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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SHRI R.K. PANDA & SHRI LALIET KUMAR
निर्धारितीती द्वारा /Assessee by: Shri Somnath Ghosh, Advocate. /Revenue by: Shri Kumar Adithya, Sr.A.R राजस्व द्वारा ई की तारीखरीख/Date of hearing: 13.07.2023 सुनवाई की तारीखरीख/Pronouncement on: 08.09.2023 घोषणा O R D E R PER LALIET KUMAR, J.M.
This appeal is filed by the assessee, feeling aggrieved by the order of Commissioner of Income Tax (Appeals) – 1, Hyderabad dt.29.08.2016 invoking proceedings under section 143(3) of the Income Tax Act, 1961 for the assessment year 2013- 14.
2. The grounds raised
by the assessee read as under : “1. FOR THAT the Ld. Commissioner of Income Tax (Appeals)-1, Hyderabad failed to appreciate that none of the conditions precedent existed for the Ld. Assistant Commissioner of Income Tax, Circle 4(1), Hyderabad for his specious action of assuming jurisdiction u/s. 40A(3) of the Income Tax Act, 1961 in the instant case and the alleged addition upheld in the sum of Rs. 3,14,00,000/- on that basis is therefore ab initio void, ultra vires and ex-facie null in law.
2. FOR THAT on a true and proper interpretation of the scope of the provisions of s. 40A(3) of the Income Tax Act, 1961, the Ld. Commissioner of Income Tax (Appeals)-1, Hyderabad was absolutely in error in upholding the specious addition of Rs. 3,14,00,000/- resorted to by the Ld. Assistant Commissioner of Income Tax, Circle 4(1), Hyderabad without considering the facts and circumstances in the light of Rule 6DD(k) of the Income Tax Rules, 1962 and such spurious conclusion derived from extraneous considerations not germane to the issue in dispute is totally arbitrary, unwarranted and perverse.
3. FOR THAT the Ld. Commissioner of Income Tax (Appeals)-1, Hyderabad acted unlawfully in upholding the tenuous addition amounting to Rs. 3,14,00,000/ -, being the expenses incurred on account of part consideration of purchase, made by the Ld. Assistant Commissioner of Income Tax, Circle 4(1), Hyderabad by an erroneous application of the provisions of s. 40A(3) of the Income Tax Act, 1961 read with Rule 6DD(k) of the Income Tax Rules, 1962 and the adverse finding reached on such unconnected parameters not amenable to reason is wholly illegal, illegitimate and infirm in law.
4. FOR THAT the specious action of the Ld. Commissioner of Income Tax (Appeals)-1, Hyderabad in upholding the addition u/s. 40A(3) of the Income Tax Act, 1961 in the sum of Rs. 3,14,00,000/- made by the Ld. Assistant Commissioner of Income Tax, Circle 4(1), Hyderabad by misreading the evidence adduced establishing the genuinity of such expense adduced on record is completely unfounded, unjustified and untenable in law.”
The brief facts of the case are that assessee is an individual and is in the business of purchase and sale of movie satellite rights, filed its return of income for A.Y. 2013-14 on 28.09.2013 declaring total income of Rs.26,32,410/-. The case was selected for scrutiny under CASS, accordingly, a notice u/s 143(2) of the Act was issued and duly served on the assessee. In 3 response to the notice, assessee furnished information from time to time. After verification of the information provided by the assessee, Assessing Officer found from the ledger account of purchase that the assessee had made some payments i.e., Rs.2 crores to Sudha Cinema, Rs.1.20 crores to Lucky Media etc., totaling to Rs.5,90,00,000/- by way of cash, violating the provisions of section 40A(3) of the Act, and hence, the Assessing Officer disallowed the entire amount invoking provisions of section 40A(3) of the Act. Assessing Officer also found that though assessee claimed deduction u/s 80C to an extent of Rs.1,00,000/- however, failed to produce proof for the claim made. With these observations, Assessing Officer had completed the assessment u/s 143(3) of the Act on 02.03.2016 determining the total income at Rs.6,17,32,410/- interalia making addition of Rs.1,00,000/- u/s 80C and Rs.5,90,00,000/- under section 40A(3) of the Act.
