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Income Tax Appellate Tribunal, -SURAT-BENCH-SURAT
Before: SHRI SANDEEP GOSAIN & SHRI O.P.MEENA, ACCOUTANT MEMBER
Shri Ramesh Malapani, CA िनधा�रती क� ओर से /Assessee by Mrs. Anupama Singla, Sr.D.R. राज�व क� ओर से /Revenue by 03.02.2020 सुनवाई क� तारीख/ Date of hearing: 03.02.2020 उ�ोषणा क� तारीख/Pronouncement on आदेश /O R D E R
PER O. P. MEENA, AM:
This appeal by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)-4, Surat (in short “the CIT (A)”) dated 07.10.2019 pertaining to Assessment Year 2009-10, which in turn has arisen from the assessment order passed under section 143(3) dated 21.12.2011 of Income Tax Act, 1961 (in short ‘the Act’) by the Joint Commissioner of Income-Tax, Circle -4 (OSD) Surat (in short “the AO”).
Grounds of appeal raised by the assessee are as under: 1)That on the facts and in the circumstances of the case as well as in law, the learned Ld. CIT(A) has erred in sustaining addition made by the AO of Rs. 81,47,100 by way of S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 2 of 16 disallowance under section 40A(3) of the Act whereas disallowance so made is clearly unjustified and contrary to settled law. 2) That on the facts and in the circumstances of the case as well as in law, the ld. CIT (A) has erred in upholding that the judicial pronouncements relied upon by the Appellant including the judgement of Hon’ble Gujarat High Court in the case of Anupam Tele Services v. ITO [2014] 366 ITR 122 (Gujarat) are not directly applicable to the facts of appellant`s case, whereas the law ( Ratio) laid down in the same is clearly applicable in appellant`s case and the appeal of the appellant`s is squarely covered by the above judgement of Hon’ble Gujarat High Court.
3. Succinct facts are that the assessee has claimed an amount of Rs.2, 63, 51, 228 under the head transportation expenses. In order to ascertain genuineness of the expenditure, to the AO issued notice under section 133(6) of the Act and obtained the Ledger copy of account of certain parties, in which five parties reflected that they had received cash payment in excess of Rs.20 000, in a day aggregating to Rs. 81,47,100. Therefore, the assessee was asked to show cause as to why the same should not be disallowed under section 40A(3) of the Act. It was explained that the assessee is engaged in the business of trading of coke therefore, the assessee is required to arrange transportation facilities for the customers for delivery of goods. For this arrangement the assessee recovers separate transporters charges from the customers. Hence, he has to pay the transportation charges for arranging the transportation for S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 3 of 16 the delivery of goods. The entire business is based on the arrangement of transportation. Therefore, the assessee had to make the payments to lorry drivers to meet their end of various expenses during their way to the customers site. All the payments to lorry drivers have been paid on behalf of the transporters and the same have been confirmed by them by way of confirmation sent to the of the AO, in response to notice under section 133(6) of the Act. Thus, payment were genuine and identity of the payee is established. The payments are made to different lorry drivers as per their requirements, payments made on a single day is also paid to different lorry drivers the assessee has also enclosed showing payments made to different lorry drivers and the vehicle numbers are also mentioned that the payments made. Therefore, it was argued that no disallowance under section 40A(3) is called for. However, the AO referred to the provisions of section 40A(3) and Rule 6DD of the Act and observed that the payments have been paid by circumventing the provisions of the Act by splitting a particular high-value payment to a person into several cash payments, each below Rs.20,000. Therefore, irrespective of any number of transactions where the amount does exceed the prescribed amount in each transaction the S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 4 of 16 rigors of section 40A (3) was applicable. Accordingly, the same were disallowed under section 40A(3) of the Act.
4. Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). Wherein it was submitted that the payments to lorry drivers is mere arrangement and the assessee is not engaged in transportation business. The nature of business of the assessee is such the assessee was forced to make payments various lorry drivers. The payments have never been made to a single person i.e. the recipient of these payments were different lorry drivers to whom payments had been made against separate LR receipts (Lorry Receipts). These payments are further adjusted in the account of the transporters who have arranged these lorries for assessee to reconcile the payments and to settle the accounts. The assessee has relied in the case of Attar Singh Gurmukh Singh v. ITO [1991] 59 Taxman 11 (SC), CIT v. Suresh Kumar Agarwal [2001] 117 Taxman 2 (All), Anupam Tele Services v. ITO [2014] 366 ITR 122 (Gujarat) and others as per discussion in the appellate order. However, CIT (A) observed that transportation charges are not just journey expenses of the driver. In journey, expenses could be Rs.1000 to Rs.1500, whereas payments shown in ledger account are in the range of 11,000 to Rs. 19,500. Hence, the claim the assessee has refuted. It was further observed S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 5 of 16 that lorries are regularly hired from only 5 transport provider. Therefore, exception provided under rule 6DD(j) is not applicable and also judicial decision do not apply. The decision of Hon’ble Gujarat High Court is not directly applicable to the facts of the case, as in the case of Anupam Tele Services v. ITO [2014] 366 ITR 122 (Gujarat) in that case, the assessee was agent of Tata Tele Services, a monopoly and who had issued a Circular requiring the assessee to deposit cash. Hence, decision of Gujarat High Court is not applicable. In view of this matter, the disallowance made under section 40A(3) of the Act were upheld.
5. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that payments to each lorry driver was below Rs. 20,000. However, the ld. CIT (A) has erred in sustaining the disallowance under section 40A(3) of the Act by aggregating the different payments below Rs. 20,000 to different persons i.e. truck operators (lorry operators) in a day by assuming such aggregate of payments in a day to the booking transport company through whom those persons ( truck operators) were hired. This view is contrary to law laid down in the case of ITO v. Dhanshree Ispat [I.T.A.No. 794/PUN/2013]. Further, the Hon’ble Gujarat High Court, in the case of Anupam Tele Services v. ITO [2014] S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 6 of 16 366 ITR 122 (Gujarat) has laid down that genuine payments in cash, confirmed by the receivers made for business necessity are allowable, even though exceeding the limits of section 40A(3) of the Act and same cannot be disallowed under section 40A(3) of the Act, in view In view of erstwhile Rule 6DD(j) read with judgement of Hon`ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO [1991] 59 Taxman 11 (SC). Therefore, the appeal of the assessee is squarely covered by the above case law of Hon’ble Gujarat High Court and Hon`ble Supreme Court. As the payments were made to truck operators under at the instruction of booking Transport Companies, the same were based on business necessity. Therefore, Ld. CIT (A) was not justified in rejecting the plea of the assessee. Further, the payments are also covered by CBDT Circular No. 220 dated 31.05.1977. The learned counsel for the assessee further placed reliance in the case of DCIT v. Mayur Sales 116 Taxman 95 (JP) in which it was held that the cash payments to truck drivers for freight in excess of prescribed limit under section 40A(3) fall under exceptional circumstances covered by Rule 6DD(j) of Income-Tax Rules, 1962. Thus, view taken by the Ld. CIT (A) that these payments cannot be said to be falling under business exigency is contrary to law S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 7 of 16 of decision of Co-ordinate Bench of tribunal and Hon’ble Gujarat High Court.
Au contraire, the ld. Sr. D.R. submitted that the payments in violation of provisions of section 40A(3) has been made to 5 transport operators hence, there was no business exigency and payments to them could have been made by account payee cheques or cross cheques. Further, the genuineness of payments is nothing to do with provisions of section 40A(3) as the same is applicable, if the payments in cash is made in excess of the prescribed limit. The CIT (A) has duly distinguished the case laws relied by the assessee in his appellate order.
7. In rejoinder to above, the learned counsel for the assessee submitted that the CIT (A) has wrongly interpreted the decision in the case of Anupam Tele Services v. ITO [2014] 366 ITR 122 (Gujarat). In Tata Tele Services the appellant was not an agent but was a distributor of Tata tele services. Therefore, where the genuineness of payment is not doubted, nor the identity of the payee and payments have been made due to business exigency, then disallowance under section 40A(3) are not justified. The learned counsel for the assessee further supported his view by placing reliance on the judgement of Hon`ble Punjab & Haryana High Court S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 8 of 16 in the case of Gurdas Garg v. CIT Bathinda [2015] 63 taxmann.com 289 (Punjab & Haryana) wherein it was held that where genuineness of transactions made in cash in excess of Rs. 20,000 was not disbelieved by authorities, same cannot be disallowed under section 40A(3) of the Act.
We have heard the rival submissions and perused the relevant material on record. We find that that the payments to lorry drivers is mere arrangement and the assessee is not engaged in transportation business. The nature of business of the assessee is such the assessee is forced to make to payments various lorry drivers. The payments have never been made to a single person i.e. the recipient of these payments were different lorry drivers to whom payments had been made against separate LR receipts (Lorry Receipts). Therefore, the individual payment to each lorry driver was not exceeding the prescribed limit. However, the lower authorities were of the view that payments are adjusted in the account of the transporters who have arranged these Lorries for assessee to reconcile the payments and to settle the accounts by splitting the transaction, hence, aggregate payments were exceeded the prescribed limit. We find that the AO obtained information under section 133(6) from these 5 transporters on whose behalf payments have been made. Thus, the S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 9 of 16 payment so made were found to be genuine which is also supported by the ledger account of person concerned. Thus, the payments so made is genuine and identity of the payee is established. As the payments are made to different lorry drivers as per their requirements, payments made on a single day is also paid to different lorry drivers the assessee has also enclosed showing payments were made to different lorry drivers and the vehicle numbers are also mentioned that the payments made. Therefore, it was argued that no disallowance under section 40A(3) is called for. The learned counsel for the assessee relied in the case of Attar Singh Gurmukh Singh v. ITO [1991] 59 Taxman 11 (SC) wherein the Hon`ble Supreme Court observed as under: “6. As to the validity of section 40A(3), it was urged that if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorising levy tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary.
