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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH, VICE- & SHRI G.MANJUNATHA
PER MAHAVIR SINGH, VP: This appeal by the Revenue is arising out of order passed by the Commissioner of Income Tax(Appeals)-18, Chennai, in dated 31.05.2017 for the assessment year 2013-14. The assessment was completed by the DCIT., Central Circle-2, Coimbatore for relevant assessment year 2013-14 u/s. 153A r.w.s143(3) of the Income Tax Act, 1961 (hereinafter “the Act”) vide order dated 31.03.2016.
At the outset, it is noticed that appeal filed by the Revenue is barred by limitation of 9 days. The order of the CIT(A) dated 31.05.2017 was received on 16.08.2017.
However, the appeal was filed by the Department on 24.08.2017, due to intervening postal holidays. Going by the reasons, we are of the view that cause is reasonable and hence, delay of 9 days is condoned and appeal is admitted.
The only issue in this appeal of the Revenue is as regards to order of the CIT(A) deleting disallowance made by the Assessing Officer on account of expenditure incurred in cash in excess of Rs.20,000/-, thereby invoking provisions of section 40A(3) of the Act. For this, the Revenue has raised following grounds of appeal:-
“2. The Id. CIT (A) erred in deleting the disallowance u/s.40A(3) of the IT Act, 1961 for AY 2013-14 amounting to Rs.2,59,07,222/- in the assessee's case.
2.1. The Ld. CIT(A) erred in allowing relief to the assessee by deleting the disallowance of Rs. 2,59,07,222/- made u/s.40A(3) by the AO, and observing that, no single entry for expenditure incurred in cash exceeded Rs.20,000/- for the assessee, when the provision of law is that, expenditure in respect of which a payment or aggregate payments made to a person in a day of should be taken into account for the purpose of sec.40A(3) of the Act.
3. The Id CIT(A) ought to have noted the fact that the relationship of 'agent' was between Shri Palanisamy and his drivers, but not between the assessee and the drivers or between the assessee and Shri Palanisamy. Shri Palanisamy was only a sand supplier to the assessee.
3.1. The Id. CIT(A) is not justified in coming to the conclusion that clause 'k of Rule 6DD of the I T Rules, 1962 is squarely applicable to the assessee's case when Shri. Palanisamy is merely a sand supplier and not an agent to the assessee.”
Brief facts are that the assessee is engaged in the business of real estate and developing properties. A search operation u/s.132 of the Act, was carried out by the Income tax Department in the assessee’s group cases, including the assessee firm, M/s.Sree Daksha Property Developers on 05.09.2013. Subsequently, notice u/s.153A of the Act was issued to the assessee and the assessee filed return of income in response to the same for the relevant assessment year 2013- 14 on 07.12.2015. The Assessing Officer during the scrutiny proceedings noticed that the assessee firm has paid in cash to one Mr. M.Palanisamy in excess of Rs.20,000/- per day on account of purchase of sand and total payment during the year was made to the tune of Rs.2,59,07,222/- . Therefore, the Assessing Officer required the assessee to show cause as to why expenditure claimed in regard to cash payment in excess of Rs.20,000/- per day be not disallowed by invoking provisions of section 40A(3) of the Act. The assessee replied vide submissions dated 28.03.2016 that an amount of Rs.2,59,07,222/- has been paid in cash to Mr. M.Palanisamy during financial year 2012-13 relevant to the assessment year 2013-14 towards supply of sand and said amount has not been paid in single transaction, but same has been paid during the course of entire year. It was stated that sand is critical component in construction business and supply of sand is highly regulated. The timely availability of sand is very critical and supplies were made in various project sites. Considering continuous supply of sand, cash payments were made, since the supplier demanded cash delivery and deliveries are made at odd hours. The Assessing Officer noted that the assessee’s case does not fall under any of the exceptions as provided under Rule 6DD and thereby, he made disallowance by invoking provisions of section 40A(3) of the Act amounting to Rs.2,59,07,222/-. Aggrieved, the assessee preferred appeal before the CIT(A).
The CIT(A) deleted addition by noting that the assessee’s nature of business and usual style and manner carried out in this line of business is unique i.e procurement of sand through lorries for construction business at various sites. The CIT(A) noted that the assessee firm gets orders from respective sites and the corresponding purchase order will be raised by the firm over phone to various locations, where Mr. M.Palanisamy operate sale of sand all over Tamil Nadu. On receipt of orders, Mr. M.Palanisamy will direct lorry drivers to supply sand through lorries owned or hired by him. Based on cash bill raised on each unit, supply of sand settlement has to be made at the site then and there to the driver on each supply /delivery of sand so as to meet cost of diesel, driver batta, vehicle maintenance etc. It was noted by the CIT(A) that price of sand is inclusive of freight which will be raised as cash bill and sent through driver/cleaner of the vehicle. He further noted that drivers of lorries after reducing cost of expenses, as mentioned above, will settle the accounts to Mr. M.Palanisamy, the supplier and the assessee settles purchases on spot delivery basis and no credit bill was raised by Mr. M.Palanisamy.
