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Income Tax Appellate Tribunal, GAUHATI BENCH VIRTUAL HEARING AT KOLKATA
Before: SHRI P.M. JAGTAP, HON’BLE VICE-(KZ)]
IN THE INCOME TAX APPELLATE TRIBUNAL GAUHATI BENCH VIRTUAL HEARING AT KOLKATA [BEFORE SHRI P.M. JAGTAP, HON’BLE VICE-PRESIDENT (KZ)] [THROUGH VIRTUAL COURT] ITA No. 63/GAU/2019 Assessment Year: 2014-15 Dey’s Pharmacy ...................................……………………………………………………………Appellant S.S. Road, Lakhtokia, Guwahati – 781001. [PAN : AADFD 4403 B] vs ITO, WARD – 2(1), Guwahati…………………………………………..………………………Respondent Appearances by: Shri Ramesh Goenka, Sr. Advocate appearing on behalf of the Assessee. Shri Subhrajyoti Bhattacharya, Addl. CIT, Sr. DR appearing on behalf of the Revenue. Date of concluding the hearing : October 04, 2021 Date of pronouncing the order : October 04, 2021 O R D E R PER P.M. JAGTAP, VICE-PRESIDENT: This appeal filed by the assessee is directed against order of ld. Commissioner of Income Tax (Appeals)- Guwahati - 2 dated 23.11.2018 and the solitary issue involved therein relates to the disallowance of Rs. 36,96,707/- made by the AO and confirmed by the Ld. CIT(A) u/s 40A(3) of the Income Tax Act, 1961.
The assessee in the present case is a partnership firm which is engaged in the business of retail trading of medicines. The return of income for the year under consideration was filed
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by it on 27.11.2014 declaring a total income of Rs. 1,07,552/-. The said return filed by the assessee was selected for scrutiny through CASS. During the course of assessment proceedings, it was noticed by the AO that the assessee during the year under consideration has purchased medicines amounting to Rs. 36,17,011/-, Rs. 44,963/- and Rs. 34,733/- from M/s. Modern Pharma Company, M/s. Brahmaputra Drug Distributors and M/s. Tirupati Pharma respectively and payments against the same were made otherwise than by way of an account payee cheque or account payee bank draft exceeding the sum of Rs. 20,000/- in a day in case of a person. He, therefore, required the assessee to explain as to why the said payments made in violation of the provisions of section 40A(3) should not be disallowed. In reply, the following three contentions were mainly raised on behalf of the assessee: “i. All the transactions of purchase of medicines and subsequent payments were genuine. ii. All the payees were identified and since payees had allowed reasonable trade discounts in consideration of prompt cash payments, the assessee acted purely for the sake of business consideration. iii. All the payments were made against separate bills none of which exceeded Rs. 20,000/- individually.”
The above contentions raised on behalf of the assessee were not found acceptable by the AO and he proceeded to make a disallowance of Rs. 36,96,707/- by invoking the provisions of
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section 40A(3) in the assessment completed u/s 143(3) of the Act vide an order dated 24.11.2016.
Against the order passed by the AO u/s 143(3) of the Act, an appeal was filed by the assessee before the Ld. CIT(A) challenging the disallowance made by the AO u/s 40A(3). During the course of appellate proceedings before the Ld. CIT(A), the contention as raised before the AO in support of its case on this issue were reiterated on behalf of the assessee. The Ld. CIT(A) however did not find merit in the same and proceeded to confirm the disallowance u/s 40A(3) for the following reasons given in his impugned order: “I have gone through the above submissions of the Appellant and have considered the facts and evidences on record. The sole issue which arises for determination in the present lis is a challenge to the disallowance of Rs 36,96,707/- under section 40A(3) of the Act. It has been noted by the Ld AD that during the course of examination of books of accounts, the Ld AO had discovered that payments towards purchases were made in cash exceeding Rs.20,000/- on each instance to 3 parties, in which due show cause was issued to the appellant. The factum of making cash payments to these parties, in violation of section 40A(3) is not in dispute. The only point requiring the determination is as to whether the appellant could be said to have acted upon under compelling circumstances and in the interest of the business to have made such payments in cash. In the submissions made, it has been contended that the appellant had a nominal sale and a nominal margin and the disallowance of Rs. 36,96,707/- was too high. At the same time, the Ld counsel had sought to
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rely on the provisions contained under the first proviso to section 40A(3A) to state that payments have been made in cash an account of considerations of business expediency and other relevant factors. Be that as it may be, the appellant while placing reliance on the first proviso to section 40A(3A), contended that payments made in cash were on account of considerations of business expediency and other relevant factors, but apparently seemed to have, by oversight, ignore that the aforesaid clause of consideration of business expediency is referred in the earlier proviso is qualified by the words and expression, 'in such cases and under such circumstances as may be prescribed'. The relevant proviso can best be appreciated in plain language to state that the disallowances under section 40A(3) and 40A(3A) shall not be made, in such cases and under such circumstances as may be prescribed, having regard to the consideration of business expediency etc. Thus, it is clear that consideration of business expediency, is per se, not a condition/exclusion clause to seek exception from the rigors of section 40A(3)/40A(3A). In-fact, based on the consideration such as nature and extent of banking facilities available, considerations of business expediency and other relevant factors, the relevant exclusions to section 40A(3) are prescribed under Rule 6DD of the Income Tax Rules, 1962 and a perusal of the same would reveal that the said rule 6DD is exhaustive and not inclusive, meaning thereby if, the case of the appellant or any other assessee, falls within the exclusions stated therein, the provisions of section 40A(3) shall not apply and if otherwise, the disallowance would be warranted. I further hold that there is no expression "reasonable cause" or even "business expediency" which finds its way in Rule 6DD and therefore the provisions section 40A(3) read with Rule 6DD requires strict interpretation. In view of the above discussion, the disallowance of Rs 36,96,707/- made by the Ld. AO under section 40A (3) of the Act is, hereby, confirmed. This ground of appeal is dismissed.”
