M CHANDRA & COMPANY,KOLKATA vs. INCOME TAX OFFICER - WARD - 40(1), KOLKATA , KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, KOLKATA SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 909/KOL/2026 Assessment Year : 2014-2015

M Chandra & Company, Vs. Income Tax Officer, 22 Rabindra Sarani, Kolkata - Ward – 40(1), Kolkata, 700073 3, Govt. Place West, [PAN: AALFM3342C] Kolkata - 700001 APPELLANT RESPONDENT

Assessee by : None Revenue by : Subrata Aich, JCIT, Sr. DR

Date of hearing : 15.06.2026 Date of Pronouncement : 24.06.2026

O R D E R This is an appeal filed by the assessee against the order passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by the Ld. Addl./Joint Commissioner of Income Tax (Appeals)-1, Hyderabad [hereinafter referred to as “the Ld. CIT(A)] dated 30.01.2026, DIN & order No. ITBA/APL/S/250/2025-26/1085364957(1) challenging confirmed the order of the AO for Rs. 6,68,000/- for violation of provision of section 40A(3) of the Act.

2 ITA No. 909/KOL/2026 M Chandra & Company 2. Briefly stated the facts of the case are that case of the assessee was completed u/s 143(3) of the Act on 20.05.2016 assessing total income at Rs. 7,79,100/- and the return income was declared by the assessee at Rs. 6,70,462/-. Later on, it was observed that the assessee has made payment to M/s Gorakhpur Golden Roadways (Cal) paid cash payment of Rs. 6,68,000/- in aggregate in violation of section 40A(3) of the Act. Accordingly, he passed the order u/s 154 of the Act and made addition of Rs. 6,68,000/- in that assessed income as per section 143(3) of the Act and completed on 10.07.2019.

“No exceptional or unavoidable circumstances within the meaning of Rule 6DD have been demonstrated. The explanation advanced is largely based on business convenience and accounting practice, which cannot override the explicit statutory prohibition. Significantly, the appellant has also not disputed the factual correctness of the dates and amounts of cash payments as recorded by the Assessing Officer. In view of the above and the clear statutory intent to discourage large cash payments, the disallowance of 6,68,000 under section 40A(3) is found to be in accordance with law and based on the assessee’s own records. The same, therefore, calls for no interference. The ground raised by the appellant on this issue is accordingly dismissed.” Accordingly, he dismissed the appeal of the assessee.

3 ITA No. 909/KOL/2026 M Chandra & Company 4. Aggrieved from the above order, the assessee is in appeal before the ITAT.

4 ITA No. 909/KOL/2026 M Chandra & Company “Explanation for the payment made to “Transporter” – Gorakhpur Golden Roadways (Cal). The AO has disallowed expenditure to tune of Rs 6,68,000/- on account of payment to cash in excess of Rs 35,000/- per day because it violates Sec 40A(3) of the IT Act. Freight is a regular cost/feature of steel trading business and we are very well aware of the cash payment limits and didn't commit any error out of lack of knowledge. Contention of AO is incorrect, as we did not pay the cash to Transporter- Gorakhpur Golden Roadways (Cal) but a portion of cash advance is paid directly to the Lorry driver at point of loading on night/evening lorry reaches us and subsequently loaded the next day when the transporter make the LR/Bilti and receives the balance payment directly. Due to Traffic rule of NO ENTRY during day time at area around our works addressLiluah Area/ GT road area, Lorry reaches us after 9pm and not during day time. As soon as Lorry reaches us we have to pay cash to driver. It is a very standard practice by Lorry drivers/owners to accept and demand cash payment at point of loading, mostly to bear the fuel expenses and other general expenses for the journey they will undertake. Also in many cases as per instruction of transporter we pay this amount as soon as lorry reaches us in evening i.e. time of entry of vehicle itself, so that driver does not run away or create problems as we load on next day and his lorry remains held up for 1 extra day leading to wastage for him. It is because of this external direct payment to driver and its accounting entry (tally) in Transporter’s ledger, the overall payment entry on a subsequent day, it seems to exceed Rs 35000 per day limit. Every time we pay such cash to Lorry driver we finally charge it upon the corresponding Transporter as a reduction of our liability towards their Invoice/billing/ledger balance for aggregate freight charges. Yes, our mistake was pertaining to manner of accounting entry and not violation of Sec 40A(3) of the IT Act, as we never paid a single person or paid behalf of single person in-excess of the defined limit of Rs 35,000 per day. Lorry Driver was paid a day prior only. Rather than debiting the account of Lorry Driver and passing a journal entry for credit in transporter ledger on the prior day, my accountant showed the entire payment in Transporter ledger supported by a narration for the utilisation/division in cash amount. I will illustrate my point will full details and justification CORRECT ACCOUNTING TREATMENT/ ENTRY SHOULD BE Entry 1: Against payment of cash at point of loading, directly to Lorry owner/driver for fuel expenses- on DAY1 XYZ Lorry driver A/c ..................Debit To, Cash A/c .................Credit Entry 2: Corresponding Journal for accounting for this cash paid to Driver against Transporter advice- on DAY1 Gorakhpur Golden Roadways A/c.......Debit To, XYZ Lorry driver A/c..............Credit