According to the CIT(A), the assessee’s transaction squarely falls under Rule 6DD(k) of the Income Tax Rules, 1962 and it clearly falls under exception as provided under Rule 6DD(k) of the Rules. According to the CIT(A), the lorry drivers acting as agent of the supplier and hence, there was compulsion for the assessee to pay in cash for the service provided on behalf of the supplier namely Mr. M.Palanisamy. The CIT(A) finally recorded that when looking at the timing of transaction and nature of commodity, it clearly falls under exception as provided under Rule 6DD(k) of the I.T. Rules. Further, he noted that each transaction involving one lorry supply is less than Rs.20,000/-. Hence, he deleted the addition. Aggrieved, the Revenue is in appeal before the Tribunal.
Before us, the learned CIT DR argued during the course of search, statement of Shri R.Mohan, Managing Director of M/s.Sree Daksha Property Developers (India) Pvt.Ltd. was recorded, wherein he stated that amount in cash were paid for sand purchases to Mr. M.Palanisamy. The ld. CIT DR referred to the statement recorded and relevant question No.43 and relevant answer which is being reproduced as under:-
“Q.No 43: I am showing you the ledger account of M Palaniswamy for the FY 11-12 maintained in tally account at your office premises wherein total cash payment is Rs. 34,34,939/- is reflected. Similarly in FY 2012-13 ledger account maintained in tally package at your office premises a cash payment of Rs. 2,59,07,222/-. Please explain the transaction?
Ans: He is the sand supplier. He was paid in cash. Our vehicle goes to their sand depots and collect the sand and deliver it to our project sites. The payments are towards cost of sand.”
Further, the ld.CIT DR referred to letter submitted by the assessee during the course of assessment proceedings dated 28.03.2016, wherein the assessee has reiterated that cash was paid to Mr. M.Palanisamy for purchase of sand and relevant text of the letter reads as under:-
“The question posted to MD does not specify whether the payment is a single payment or multiple payments in a year and hence the response from MD is also in the same line. We would like to inform you that an amount of Rs. 2,59,07,222/- has been paid in cash to Mr.Palaniswary during the FY 2012-13 towards supply of sand, the said amount has not been paid in single transaction but the same has been paid during the course of the entire year. Further it is informed sand is critical component in construction progress and the supply of sand is highly regulated. The timely availability of sand is very critical and supplies were made in various project sites. Considering the criticality and business expediency for continuous supply of sand cash payments were made since the supplier demanded cash on delivery and deliveries are made at odd hours. None of the single payments made in a day are exceeding the limits prescribed u/s 40A(3) of the Income Tax Act.”
The CIT DR stated that it is very clear that Mr. M.Palanisamy is a sand supplier and relation between the assessee and supplier is of purchaser & supplier and nothing more. According to him, there exists no principal-agent relationship as noted by the CIT(A). The CIT DR further controverted statement of the assessee that cash payments have to be made to transporter, who act as agent of sand supplier M.Palanisamy. For this, he stated that the CIT(A) has not considered following facts:- i) M.Palanisamy is a sand supplier and wholesale sand supplier in Tamil Nadu ii) The existence of principal-agent relationship has not been established with any evidence. iii) No evidence for proving that there an agency; iv) No remuneration was paid to agent for their services; & v) This claim is made at CIT(A) level and no such claim was made during search or during assessment proceedings.
Further, the CIT DR has relied on the decision of Hon’ble Madras High Court in the case of P.K. Ramasamy Nadar & Bros Vs. ITO (2014) 41 taxmann.co. 538 (Mad). Finally, he stated that relation of principal-agent is between M.Palanisamy and drivers and not between the assessee and drivers as noted by the CIT(A) and hence, the assessee’s case falls on this very ground. Accordingly, he asked the Bench to confirm order the Assessing Officer .
On the other hand, the learned counsel for the assessee explained nature of business and how sand supply is being carried out. He also explained that considering the practicability and the customs prevalent in the line of trade, the learned Assessing Officer ought to have appreciated the practical difficulties. Though ultimately bills for sand procurement are subsequently given by Mr. Palanisamy, the fact is to be considered that the sand is transported by trucks past midnight on account of their prohibition to run on the day.
