T.RAJENDRAN,CHENNAI vs. ACIT NON CORPORATE CIRCLE 20, CHENNAI

आदेश /O R D E R

PER MANJUNATHA. G, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-7, Chennai, dated 31.03.2019 and pertains to assessment year 2012-13.

:-2-: ITA. No: 2032/Chny/2019 2. At the outset, we find that there is a delay of 32 days in filing of appeal before the Tribunal, for which a petition along with affidavit explaining reasons for delay in filing appeal has been filed. The ld. Counsel for the assessee, submitted that the assessee was suffering from various ailments and was under treatment when the order of the CIT(A) was served on the assessee. Since, the assessee was on medical treatment, he could not file appeal which resulted in delay of 32 days. The delay in filing of appeal is neither intentional nor for want of undue benefit, but purely beyond control of the assessee. Therefore, delay may be condoned in the interests of justice. The ld. DR, on the other hand submitted that although the assessee gave medical reasons for non-filing of appeal in his affidavit, but no evidence has been filed. Therefore, delay should not be condoned.

:-3-: ITA. No: 2032/Chny/2019 filing appeal, it is very clear that there is no deliberate attempt from the assessee to delay in filing of appeal. Therefore, considering the reasons given by the assessee, we condone the delay in filing of appeal and admit appeal filed by the assessee for adjudication.

:-4-: ITA. No: 2032/Chny/2019 5. The brief facts of the case are that, the assessee is in the business of film distribution under name and style of Chimbu Cine Arts, a proprietary concern. The appellant is also the managing director of M/s. Kural TV Creations Pvt Ltd, which is also in the business of film distribution. The appellant had filed his return of income for the assessment year 2012-13 on 26.09.2012, admitting a loss of Rs. 2,86,53,021/-. The case has been selected for scrutiny through CASS and during the course of assessment proceedings, the Assessing Officer noticed that the assessee is engaged in the business of film distribution. During the financial year relevant to assessment year 2012-13, the predominant component of the credits and debits to the profit and loss account relates to the sale and purchase of the rights of the movies ‘Vaanam and Osthi’. It was further noted that, as per ledger folio of ‘Osthi’ right purchase and ‘VTV production Vaanam’ in the books of proprietary concern of the assessee M/s. Chimbu Cine Arts, substantial portion of the payment has been made in cash amounting to Rs. 4,73,65,001/- and the particulars of cash transactions are tabulated in para 3 of assessment order. The AO, called upon the assessee to explain as to why cash payment in excess of Rs. 20,000/- shall not be disallowed u/s.

:-5-: ITA. No: 2032/Chny/2019 40A(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”).

:-6-: ITA. No: 2032/Chny/2019 the producer of film and distributor, time was essence of the contract and as per which, before releasing the film on 08th December, 2011, both M/s. Kural TV Creations Pvt Ltd and M/s. Balaji Real Media Private Limited were jointly responsible to remit Rs. 12.75 crores one day before theatrical release date i.e., 07th December, 2011. Since, the assessee was acting as an agent for M/s. Kural TV Creations Pvt Ltd, he has collected cash from exhibitor/theatre owners for onward remittance to M/s. Reliance Big Entertainment Pvt Ltd through the bank account of M/s. Kural TV Creations Pvt Ltd. The cash payment reflected in ledger account of Osthi right purchase and VTV production Vaanam, is the very same cash collected from exhibitors and theatre owners and gave to M/s. Kural TV Creations Pvt Ltd. Since, money collected from exhibitors and theatre owners as an agent on behalf of the distributor, same cannot be treated as expenditure of the assessee for the purpose of provisions of section 40A(3) of the Act.

:-7-: ITA. No: 2032/Chny/2019 IT Rules, 1962. Therefore, rejected arguments of the assessee and disallowed cash payment of Rs. 4,73,65,001/- u/s. 40A(3) of the Act.

