B SARAVANAN,TRICHY vs. ITO NON CORPORATE WARD 12(1), CHENNAI

आदेश / O R D E R

PER MANJUNATHA.G, ACCOUNTANT MEMBER:

1. The CIT(A) is not justified in holding that payments made through uncrossed bearer cheques are to be disallowed under section 40A(3), in thecircumstances of the case.

2. As payments made through bearer cheques find place in bank's account statements and serve the purpose of Section 40A(3), proving genuineness of payments and identity of payees, who sign the reverse side of the cheques, a disallowance ought not to have been made,

3. In 63 TTJ 657 and 2009 TIOL 442, the Madras Bench of Income Tax Appellate Tribunal and Madras High Court respectively have held that the Section is inapplicable, when genuine payment is made to identifiable parties out of disclosed sources,

i. 167 ITR 139 Raj ii. 179 ITR 122 Cal iii. 191 ITR 667 SC iv. 200 ITR 490 Del v. 216 ITR 366 Gau vi. 225 ITR 57 Gau vii. 240 ITR 902 Gau viii. 265 ITR 121 Guj ix. 298 ITR 349 Raj x. 366 ITR 122 Gau

For these and other reasons, which may be stated at the time of hearing of the appeal, it is prayed that the addition made under section 40A(3) may please be deleted.

The assessment has been completed u/s.143(3) of the Income Tax Act, 1961 (in short “the Act"), on 29.12.2011, rising a demand of Rs.69,15,065/-. The assessee preferred an appeal before the Ld.CIT(A) and the Ld.CIT(A) vide their order dated 28.09.2012 allowed relief to the assessee. The Revenue challenged the order of the CIT(A) before the Tribunal and the ITAT, Chennai Benches in its order dated 08.08.2014 in remitted the issue of disallowance u/s.40A(3) of the Act & u/s.40(a)(ia) of the Act, to the file of the AO for fresh examination in accordance with law. In pursuant to directions of the ITAT, the AO called upon the assessee to file necessary details with regard to cash payments in excess of prescribed limit as per provisions of Sec.40A(3) of the Act, and also disallowance of payments made to M/s.Srinivasa Roadlines & M/s.Andhra Trans Freight. In response, the assessee submitted that although, he had paid to parties through bearer cheques, but such payments are in accordance with business exigency, because, suppliers were insisting for payment immediately as the assessee has closed down its business. The AO on the basis of information submitted by the assessee and also details collected from the Branch Manager, Axis Bank, George Town, Chennai, u/s.133(6) of the Act, opined that the assessee has made payments in excess of prescribed limit other than by way of ‘crossed cheque’ or ‘account payee’ and electronic mode of payment, and therefore, disallowed a sum of Rs.97,45,000/- u/s.40A(3) of the Act. The AO had also disallowed payment made to M/s.Andhra Trans Freight, u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.194C of the Act.

4. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee submitted that he had purchased oil from Mumbai parties on credit and the payment to such trade creditors were outstanding for considerable time. When the assessee had stopped making fresh purchase, the trade creditors were pressing for early settlement of their dues, in such circumstances, the assessee was compelled to make payment through bearer cheques and such payments are comes under proviso to sec.40A(3) of the Act, because, there was business exigency in making payment. The assessee further contended that he had made payment through Agent and his case comes under Clause (k) of Rule 6DD of the Income Tax Rules, 1962 (in short “the Rules"). The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of relevant provisions of Sec.40A(3) of the Act & Clause (k) of Rule 6DD of the IT Rules, opined that the assessee could not produce any supporting evidence which can establish that the assessee’s case is covered by the Rule 6DD (k) of the IT Rules, 1962. The Ld.CIT(A) further observed that the assessee could not furnish any evidences to prove that there was a business exigency in making payments through bearer cheques. Therefore, opined that there is no error in the reasons given by the AO to disallow cash payments u/s.40A(3) of the Act, and thus, sustained additions made by the AO. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.