According to him, the sand loads carried by different truck drivers were delivered to the different locations and projects on the same day and the cost of each load delivered in one single site may not exceed Rs. 20,000/-. He submitted that on the same day a different driver may have delivered different loads in different locations where the assessee's construction was in progress. Since the major portion of the sand bill consists of lorry freight, the driver who brings the delivery note which will be much below Rs. 20,000/- would demand cash payment in the night in order to meet the wage payment. The counsel further submitted that unless the drivers are paid in cash, which is insisted upon, there may be labour dispute and hence, on account of the urgent business exigency and as is the custom of the buyers of sand, this procedure of payment in Cash cannot be avoided. Therefore, the learned counsel submitted that the Assessing Officer ought to have appreciated the practical difficulties and he ought to have appreciated the fact that cash payment for the delivery otherwise found genuine ought not to have applied the provisions of section 40A(3), which is unjustified having regard to facts and circumstances and actual custom in the trade. The learned counsel for the assessee further argued that trucks of sand loads are delivered in different locations by the drivers and after collecting cash, ultimately drivers would send details to the suppliers for sand supply. The bills are delivered periodically only after collection of cash by drivers at the delivery spot. He also argued that cost of sand delivered on a single day at the particular site of construction does not exceed Rs.20,000/- and only after taking into account total loads supplied on different locations are supervised by different employees. The total payment made may exceed Rs.20,000/-, but circumstances are beyond control of the assessee. The learned counsel for the assessee also argued that CIT(A) has rightly held that truck drivers are agent of assessee, for this, he explained order for sand is given not to Mr. M.Palanisamy, supplier, but it is given to truck drivers directly by supervisors at different locations and who in turn supply sand, although, bill is raised by main supplier Mr. M.Palanisamy, but for this the assessee is not at all aware he is only making cash payment at the spot, because sand is transported by trucks during past-midnight on account of prohibition to run during the day. Accordingly, these truck drivers are practically agent of the assessee and not of the supplier Mr. M.Palanisamy. Hence, he argued that assessee’s case squarely falls under exception framed under 6DD(k) of the Rules. He also made another argument that in case, the Bench is not agreeable to any of the arguments, the matter can be referred back to the file of the Assessing Officer to verify whether any cash payment made on account of sand delivered in different locations by drivers separately is below Rs.20,000/- or in excess of Rs.20,000/-. In term of the above, learned counsel for the assessee asked the Bench to confirm order of the CIT(A).
We have heard rival contentions and gone through facts and circumstances of the case. The disallowance u/s.40A(3) of the Act is on account of amount being paid to Mr. M.Palanisamy in excess of Rs.20,000/- in a day to procurement of sand. The total payment made during the year was Rs.2,59,07,222/-. The assessee admitted the fact that cost of sand delivered on a single day in a particular site of construction does not exceed Rs.20,000/-, but, after taking into account total sand supplied on different locations, of different parties, supervised by different employees of the assessee total payments exceed Rs.20,000/-. Going by nature of business and practicability of the line of trade, we have to consider that though ultimate bill of sand procured subsequently given by Mr. M.Palanisamy, the fact is to be considered that sand is transported by trucks past midnight on account of prohibition to run on the day. Actually, there is prohibition to run heavy trucks i.e. from 6.00 am to 6.00 pm in metros and big cities of India. The sand loads carried by different truck drivers are delivered at different locations of projects on the same day past mid-night. Although, cost of each load delivered in one single site may not exceed Rs.20,000/-, but on the same day different drivers have delivered different loads at different locations as is noted from ledger account submitted by the assessee, different drivers have delivered different loads at different locations of assessee’s construction sites and cumulatively, on a single day exceeds Rs.20,000/-. Considering that since major portion of sand will consist of lorry freight, drivers who bring delivery of sand would demand cash payment in night in order to make wage payments. Hence, considering the entirety of facts, we are of the considered view that although, provisions of section 40A(3) applies to present case, but neither the Assessing Officer nor the CIT(A) has gone into factum of delivery of sand load of trucks, whether truck drivers are agents of assessees or agent of sand supplier. No clarity is coming out from the orders of lower authorities on this issue. Hence, another angle is that in case, entire amount of Rs.2.59 crores is added to the returned income of the assessee, profit margin of the assessee will be more than 50%, which is not at all possible in the given scenario and nature of business of the assessee. Therefore, considering entirety facts, we estimate fair amount of disallowance and thus, we estimate disallowance at 25% of sand supplied by the assessee of Rs.2,59,07,222/-. Hence, we direct the Assessing Officer accordingly.