5 ITA No. 909/KOL/2026 M Chandra & Company Entry3 For payment made directly to the Transporter – on DAY2 Gorakhpur Golden Roadways A/c.......Debit To, Cash..................................Credit Whereas my accountant made below mentioned entry (mentioning driver pay in narration) Gorakhpur Golden Roadways A/c....Debit To, Cash A/c.............. .......................Credit Narration : Rs X paid to driver lorry No XX, XXX amt paid to Transporter In order to clearly illustrate my point, i would like to share complete explanation with supporting documentary evidences - Date and Amount wise explanation with proofs like Bill and Money receipt - Narration in my Tally ledger for each dates of contended 40A(3) violation, making distinction between cash paid to Transporter- Gorakhpur Golden Roadways (Sighviji) and cash paid to Lorry driver/owner - Account statement made by Transporter- Gorakhpur Golden Roadways accepting the direct payment made to Lorry Driver/owner. - Snapshot of Explanation DATE WISE EXPLANATION 3-5-2013: Rs 40000 Rs 20000 was physically paid on 2nd May 2013 (Gandhi Jayanti Holiday) and only Rs 20000 was paid on 3rd May 2013 (money receipt for each payment is available). But as 2nd May was holiday/ non working day for office staff, my accountant decided to enter both amount on working Day i.e. 3rd May 2013 –Friday, feeling that Tally entry date cannot should not be on a Holiday. Though, he mentioned 2nd and 3rd May in narration. 22-8- 2013: Rs 51000 Rs 17000 was paid to driver of Lorry No wb038103 Loaded on 22-8-2013 against Transporter Invoice No GGRC/13-14/71 dated 22-8- 2013 for Rs 20760. Balance Rs 34000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 21-9-2013: Rs 65000 Rs 35000 was paid to driver of Lorry No wb51a4692 Loaded on 21-9-2013 against Transporter Invoice No GGRC/13-14/84 dated 21-9-2013 for Rs 51597 Balance Rs 30000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 7-10- 2013: Rs 40000 Rs 15000 was paid to driver of Lorry No wb37b6775 Loaded on 8-10-2013 against Transporter Invoice No GGRC/13-14/95 dated 8-10- 2013 for Rs 20760 including detention charges of 1 day as Lorry had arrived on 7-8-2013 but loaded on 8-10-2013 Balance Rs 25000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 26-12- 2013: Rs 40000 Rs 20000 was paid to driver of Lorry No wb11c3001 Loaded on 26- 12-2013 against Transporter Invoice No GGRC/13-14/123 dated 26-12-2013 for Rs 37165 Balance Rs 20000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 30-12-2013: Rs 46000 Rs 13000 each was paid to driver of Lorry No wb23b9872 & Lorry No up66e9020 Loaded on 30-12- 2013 against Transporter Invoice No GGRC/13-14/130 dated 30-12-2013 for Rs 33917 and Invoice No GGRC/13-14/131 dated 30.12.2013 for Rs 33041 Balance Rs 20000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 28-1-2014: Rs 40000 Rs 15000 was paid to driver of Lorry No wb15b8283 Loaded on 30.1.2014 against Transporter Invoice No GGRC/13- 14/146 dated 30-1-2014 for Rs 30979 including detention charges of 2 day as Lorry had arrived on 28-1-2014 but loaded on 30-1-2014 Balance Rs 25000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 6- 2-

