Chakravarthy Byra and Pavani Chitikuri and colleteral Security of Property Belonging to In this case the gross profit is around 13% and the interest cost is around 2.5 percent, leaving a net profIt of approximately 0.32%. Thus, the interest cost is approximately 8 times the net profit and any change in the reduction of interest servicing will affect the profitability of the group company. It is important to note that VVOPL and VVHRPL do not have a strong asset base and they have hypothecated stocks and receivables along with other guarantees. Thus, the borrowings of 2.42 crore which are secured borrowings in the case of VVHRPL and the borrowings of 2.55 crores in the case of VVOPL which is also secured borrowings is primarily based on the hypothecation of receivables. Thus, the receivables which are primarily from the appellant company, if

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deposited well before time reduces the interest cost of the group company and also does not cross the thresholds of the borrowings. Thus, the arrangement made to collect the counter sales of the appellant company by the supplier group companies was only to reduce their interest cost by making deposits at the earliest. Though the above method is not the best method to be adopted in the present availability of e-transactions and super fast banking modes, wherein the same amount of cash collection could have been deposited in the appellant's bank account and would have been transferred immediately to the group company and thus the transaction would not have been made in cash and the provisions of section 40A(3) would not have been invoked by a simple process of depositing the same and crediting the other bank accounts of the supplier companies on the even date. However, by adopting the allowance of the suppliers to collect the cash pertaining to over the counter sales also is not intended to either evade tax or hide the identity of the purchase party in any manner. The Allahabad High Court vide order dated 28.07.2011 in ITA No. 65 of 2000 in the case of M/S Rajesh Cement Pipe Industry Vs. CIT held that as the genuineness of the transactions were not in dispute, the applicability of Section 40A(3) of the Act as a rule is not to deny basic expenditure. The jurisdictional High Court in the case of Sri Laxmi Sa tyanarayana Oil Mill Vs. Commissioner of Income-tax, R.C. NO.16 OF 2000 vide order dated June 12, 2014 observed as under: "16-17. The purport of Section 40 of the Act fell for consideration and interpretation by the Honble Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11. It was in the context of a challenge under Section 40A(3), Their Lordships observed, As to the validity of section 40A(3), it was urged that, if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or a crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy of tax on an assumed income would be a restriction on the right to carry on business, besides being arbitrary. 18. 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 OjJicer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The

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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 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. 19. Several High Courts followed this dictum and took the view that the provision must be interpreted liberally and the assessees cannot be subjected to undue rigor. The Rajasthan High Court in Smt. Harshila Chordia v. ITO [2008/298 ITR 349 went a step further, and held that the circumstances mentioned in the circular of the CBDT cannot be said to be exhaustive, and that the Board clearly expressed the view that clause OJ of Rule 6DD must be liberally construed. 20. As observed by the Supreme Court, once an assessee furnishes the circumstances under which the payment in the manner prescribed in Section 40A (3) lVas not practicable or would have caused genuine problems, the proviso, and thereby the Rule 6DD, get attracted. The Parliament did not intend that payment of Rs. 2, 500/- , or more, must be made only through the crossed cheque. This is evident from the proviso to Section 40A(3), Rule 6DD, and the circulars issued from time to time. Clause (j)(2) of Rule 6 DD take in their fold, all the circumstances, under which an assessee faces in the course of his business. Paragraph 3(vi) of the circular of the CBDT has further widened the scope of the rule, by mentioning that if the payment, otherwise than through cheque was made, on being promised and specific discount by the seller, the rigor of Section 40A(3) does not apply. 21. Corning to the facts of the case, the consistent plea of the applicant was that it had to make the payment for purchase of the ground-nut, in cash, because the seller not only insisted on that, but also gave incentives, such as facility of payment within one week, and discount. The certificate issued by Mis Satyanarayana Trading Company supported this. The question as to whether there was