Feeling aggrieved with the order passed by the assessing officer, assessee filed appeal before the Ld. CIT(A) who granted partial relief to the assessee.
Aggrieved with the order of ld.CIT(A), assessee is now in appeal before us.
Before us, ld. AR filed written submissions and the gist of the written submissions is that during the impugned assessment year 2013-14, assessee had incurred Rs.3,14,00,000/- in cash and an amount of Rs.65 lakhs through cheque towards purchase of movie satellite rights, which the assessee had paid to the producers of movies and that Rs.2,11,00,000/- was paid directly by the various debtors of the assessee to the movie producers by cheque and given all the particulars in a tabular form. Thereafter, the ld. AR submitted
4 that as the movie industry is volatile, assessee has to purchase / sell satellite rights only in cash and that the same is evident from the agreements entered into by the assessee with various vendors and further contended that the sellers insist the assessee to make payment in cash and then he drew our attention to the agreements entered into by the assessee with various parties for purchasing and selling of movie satellite rights.
6.1. Ld. AR further submitted that the Assessing Officer has not considered the alleged agreements and totally ignored the commercial expediency of the assessee and thereby made an addition of Rs.5,90,00,000/- which was showed towards movie satellite rights under the head “Purchases” in the profit and loss account ignoring the fact that payment of Rs.2,11,00,000/- by the vendors of the assessee directly to the labs and Rs.65,00,000/- by the assessee through banking channels and not by way of cash. In fact, assessee had paid Rs.3,14,00,000/- only by way of cash and hence, the Assessing Officer had made error by disallowing the entire amount without appreciating the agreement copies, bank statements, TDS Certificates etc. Ld. AR further submitted that section 40A(3) of the Act is applicable only to those expenditures which were incurred by the assessee with an intention to evade the tax and not applicable to genuine business payments made in the regular course of business. He relied on the decisions of Hon'ble High Court of Gujarat in the case of Hasanand Pinjomal Vs. CIT reported in (1978) 112 ITR 134, Walford Transport (Eastern India) Limited Vs. CIT (1999) 240 ITR 902 (Gau), Giridharilal Goenka Vs. CIT (1989) 179 ITR 122 (Cal), S. Venkata Subbarao Vs. CIT (1988) 173 ITR 340 (AP), Attar Singh Gurmukh Singh Vs. ITO reported in 191 ITR 667 etc., 6.3 Ld. AR further submitted that provision of section 40A(3) as well as Rule 6DD are not intended to restrict business activities and that the terms of section 40A(3) of the Act are not absolute. Ld. AR further submitted that assessee did not fall within the exclusion clause in Rule 6DD, section 40A(3) of the Act will not apply as there was no doubt about the genuineness of the payment nor the identity of the payee and that he was compelled to pay cash owing to the insistence of its principal and that the exceptions in rule 6DD are not exhaustive and the rules must be interpreted liberally.
6.4 On the other hand, ld.DR relied upon the order passed by lower authorities. He has drawn our attention to Page 5 of the assessment order more particularly, clause (g) and (h) of the assessment order and he has also drawn our attention to Page 15 of the ld.CIT(A)’s order.
We have heard the rival contentions and perused the material available on record. In the assessment order, the Assessing Officer in Para (g) at Page 5 mentioned as under :
“(g) It is also a fact that the assessee, though having knowledge of the provisions of section 40A(3), has resorted to the cash purchases. The purchase ledger, as of Rs.5,90,00,000/- which also corroborate with the agreements entered into with the sellers as furnished by the assessee.
From the findings of learned Assessing Officer, it is clear that the assessee has to deal with the agreements with the purchases of Film Rights which were not disputed by the Assessing Officer and rather the additions were sought to be made on the basis of said agreements.