6 ITA No. 909/KOL/2026 M Chandra & Company 2014: Rs 40000 Rs 10000 was paid to driver of Lorry No wb038103 Loaded on 5-2- 2014 against Transporter Invoice No GGRC/13-14/151 dated 5-2- 2014 for Rs 15516. Lorry was loaded on 5.2.2014 but left our Works site on 6.2.2014 when we paid them cash Balance Rs 30000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 29-3-2013: Rs 45000 & Rs 65000 (Total Rs 110000) Rs 10000 was paid to driver of Lorry No wb41b5811 Loaded on 28-3-2013 against Transporter Invoice No GGRC/13- 14/197 dated 28-3-2014 for Rs 13454. This Lorry was loaded on 28.3.2014 but left our Works site on 29.3.2014 when we paid them cash. Rs 16250 each was paid to 4 drivers of Lorry No wb37a5783,wb11a8125,ap37tc4536,wb23b9872 Loaded on 31.3.2014 against Transporter Invoice No GGRC/13-14/199 &200 &201 & 202 dated 31-3- 2014 for Rs 17577 each including detention charges of 2 day as Lorry had arrived on 29-3-2014 but loaded, billed and dispatched on 31-3-2014 Balance Rs 35000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt 31-3-2013: Rs 75000, Rs 36000, Rs 45000, Rs 45000 (Total Rs 201000) Year ending is a difficult time and there was immense pressure from all Buyers to dispatch material. External Hydra based conveyance was used and paid Rs 21,770 on 31.3.2014 to quickly move the material on the lorry. (charged in P&L and cash book) Rs 15000 each was paid to 11 drivers of Lorry No.wb03b5854,wb51a4692,hr56l3036,ap21w6957,wb23c5821,wb51a4692 ,wb23b9872,nl01k0584,w899,ap29tb7613,wb038103 Loaded on 31.3.2014 against Transporter Invoice No GGRC/13-14/220 & 221 & 222 & 223 & 224 & 225 & 226 & 227 & 228 & 230 & 231 dated 31-3-2014 for Rs 17577 each Rs 12000 was paid to driver of Lorry No wb37b 6775 Loaded on 31-3-2014 against Transporter Invoice No GGRC/13-14/229 dated 31-3-2014 for Rs 16547 Balance Rs 24000 was paid in cash directly to Transporter against settlement of his previous outstanding (ledger balances) and same is supported with Money receipt.” 8. On going the through the above detailed written submission, it is clear that the assessee has made payment more than the prescribed limit on different dates after consolidating the different bills or dues to the transporter due to settlement of earlier dues and payment made by the assessee has not been doubted at any point of time i.e. payments are genuine. For the business expenditure paid to the transporter. I also noted from the above submissions that the payments have been made to the Drivers on different account and against various bills or Lowry No.

7 ITA No. 909/KOL/2026 M Chandra & Company in the case of the assessee has fulfilled the requirement of section 37 of

the Act and due to circumstances that the reasons the assessee had to

pay in cash, therefore, in such circumstances the payment should have

been allowed. I am relying on the judgment of Co-ordinate Bench of the

Tribunal, Delhi Benches reported in (2021) 124 taxmann.com 563 (Delh-

Trib.) in the case of ITO Vs. Suresh Kumar, in ITA No. 4111/Del/2015,

order dated 09.12.2020.

8 ITA No. 909/KOL/2026 M Chandra & Company b. the transactions are made at a place where ei ther the purchaser or the seller does not have a bank account; or

c . the transactions and payments are made on a bank holiday; or

d. the seller is refusing to accept the payment by way o f crossed cheque/dra ft and the purchaser’s business interest would suf fer due to non-availabili ty of goods o therwise than from this par ticular seller; or

e. the seller , acting as a commission agent , is requi red to pay cash in turn to per sons from whom he has purchased the goods; or

f . speci fic discount is given by the seller for payment to be made by way of cash .

5 . It can be said tha t i t would , generally, sa tisfy the requirements of rule 6DD( j) , i f a letter to the above e f fect is produced in respect of each transaction falling wi thin the categories listed above from the seller giving full par ticulars of his address , sales tax number/permanent account number , i f any , for the purposes of proper identi fica tion to enable the Income-tax O f ficer to satisfy himself about the genuineness of the transaction. The Income-tax O f ficer will , however, record his satis faction be fore allowing the bene fi t of rule 6DD( j) .

6 . It is fur ther clari fied that the above circumstances are not exhaustive but illustrative . There could be cases other than those falling wi thin the above ca tegories which would also meet the requirements of rule 6DD( j).”

The cases indicated in paragraph 4 are merely illustrative and not exhaustive but the underlying idea is that if the seller’s identity can be established, it would be possible for the Income-tax Officer to cross- check whe ther the transaction in fact had taken place as stated and was of a genuine nature . Even though this circular came to be issued in May, 1977, the assessee is justified in pressing it into aid as the circular merely indicates the circumstances in which rule 6DD( j) would be attracted."

The circular o f the Board is not exhaustive but only illustrative. The Income-tax Officer has to take a pragmatic view o f the matter. The Income-tax Officer should take a practical approach to problems and strike a balance between the direction o f law and hardship to the assessee . He should no t enmesh himsel f in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts o f each particular case in exercising his discretion either in favour or against the assessee . There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certi ficate to that effect filed; absence o f banking facilities in places where cash payments are made . All such cases would come within the purview o f exceptional or unavoidable circumstances."

9 ITA No. 909/KOL/2026 M Chandra & Company 17. In CIT Vs. Trinity Traders [1987] 163 ITR 381 (Gu j.), the above circular was referred to with the following observations: "The circular makes it clear that these are merely illustrative instances o f cases in which rule 6DD( j) would be applicable. The circular also points out that the requirements o f rule 6DD(j) can be satisfied if a letter to the above e ffect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales-tax number/permanent account number, if any, for the purposes o f proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction . . . ."