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justification on the part of the seller of the goods in imposing such conditions, is outside the scope of the enquiry. As a matter of fact, there existed some justification for the traders, at least at the relevant point of time, in insisting the payment of amounts, in cash. The reason is that the banking activity was not that prominent and popular, and instances of cheques issued by agencies or persons, in the course of business being bounced, were not infrequent. The delay in receiving the consideration for any material supplied by a trader would have its own cascading effect on the business activities. It is only when both the parties to the contract are known to each other so intimately, and the seller is very confident not only of the solvency of the purchaser, but also his business ethics, that he would be inclined to receive the consideration through cheque. 22. Obviously because the Parliament as well as the CBDT were live 10 these issues, the provisions referred to above, wer enacted or incorporated. The Assessing Authority has taken a hyper technical view and failed to discern the spirit underlying the relevant provisions. Though the Appellate Authority exhibited on element of objectivity, it was only in a limited aspect. The Tribunal has ignored the purport of the relevant provisions of law and refused to grant any relief to the assessee. 23. We are of the view that once the assessee has placed the proof of payment of the consideration, in cash, in excess of Rs.2,500/-, for its transaction to the seller, and the latter admitted the payment, there is no question of disallowing such amount by the Assessing Authority. 24. The question referred to is answered in favour of the assessee and against the department. The above instance is similar to the case of appellant where the group concerns had a lien on the sales made over the counter as they were the main suppliers of the appellant and had in turn taken overdraft facility. The immediate deposit not only reduce the interest cost but more importantly saved the appellant from crossing the overdraft limit which would have caused more problems to the supplier group companies. The Punjab & Haryana High Court in the case of Gurdas Garg v. CIT in ITA No.413 0[2014, dated 16-7-2015 held as under "It is important to note some of the findings of fact by the CIT (Appeals). The identity of the payees i.e. the vendors in respect of the lands purchased by the appellant, was established. The sale deeds were produced. The genuineness thereof was accepted. The amount paid in respect of each of these agreements was certified by the Stamp Registration Authority. The CIT (Appeals) held the transactions to be genuine. Accordingly, the CIT held that the bar against the grant of deductions under Section 40A(3) of the Act was not attracted.

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It is important to note that the Tribunal did nat upset these findings including as to the genuineness and the correctness of the transactions. It is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market, that it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to settle the deals. The Tribunal did not doubt his case. The Tribunal, however, held that the claim for deduction was not sustainable in view of Section 40A(3) as the payments which were over Rs 20,000/- were made in cash The Tribunal, therefore. disallowed the same only on a construction of Section 40A(3) The Tribunal restricted the ambit of the proviso to the circumstances mentioned in Rule,6DD of the Income Tax Rules, 1962. At the cost of repetition, the Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important. the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct. they clearly make out a case of business expedience. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act." The Chandigarh Bench of ITAT in the case of Dreamland Colonizers Pvt. Ltd vide order dated 15-2-2016 held that where expenses incurred in cash were genuine which were paid to the seller for purchase of land and there were practical expediency because of which the payments have to be made in cash no disallowance uj s. 40A(3) is called for and also in the case of Dhuri Wine, Chandigarh vide order dated 9-10-2015 held that where the Expenses incurred in cash were genuine and were paid to distilleries through Excise Department for purchase of liquor and there were practical expediency because of which the payments have to be made in cash and therefore such payment were not in the ambit of disallowance u/s. 40A(3). The Amritsar Bench of ITAT in case of Rakesh Kumar, Muktsar v. Assessee on 9th March, 2016 stated that- "In the present case, the genuineness of payment has not been doubted as Assessing Officer himself has held that sale deeds of properties were registered with the Revenue Department of Govt. Therefore, the case of the assessee is fully covered by the above decision of Hon'ble Punjab and Haryana High Court."

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In the case of CIT v. Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) has held as under: In this case the Court upheld the view of the Tribunal in not applying section 40A(3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee. Which is also the case in the matter of the appellant that the group companies have directly deposited the money in their bank account. The Hon'ble Kerala High Court in case of M/s. Keerthi Agro Mills (P) Ltd., Mattoor on 3-10-2017 in ITA.No. 257 of 2015 has held as under: " .... Similarly, in Attar Singh Gurmukh Singh, the Supreme Court has examined both Section 40-A(3) and Rule 6DD. It has held that 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. 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 disclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the Section. 25. It is open to the assessee, Attar Singh Gurmukh Singh further observes, 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions .... " The above judgment is also squarely applicable to the transactions entered into by the appellant with the group concerns to be not covered under the provisions for disallowance u/s.40A(3) as no unaccounted money was involved and nor it was an out of books transaction.