5. The Ld.AR for the assessee referring to proviso to Sec.40A(3) of the Act, submitted that no disallowance shall be made and no payment shall be deemed to be profits & gains of business or profession under sub-section (3), in such cases and under such circumstances as may be prescribed having regard to nature and extent of banking facilities available, considerations of business exigency and other relevant factors. Since, there is a business exigency in making payments to creditors through bearer cheques rigors of provisions of Sec.40A(3) of the Act, cannot be invoked towards payment to creditors. He further submitted that the case of the assessee is also comes under Clause (k) of Rule 6DD of the IT Rules, because, the assessee has availed services of Agents, through whom, he had purchased goods. Therefore, when the payment is made by Agent who is required to make payment in cash for goods or services on behalf of such person, then no disallowance as specified u/s.40A(3) of the Act, shall be made. In this regard, he relied upon the decision of the Hon’ble Madras High Court in the case of N.Mohammed Ali v. ITO reported in [2016] 237 Taxman 211 (Madras).

In fact, the assessee admitted the fact that he had made payments to creditors through bearer cheques. Further, information supplied by the bank in response to notice u/s.133(6) of the Act, also proves payment through bearer cheques. Therefore, we are of the considered view that the assessee has made payments in excess of prescribed limit as per provisions of Sec.40A(3) of the Act, otherwise than by an account payee cheque drawn in a bank or account payee bank draft or use of Electronic Clearance System through bank account. To this extent, there is no dispute, because, the payments made by the assessee to creditors is in excess of prescribed limit as per provisions of Sec.40A(3) of the Act. Having said so, let us come back, whether the case of the assessee comes under any of exceptions as provided u/r.6DD of the IT Rules, and further, proviso to sec.40A(3) of the Act, has no application to the facts of the present case. As per proviso to sec.40A(3) of the Act, no disallowance shall be made and no payment shall be deemed to be profits & gains of business or profession under sub-section (3), in such cases and under such circumstances as may be prescribed having regard to nature and extent of banking facilities available, considerations of business exigency and other relevant factors. The cases and circumstances under which payments can be made otherwise than by an account payee cheque or bank draft or Electronic Clearance System, has been prescribed u/r.6DD of the IT Rules, 1962. If you go through Clauses of u/r.6DD of the IT Rules, the case of the assessee does not fall under any of exceptions as provided u/r.6DD of the IT Rules. Although, the assessee claims to have fall within the ambit of Clause (k) of Rule 6DD of the IT Rules, 1962, but on perusal of details filed by the assessee, we find that the claim of the assessee that he had paid through Agent is unsubstantiated. Therefore, we are of the considered view that case of the assessee does not come under Clause (k) of Rule 6DD of the IT Rules, 1962.

Further, assuming for a moment, the cases and circumstances of consideration of business exigency and other relevant factors comes under exception, but in this case, the assessee could not make out a case of business exigency and other relevant factors which compelled the assessee to make payment through bearer cheques to the parties, because as claimed by the assessee, the business of the assessee was closed down long back and the assessee was not making any purchases from the parties.

Further, the assessee has made payment through proper banking channel, but such payments have been made otherwise than account payee cheque or bank draft and the assessee could not explain ‘as to why’ payment cannot be made through ‘crossed cheque’ and bank draft or by electronic mode of transfer of funds. Since, the assessee could not make out a case of business exigency, we are of the considered view that no exceptions can be made out from the proviso to Sec.40A(3) of the Act, and thus, we reject the arguments of the assessee. In so far as, the case law relied upon by the assessee in the case of N.Mohammed Ali v. ITO (supra), we find that in the said case, the Hon’ble Madras High Court has taken note of proviso to Sec.40A(3) of the Act, and three ingredients provided thereunder including regarding business exigency, but made it very clear that it is for the assessee to prove the existence of consideration of business exigency that compelled to make payment in cash. Since, the assessee could not make out a case of business exigency in making payment otherwise by way of mode of payment specified u/s.40A(3) of the Act, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to sustain addition made towards payment u/s.40A(3) of the Act, and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the arguments of the assessee.

Order pronounced on the 15th day of March, 2023, in Chennai.