Aggrieved by the order of the Ld. CIT(A), the assessee has preferred this appeal before the Tribunal.
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I have heard the arguments of both the sides and also perused the relevant material available on record. The main contention raised by the ld. counsel for the assessee is that none of the purchases in question made by the assessee during the year under consideration individually exceeded Rs. 20,000/-. He has invited my attention to the relevant details of the said purchases as given in annexure 1 to the assessment order to point out that none of the cash memos/bills raised by the concerned three parties exceeded Rs. 20,000/- in any single transaction and this position which is clearly evident from the details given by the AO himself in annexure 1 to the assessment order is not disputed even by the ld. DR. As rightly contended by the ld. counsel for the assessee in this regard by relying on the section 40A(3), the said provision is applicable only where the assessee incurs any expenditure in respect of which any payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds Rs. 20,000/-. In the present case, none of the expenditure incurred by the assessee on purchase of medicines from the concerned three parties exceeded Rs. 20,000/- in a single transaction in as much as none of the cash memos/bills raised by the said parties exceeded the amount of Rs. 20,000/- in any singular transaction as it is evident from the details given by the AO himself in the annexure 2 in the assessment order and this being the undisputed
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position, I am of the view that the provisions of section 40A(3) were not attracted to the transactions in question involving purchase of medicines by the assessee from the concerned three parties. For this conclusion, I rely on the decision of Cochin Bench of this Tribunal in the case of Raja & CO vs DCIT (64 SOT 12) cited by the ld. counsel for the assessee wherein a similar issue involving identical facts was decided by the Tribunal in favour of the assessee after taking into consideration the CBDT Circular vide paragraph no. 17 as under: “17. The CBDT circular (referred supra) refers to "a particular high value payment”. The necessity to make payment to a party would arise only after conclusion of a transaction, say a "purchase" and the said deal would culminate into rising of a bill/invoice. Hence the term "high value payment" apparently refers to the concerned bill/invoice in respect of which the payment is required to be made, meaning thereby, the concerned bill/invoice should also be of a higher value. However, if the value of bill/invoice itself is less than Rs. 20,000/-, it cannot be considered as a high value transaction in the context of sec. 40A(3) and hence the payment effected in respect of that kind of bill/invoice cannot be considered as high value payment. Accordingly, in our view, if the purchase is effected from a single person by way of several bills/invoices and if the value of each bill/invoice is less than Rs. 20,000/-, then payments made to settle each bill/invoice would not be hit by the provisions of sec. 40A(3), as each bill/invoice has to be considered as a separate contract. The question of splitting up of the payment also does not arise in respect of such type of bills/invoices, as the value of each bill is less than Rs. 20,000/-. In view of the above, we are unable to agree with the decision of Ld. CIT(A) in holding that the purchases effected through several bills/invoices from a person shall also be hit by the provisions of sec. 40A(3) and accordingly set aside the said view of the tax authorities.”
Having regard to the relevant facts of the case in hand as discussed hereinabove and keeping in view the decision of Cochin Bench of this Tribunal in the case of Raja & Co. (supra), I hold that the disallowance made by the AO u/s 40A(3) and
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confirmed by the ld. CIT(A) is not sustainable and deleting the same, I allow this appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 4th October, 2021.
Sd/- (P.M. JAGTAP) VICE PRESIDENT Dated: 04/10/2021 Biswajit, Sr. PS Copy of order forwarded to: 1. Dey’s Pharmacy, S.S. Road, Lakhtokia, Guwahati – 781 001. 2. ITO, WARD-2(1), Guwahati. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order,
Sr. Private Secretary ITAT Kolkata Benches, Kolkata