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 S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 10 of 16 to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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 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 (AP). 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.
8. As to the second question, it may be stated that the word 'expenditure' has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word 'expenditure' for the purpose of the section. The expenditure for purchasing the stock-in-trade is one of such outgoings. The value of the stock- in-trade has to be taken into account while determining the gross profits under section 28 of the Act on principles of commercial accounting. The payments made for purchases would also be covered by the word 'expenditure' and such payments can be disallowed if they are made in cash in the sums exceeding the amount specified under section 40A(3). We have earlier observed that rule 6DD has to be read along with S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 11 of 16
section 40A(3). The rule also contemplates payments made for stock-in-trade and raw materials. This rule is in accordance with the terms of section 40A(3). The rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials. This is also the view taken by several High Courts. - Sajowanlal Jaiswal v. CIT [1976] 103 ITR 706 (Ori.), U.P. Hardware Store v. CIT [1976] 104 ITR 664 (All.), Raton Udyog v. 1TO [1977] 109 ITR 1 (AIl), PH. Textiles v. CIT [1980] 121 ITR 237 (Ker.), CIT v. Kishan Chand Maheshwari Dass [1980] 121 ITR 232 (Punj. & Har.), Kanti Lal Purshottam & Co. v. CIT [1985] 155 ITR 519 (Raj.), CIT v. New Light Tin Mfg. Co. [1980] 121 ITR 229 (Punj. & Har.), Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj.), Venkata Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253 (AP), and Akash Films v. CIT [1991] 190 ITR 32 (Kar.). The decisions of the High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab & Haryana, Rajasthan and Patna are to the effect that the payments made for purchasing stock-in- trade or raw materials should also be regarded as expenditure for the purpose of section 40A(3). The only discordant note struck on this aspect is by the Gauhati High Court in CIT v. Hardware Exchange [1991] 190 ITR 61. The Gauhati High Court has observed that section 40A(3) applies only to payments made on account of 'expenditure incurred' and the payment made for purchase of stock-in-trade cannot be termed as 'expenditure incurred' since money does not go irretrievably in such cases. We are unable to agree with the view taken by the Gauhati High Court.
Thus, the Hon`ble Supreme Court has laid down that the terms of section 40A(3 ) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 12 of 16 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. Considering the case of the assessee, we find that the payment were made from discloses sources and same were found to be genuine as confirmed by the recipients in response to notice under section 133(6) of the Act. The nature of business of the assessee is such which necessitates the assessee to make payment for delivery goods to the customers in cash for journey to the site of customers. Therefore, where genuineness is not doubted and business exigency is proved no disallowance under section 40A(3) of the Act cannot be made in the light of ratio laid down by the Hon`ble Supreme Court (supra).
Similarly, the Punjab & Haryana High Court in the case of Gurdas Garg v. CIT Bathinda [2015] 63 taxmann.com 289 (Punjab & Haryana) while considering similar issue held that wherein it was held that where genuineness of transactions made in cash in excess of Rs. 20,000 was not disbelieved by authorities, same cannot be disallowed under section 40A(3) of the Act.
S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 13 of 16
The Hon`ble Rajasthan High Court in the case of Smt. Harshila Chordia v. ITO 298 ITR 349 (Raj.) deleted the disallowance made under section 40A(3) by observing that no disallowance under section 40A(3) could be made by hyper technical view where the transaction are genuine.
The Hon`ble jurisdictional High Court of Gujarat in the case of Anupam Tele Services v. ITO [2014] 366 ITR 122 (Gujarat) held as under: “18. It could be appreciated that Section 40A and in particular sub-clause (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 S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 14 of 16 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 to prevent the use of unaccounted money or reduce the chances to use black money for business transactions."
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.
In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the Appellate Commissioner. The Tribunal also did not disturb such facts but relied solely on Rule 6DD (j) of the Rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of Rule 6DD, consequences envisaged in Section 40A(3) of the Act must follow.
In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons :— (a) The paramount consideration of Section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of the Act does not eliminate considerations of business expediencies. (b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow - (i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a S. D. Mineral Pvt. Ltd. v. JCIT-Circle-4 (OSD) Surat /I.T.A.No. 554/SRT/2019/A.Y. 09-10 Page 15 of 16 cooperative bank would not do, since the realization takes a longer time; (ii) the assessee was, therefore, required to make cash payments only; (iii) Tata Teleservices Limited assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee; (iv) It is not disputed that the Tata Teleservices Limited did not act on such promise; (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.
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.