7.1 Quite contrary to this, the ld.CIT(A) at Page 6 of order had captured that the amount of Rs.3.14 crore was paid in cash by the assessee to the sellers for movie rights after receiving it from the following four parties :
Sl.No. Seller Cash paid 1 Sudha Cinema 95,00,000/- 2 Lucky Media 80,00,000/- 3 Vanitha’s Dream Line 79,00,000/- 4 Hanu Cine Creation 60,00,000/- Total 3,14,00,000 The assessee had also placed on record the signed copy of the agreement entered by the assessee with M/s. Sudha Cinema and others to the Assessing Officer / ld.CIT(A). The agreement with the purchaser and the cash payment made by the assessee after receiving it from the purchaser to the seller are not disputed by the revenue authorities. Thus, the genuineness of the transactions has not been doubted by the revenue authorities. In fact, the amount of Rs.3,14,00,000/- was paid by the assessee after receiving it from M/s. Sudha Cinema and others in his individual capacity. In our view, once the genuineness of the cash payment for purchasing the movie rights have been considered by the revenue authority with respect to the other transaction namely, for the other part of the amount which was paid through the banking channel for an amount of Rs.2,11,00,000/-, then the transaction cannot be doubted by the revenue authorities. In our view, once the transaction has not been doubted by the revenue authority, then for the purposes of violation of provision of section 40A(3), we may fruitfully rely upon on the decisions in the following cases :
In Basu Distributor (P) Ltd Vs. ACIT reported in (2012) 19 taxmann.com 111 (Delhi), the Hon’ble High Court has observed as under : “8. In the present case, the appellant assessee had filed before the Tribunal a copy of their bank account statements as well as ledger account of the parties to whom the payment was required to be made. It is apparent that the appellant-assessee was not doing well in its business and was facing liquidity and financial crunch. An examination of the bank account statement shows that whenever cash deposit was made in the bank account, it was immediately thereafter utilized to issue cheques towards the expenditure. The explanation of the appellant- assessee was that payments were made in cash, as preparation of a bank instrument or issue of cheque would have resulted in a missed opportunity or failure of a favourable or good business deal with the third parties. The provisions of Section 40A (3) and Rule 6 DD (j) have been incorporated in the Act in order to check the incurring of bogus and fictitious expenses to non existing parties. In the present case, the appellant-assessee had furnished explanations on the basis of the bank statements as well as the ledger accounts of the payees to show that the appellant-assessee did not have sufficient cash balance. This position is clear and cannot be doubted. The appellant-assessee had submitted that if they had failed to make cash payments, they would have breached terms of the agreements entered into with the third parties or would have missed out on the business opportunity. In cases of earlier bounced cheques and when a party is facing liquidity problem, it can get difficult as third parties are reluctant to accept cheques and insist on cash payments. Arranging funds is also a problem and not easy. It is submitted that the Assessing Officer did not doubt the funds and no addition on this ground and reason was made. The stand of the appellant was that the cash was made available since M/s. Ritz Theatres (P) Ltd. was holding the cash collection out of the hire charges. On the said aspect an order of remit was passed by the tribunal and no addition or adverse observation was made by the Assessing Officer. These were relevant and material aspects which were required to be considered and examined by the tribunal but have been overlooked. Keeping in view the quantum of the total amount, we were initially inclined to remit the matter. However, looking at the averments made, the assessment years in question and explanation given, we refrain from issuing the said direction and accept the contention of the appellant.
Similarly in Honey Enterprises Vs. CIT, Delhi reported in (2016) 65 taxmann.com 35 (Delhi), the Hon’ble High Court has observed as under :
31. Rule 6DD of the Rules expressly provides that no disallowance under Sub-section 3 of Section 40A shall be made, inter alia, in circumstances specified thereunder. Clause (j) of Rule 6DD of the Rules (as applicable during the relevant assessment years) expressly provided that no disallowance under Section 40A(3) of the Act would be made in cases where the Assessee furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee. And, the Assessee further satisfies the Income-tax Officer that payment could not be made by crossed cheque drawn on a bank or by a crossed bank draft (a) due to exceptional or unavoidable circumstances; or (b) because payments in the manner aforesaid was not practicable, or would have cause genuine difficulty to the payee, having regard to the nature of transaction and the necessity for expeditious settlement thereof."