:-8-: ITA. No: 2032/Chny/2019 Unless, the payment is made the distributor cannot exhibit the movie. Therefore, there was urgent requirement for payment of cash and thus, the assessee has collected cash from exhibitors and paid to distributors.

:-9-: ITA. No: 2032/Chny/2019 as much as tri-party agreement between M/s. Reliance Big Entertainment Pvt Ltd and M/s. Kural TV Creations Pvt Ltd & M/s. Balaji Real Media Private Limited, there is a requirement of making payment of Rs. 12.75 crores, one day before the theatrical release of film. Unless, the distributors make payment to the producer, they cannot release the film for public audience. Since, there was urgent requirement for making payment, the assessee being an agent of M/s. Kural TV Creations Pvt Ltd, has collected cash from exhibitors/theatre owners for onward payment of money to M/s. Reliance Big Entertainment Pvt Ltd through bank account of M/s. Kural TV Creations Pvt Ltd. Further, the money collected from exhibitors/theatre owners and paid to distributor is neither belongs to assessee nor expenditure of the assessee. Therefore, the question of application of provisions of section 40A(3) of the Act, does not arise. In this regard, he relied upon the decision of ITAT Delhi Benches in the case of M/s. Geo Connect Ltd vs DCIT in ITA No. 2896/Del/2018 dated 29.08.2022.

:-10-: ITA. No: 2032/Chny/2019 fact that the assessee has made cash payment in excess of prescribed limit. It is also not in dispute that case of the assessee does not come under any of exception as provided under the IT Rules, 1962. Therefore, the AO has rightly disallowed cash payment u/s. 40A(3) of the act and thus, their order should be upheld. In this regard, he relied upon the decision of Hon’ble High Court of Madras in the case of Vadugananthan Talkies vs ITO [2020] 120 taxmann.com 25 (Mad).

:-11-: ITA. No: 2032/Chny/2019 exhibitor/theatre owner for onward payment to M/s. Reliance Big Entertainment Pvt Ltd through bank account of M/s. Kural TV Creations Pvt Ltd. The assessee has collected cash from various exhibitors/theatre owners on behalf of M/s. Kural TV Creations Pvt Ltd and gave to distributor for onward payment of money to M/s. Reliance Big Entertainment Pvt Ltd. Although, the assessee has credited and debited cash collected from exhibitors/theatre owners in his profit and loss account as income and expenditure, but fact remains that the role and responsibility of assessee is limited to the extent of working as an agent for M/s. Kural TV Creations Pvt Ltd and M/s. Balaji Real Media Private Limited. Therefore, it is necessary to examine whether provisions of section 40A(3) of the Act is applicable in the given facts and circumstances of this case, in light of arrangements between the parties. It is an admitted fact that M/s. Reliance Big Entertainment Pvt Ltd, is the producer of the movie Vaanam.

:-12-: ITA. No: 2032/Chny/2019 agreement, date and time for the release of movie was fixed on 08th December, 2011. The agreement further states that the distributor is responsible to remit a sum of Rs. 12.75 crores one day before theatrical release of the film, i.e., on 07th December, 2011. Since, it is important to adhere to the pre-determined release date of the movie, the assessee was under obligation to settle the accounts of various parties as directed by the producer of the movie M/s. Reliance Big Entertainment Pvt Ltd. Since, the assessee was acting as an agent of M/s. Kural TV Creations Pvt Ltd, they have directed the assessee to settle the accounts of various parties on behalf of M/s. Reliance Big Entertainment Pvt Ltd and accordingly, the assessee has made cash payments to various parties on behalf of the M/s. Reliance Big Entertainment Pvt Ltd and debited to the accounts of M/s. Kural TV Creations Pvt Ltd. If you go by the arrangement between the parties, the assessee is neither producer of the movie nor distributor and exhibitor. But, he has acted as an agent for distribution and marketing of movie. Therefore, amount paid by the assessee to various parties and debited into ledger account of ‘Osthi’ right purchase account and VTV production ‘Vaanam’ account, cannot be considered as amount paid for purchase of movie,

:-13-: ITA. No: 2032/Chny/2019 even though the assessee by mistake has debited said amount to profit and loss account. It is a settled principal of law by various decisions that, entries in books of accounts will not decide the taxability of any income, but what is relevant is to see the nature of income and its taxability. Since, the assessee was only an agent for distributor and collected money from exhibitor/theater owners on behalf of distributors, payment made by the assessee to various parties on behalf of producer of movie cannot be considered as income/expenditure of the assessee to invoke provisions of section 40A(3) of the Act.