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It is also important to note that in the case like the appellant's, if the sale made by the appellant is let say Y and the purchases made are X and let us presume that there is a 5% net profit on sales and there are no expenses for the sake of assumption, which implies that the tax has to be paid on 0.05 Y. If the cost of input is in cash under the circumstances mentioned above and all of it is in cash, the profit would thus be 0.05 Y + X which implies that the same is equivalent to Y. The appellant would thus pay tax on Y which means that all the sale are income and would land up paying a tax of 0.3 Y which is higher than the profit ever made or envisaged by the appellant rather the appellant has landed up paying a penalty to the extent of 5 times the profit and 20 times the tax which it would have been liable under bonafide circumstances. Therefore, the bonafide circumstances cannot be included under the purview of section 40A(3) as it was introduced by the Parliament to curb black money and tax evasion and not with the primary intent to penalise bonafide transaction. Therefore in the case of the appellant, the following with regard to the transactions pertaining to cash payment are observed as under: i.The genuineness of the transaction has not been doubted by the AO. ii.The price paid by the appellant has not been doubted by the AO and the transaction was at arm's length price and section 40A(2)(b) has not been invoked. The appellant has a healthy gross profit of 33% on sales. iii.The money received from the appellant found the way into the bank of the supplier companies of the same group. iv.The supplier company have confirmed the transaction and have also duly reflected the same in the P & L account and in their Income Tax returns. v.The group company had borrowed funds from the bank 3.....'1.d hac an overdraft and required the lien over cash counter sale of the appellant to be deposited in their bank accounts. vi.All the transactions of purchase and sale are verifiable and the pricing is not a point of dispute and the transactions have been held as genuine. vii.The identity of both parties involved is established. viii.The appellant company had its major share of supply from the group company at credit and therefore were liable to consent to the requirement of payments insisted by the suppliers. ix. The whole arrangement could have been better structured but just because the structuring was not up to the mark, it would be giving absurd tax liability in the case of appellant. If the appellant had 100% supply from the group company and the repayment was in cash, it would result in an income of 100% of cost + net profit and

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would result in an artificial tax burden, which the statue never desired. x. The section 40A(3) was to curb black money and unaccounted transactions. Both the elements are absent in the case of appellant as the transactions are accounted and genuine. To sum up the transaction entered by the group company with its associate group company was neither to evade taxes nor involve black money or to get into unaccounted transactions. Rather the transactions are genuine and accounted. The appellant was also at the mercy of the supplier company who insisted on certain payments to be received in cash for their banking limits. Thus, as the transactions were fairly priced, following the ratio of the Apex Court in the case of Attar Singh, the quantum of Rs.7,59,00,557/- made in cash from the group concerns is held out of the purview of section 40A(3) and the addition made by the AO is deleted. In view of the above, the appellant gets relief on ground no. 1 and 2 and the ground no. 3 needs no adjudication as the relief has been allowed in ground no. 1 and 2”. To sum up appeal is allowed. 4. We have given our thoughtful consideration to Revenue’s foregoing stand in support of the impugned Section 40A(3) disallowance and find no merit in the same. There is hardly any dispute about the basic fact that both the payer and payee(s) herein are group entities only. The Revenue’s argument in support of the impugned Section 40A(3) cash payment disallowance is that the operation thereof ought to be excluded merely because the twin entities herein are group concerns. We note from a perusal of the Ld.CIT(A)’s detailed discussion that not only he has examined all the relevant factual aspects but also considered the relevant judicial precedents (supra) whilst concluding that the overwhelming genuine expenditure payments deserve to be accepted even if they have been made in cash. We further take note of the hon'ble apex court’s landmark decision in Attar Singh Gurmukh Singh Vs. ITO (1991) 191 ITR 667 (SC) that this

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statutory provision comes into play so as to prevent un- accounted cash from being ploughed in the system. Case law Harshita Chordia (298 ITR 349) (supra) and Anupam Tele Services Vs. ITO (2014) 366 ITR 122 (Guj) held that such overwhelming genuine payments ought not to be disallowed in light of the restrictive interpretation of rule 6DD of the Income Tax Rules which is not self-exhaustive. We therefore quote hon'ble apex court’s yet another landmark decision in CIT Vs. K.Y.Pilliah (1967) [63 ITR 411] (SC) to express our complete agreement with the CIT(A)’s conclusion deleting the impugned Section 40A(3) disallowance in entirety without delving much deeper in the relevant facts herein. 5. We lastly acknowledge that although the instant lis is being decided after a period of 90 days from the date of hearing as per Rule 34(5) of the IT(AT) Rules 1963, the same however, does not apply in the covid lockdown situation as per hon'ble apex court’s recent directions dated 27-04-2021 in M.A.No.665/2021 in SM(W)C No.3/2020 ‘In Re Cognizance for extension of limitation’ making it clear that in such cases where the limitation period (including that prescribed for institution as well as termination) shall stand excluded from 14th of March, 2021 till further orders in above terms.

Order pronounced in the open court on 26th August, 2021

Sd/- Sd/- (LAXMI PRASAD SAHU) (S.S.GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 26-08-2021 TNMM

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Copy to : 1.Income Tax Officer, Ward-17(3), Hyderabad. 2.M/s.Value Pharma Retail (Hyd) Private Limited, Plot No.26, D.No.8-2-248/1/7/26/2, Nagarjuna Hills, Punjagutta, Hyderabad. 3.CIT(Appeals)-5, Hyderabad. 4.Pr.CIT-5, Hyderabad. 5.D.R. ITAT, Hyderabad. 6.Guard File.