Apparently, several representations were received by the CBDT regarding difficulties that were being faced by tax payers due to the lack of uniformity in the interpretation of the aforesaid Rule. In the circumstances, the CBDT issued a circular – being Circular No. 220, dated 31st May, 1977, inter alia, providing as under:— "4. All the circumstances in which the conditions laid down in rule would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are ; (i) The purchaser is new to the seller ; or (ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iii) The transactions and payments are made on a bank holiday ; or (iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller ; or (v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or (vi) Specific discount is given by the seller for payment to be made by way of cash."
CBDT further clarified that "the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule"
The ITAT had considered the above mentioned CBDT Circular and had rightly concluded that the circumstances as spelt out in CBDT Circular No. 220 (supra) were not exhaustive but were merely illustrative of situations where business exigencies required that the payments be made in cash. The ITAT also referred to the decision of the Gujarat High Court in Hasanand Pinjomal v. CIT [1978] 112 ITR 134, wherein the Court had observed that the practicability would have to be judged from the angle of a businessmen and not the Revenue.
In the present circumstances neither the genuineness of the payment nor the identity of the payee is disputed. The only controversy that needs to be addressed is whether the ITAT's decision that such payments had been made by the Assessee on account of business exigencies is perverse. 36. In the present case, the AO does not dispute that the Assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights. The Assessee had also contended that such payments were made as the producers required the payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business. 37. In our view, the question whether the Assessee's business exigencies required payments to be made in cash, is a question of fact. The ITAT has returned a finding in favour of the Assessee and it is not possible to conclude that such finding is without any basis or any material on record. The ITAT's decision, thus, cannot be held to be perverse. Accordingly, the question of law is answered in favour of the Assessee and against the Revenue.
3. Similarly, in CIT, Kolkata Vs. CPL Tannery reported in (2008) 175 Taxman 316 (Calcutta), the Hon’ble Kolkata High Court has observed as under : 7.1 On the same reasoning in this year also the status of the same suppliers cannot suddenly change and they, in our considered opinion, remain producers of hides and skin in this year also. The reasoning of the CIT(A) that products of hides and skin cannot be regarded as products an animal husbandry because the produces are not directly connected to live animals at some point of time, is, in our opinion, far- fetched. The plain reading of the rule suggests that the words (including hides and skin) are specifically inserted in the rule to describe products of animal husbandry. When the plain reading of the rule is unambiguous, the principles of interpretation suggests that there is no necessity to derive other meanings of the rule by looking into dictionary meaning or otherwise. This contention of the CIT(A) is not acceptable. The contention of the assessee that he purchased goods from suppliers who are producers of hides and skin, has not been refuted either by the Assessing Officer or by the CIT(A). The second contention of the assessee that owing to business expediency, obligation and exigency, the assessee had to make cash payment for purchase of goods so essential for carrying on of his business, was also not disputed by the Assessing Officer. The genuinity of transactions, rate of gross profit or the fact that the bona fide of the assessee that payments are made to producers of hides and skin are also neither doubted nor disputed by the Assessing Officer. On the basis of these facts it is not justified on the part of the Assessing Officer to disallow 20 per cent of the payments under section 40A(3) in the process of assessment. We, therefore, delete the addition of Rs. 17,90,571 and ground No. 1 is decided in favour of the assessee."
Respectfully, following the decisions of the Hon’ble Delhi and Calcutta High Courts cited (supra), we hereby allow the appeal of assessee and direct the Assessing Officer to delete the addition. Thus, the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.