:-14-: ITA. No: 2032/Chny/2019 agreement between M/s. Reliance Big Entertainment Pvt Ltd and M/s. Kural TV Creations Pvt Ltd and M/s. Balaji Real Media Private Limited, the distributor of the movie shall remit Rs. 12.75 crores one day before theatrical release of the movie i.e., on 07th December, 2011. As per agreement between the parties, the producer of the movie ‘Osthi’, M/s. Reliance Big Entertainment Pvt Ltd, has imposed certain conditions to both M/s. Kural TV Creations Pvt Ltd and M/s. Balaji Real Media Private Limited, to settle the accounts of various parties for a sum of Rs. 3.91 crores, one day prior to the theatrical release to the movie. Unless, the accounts of various persons including technicians of the movie was settled, it is impossible to release the movie on the specified date for public audience. Since, there was a business expediency in settling of accounts of various parties and also as per the directions of the producer of the movie, the distributor of M/s. Kural TV Creations Pvt Ltd, directed the assessee to make payment to various parties out of amount collected from exhibitor/theatre owners. The assessee, as per directions of his principle paid amount to various parties and debited to their accounts. Therefore, from the above, it is very clear that there is business expediency in making cash payments and thus, we

:-15-: ITA. No: 2032/Chny/2019 are of the considered view that provisions of section 40A(3) of the Act cannot be invoked in the given facts and circumstances of this case. Further, the entire cash transactions amounting to Rs. 4.73 crores is supported by necessary evidence as per which the first payment of Rs. 71 lakhs has been paid by the appellant to M/s. Kural TV Creations Pvt Ltd for onward payment to M/s. Reliance Big Entertainment Pvt Ltd. In this regard, necessary bank statements evidencing payment made to M/s. Reliance Big Entertainment Pvt Ltd was enclosed. The second payment of Rs. 3,69,15,000/- paid to various parties, was out of amount collected by the appellant and to be payable to M/s. Kural TV Creations Pvt Ltd for onwards payment to M/s. Reliance Big Entertainment Pvt Ltd., as per their directions. Therefore, genuineness of these two payments cannot be doubted. The balance amount of sum of Rs. 33,50,000/- was collected by the appellant and gave to M/s. Kural TV Creations Pvt Ltd for settlement of dues payable before the release of the film ‘Vaanam’. From the above, it is very clear that the payment to various parties on behalf of producer and distributor is not in dispute. Further, there is a business expediency in making these payments because there was an urgent requirement to make payment one day before

:-16-: ITA. No: 2032/Chny/2019 release of the movie. Unless, these payments are settled, the movie cannot be released for public audience. In this line of business, if the schedule is not adhered, there is chance of movie being commercially fail which may result in huge loss to various parties. Therefore, we are of the considered view that when the assessee has filed necessary evidences to prove his case that payments are genuine and said payments are made out of business expediency, then in our considered view the AO ought not to have disallowed said payments u/s. 40A(3) of the Act.

:-17-: ITA. No: 2032/Chny/2019 assessee is in real estate business and for that purpose it purchased an agricultural land from one Sh. Ugma, an old man of 75 years. Towards sale consideration of the said land, the assessee issued bearer cheques for an amount of Rs.1,06,50,000/- to the seller. It is the stand of the assessee from the stage of assessment proceeding itself that the seller of the agricultural land made a precondition of payment of cash for registration of sale deed. Since, the assessee was desperately in need of the land, he had no other option but to accede to the pre-condition of the seller. Accordingly, the payment was made through bearer cheques. From perusal of bank statements, a copy of which is placed in the paper-book, it appears that the sale consideration was paid to the seller of the agricultural land through eight bearer cheques, which were withdrawn on the same day i.e. 07.02.2014. On the very same day, the sale deed was registered in favour of the assessee. Thus, from the aforesaid facts, it is very much clear that the transaction between the parties and the payment made and purpose of the payment is well established and genuine. 9. On a reading of section 40A(3) of the Act, it becomes clear that any expenditure exceeding the amount prescribed therein would not be allowed as deduction, if they are made other than by way of account payee cheque or bank draft. However, the first proviso to section 40A(3) makes it clear that no disallowance under subsection (3) to section 40A should be made in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, consideration of business expedience and other relevant factors. Rule 6DD prescribes the exceptions under which section 40A(3) would not apply. Consistent with the substantive provisions of section 40A(3) of the Act, sub- rule (j) of Rule 6DD was introduced. Sub-rule (j) of Rule 6DD, which existed in its original form from 01.04.1970 to 27.07.1995, prior to its amendment, reads as under:

“Rule 6DD: (j) in any other case where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft. a. Due to exceptional or unavoidable circumstances; or b. because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof.”

:-18-: ITA. No: 2032/Chny/2019

:-19-: ITA. No: 2032/Chny/2019 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. - Mudiam Oil Co. v. ITO [1973] 92 ITR 519 (API. 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 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.”

:-20-: ITA. No: 2032/Chny/2019 deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, clause (j) which is relevant, read as under:— (j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; 18. It could be appreciated that Section 40A and in particular subclause (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 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 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

:-21-: ITA. No: 2032/Chny/2019 to prevent the use of unaccounted money or reduce the chances to use black money for business transactions." 19. It was because of these considerations that this Court in case of Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the payment and the identify 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.

:-22-: ITA. No: 2032/Chny/2019 (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. 22. 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. 23. We notice that the Division Bench of the Rajasthan High Court in case of Suit. Harshila Chordia v. ITO f2008] 298 ITR 349 /Rail had observed that the exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally. 24. 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 Infocom. Learned counsel for the appellant also clarified that this appeal is confined to only the payments made to Tata Teleservices Limited and no others. 13. In case of A. Daga Royal Arts Vs. ITO (supra), the Coordinate Bench while dealing with identical issue has observed that even after amendment of Rule 6DD(j), the legal exposition propounded by the Hon’ble Supreme Court regarding consideration of expediency and other relevant factors cannot be considered to be diluted as the rules framed by way of delegated legislation cannot override the substantive legislation in form of section 40A(3) which has not changed its character. Following observations of the Coordinate Bench would be of much relevance: “27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a

:-23-: ITA. No: 2032/Chny/2019 mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance. 28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to ITA No. 1065/JP/2016 M/s A Daga Royal Arts, Jaipur Vs ITO, Jaipur curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions.” 14. The ratio laid down in the aforesaid judicial precedents squarely apply to the facts of the assessee’s case due to following reasons: (a) The genuineness of the payment made was not doubted. (b) The recipient of the amount made a pre-condition for registration of sale deed only on payment of cash. (c) Due to business expediency the assessee had to make the payment in cash. 15. The other decisions cited by learned counsel also supports this view. Even otherwise also, various judicial precedents have been cited before us laying down the ratio that no

:-24-: ITA. No: 2032/Chny/2019 disallowances under section 40A(3) of the Act can be made where seller of agricultural land insisted on payment in cash. Thus, applying the legal principles enunciated in the judicial precedents cited before us, we hold that the disallowance made under section 40A(3) of the Act is unsustainable. Accordingly, we delete it.”

:-25-: ITA. No: 2032/Chny/2019 Therefore, we are of the considered view that case laws relied upon by the ld. DR is not applicable to the facts and circumstances of the present case and thus, rejected.