"It is no doubt true that the said circular was not available at the time when the Income-tax Of ficer passed the assessment order and the Appellate Assistant Commissioner considered the appeal of the assessee . The guidelines contained in the said circular can, in our opinion, be taken into account for the purpose of considering as to whether the payments in question can be regarded as falling within the ambit o f rule 6DD(j) o f the Rules .

" 19. The above circular was re ferred to in Venkata Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253 (AP) with the following observations: ". . . On the merits, we are satisfied that the assessee is enti tled to exemption for the payments in view o f rule 6DD( j) read with clause 4(ii) of Circular No. 220 , dated May 31 , 1977 o f the Central Board of Direct Taxes ...."

See also CIT v. Union Agencies [1987] 166 ITR 529 (Delhi).

The Indian Parliament incorporated the above provisions to check evasion of taxes. Even in genuine cases where payments are shown to have been made in cash, the assessee is put to the necessity to prove that in the area o f business, banking facilities are not adequate. There fore, impelled by genuine difficul ty, the assessee had to make payment in cash. The same idea is writ large in the Rules . The assessee will have to show that there was no way left for the assessee except to pay in cash. In the nature of things whe ther in the statute , rules or circulars, all the contingencies cannot be enumerated exhaustively. Parliament re ferred to the inadequacy of facilities in section 40A. The rule-making authorities illustrated

10 ITA No. 909/KOL/2026 M Chandra & Company some of the circumstances in the Rules. The Revenue supplemented the further circumstances when exemption can be claimed and allowed.”

In the paper book we find that the three subcontractors appear to have agreed to take up the work from the assessee- firm on the clear understanding that payments to them, as and when needed, shall have to be made in cash as they would be requiring cash for payment to the labourers who were executing the work on site. The site of the work was admittedly at about 12 Km. away from the place where bank facilities were available to the parties. Looking to the nature of the business o f the assessee-firm, the insistence of the sub-contractors who received payments in cash in order to enable them to pay cash to the labourers on site , the provisions o f r. 6DD( j) read with the Circular o f the Board applies for the bene fit of the assessee- firm . ."

"6.1 In Circular No . 220 dated 31-5-1977 , it has been clarified that it would generally satisfy the requirements o f rule 6DD(j) if a letter explaining the exceptional and unavoidable circumstances such as mentioned in para 4 of the said circular is produced in respect of each transaction falling within the categories listed in para 4 of the said circular from the seller giving full particulars o f his address, salestax number, permanent account number, i f any, for the purpose of proper identification to enable the ITO to satisfy himself about the genuineness o f the transaction. One o f the illustration o f exceptional circumstance given in para 4 of the said circular is that if the seller is re fusing to accept payment by way of crossed cheque/draft and the purchasers business interest would suf fer due to non-availability o f goods otherwise than from this particular seller. The other illustration is that the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he had purchased the goods. Few more instances of exceptional circumstances have been given in the said circular. The Hon’ble Gu jarat High Court in the case o f Navsari Waste Cotton Products v. CIT [1987] 163 ITR 378 has held that the

11 ITA No. 909/KOL/2026 M Chandra & Company said circular merely indicate the circumstances in which rule 6DD( j) would be attracted. The underlying idea is that if the seller’s identity can be established, it would be possible for the ITO to cross-check whether the transactions in fact had taken place as stated and was of a genuine nature . The instances given in the said circular are merely illustrative and not exhaustive . . . ."

"It would appear from the perusal o f the Board’s circular referred to above that the seller’s refusal to accept the payment by crossed cheque or dra ft may permit the assessee to make payment in cash. But, at the same time , it should also be shown that the assessee’s business interest would have suffered due to non-availability of goods otherwise than from that particular seller. Sub-clause (iv) of clause 4 of the circular requires the fulfillment o f both the conditions as aforesaid. In this light, the factum o f insistence by the recipients may not alone be sufficient to attract clause 4(iv) o f the circular."

12 ITA No. 909/KOL/2026 M Chandra & Company goods were purchased and the requirements o f rule 6DD( j) would stand satisfied i f a letter is produced from the seller in respect o f each transaction falling within the categories illustrated in paragraph 4 giving full particulars o f his address, sales tax registration number, if any, for the purposes o f proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. It was further added that the circumstances indicated in paragraph 4 o f the circular were merely illustrative and not exhaustive, but the underlying idea was that i f the seller’s identity can be established, it would be possible for the Income-tax Officer to cross-check whe ther the transaction had, in fact, taken place as stated and was of a genuine nature .” 35. A similar view is expressed by the High Court of Calcutta in Girdharilal Goenka v. CIT [1989] 179 ITR 122, where it was observed that (at p. 128): “The circu lar of the Board is not exhaustive, it is only illustrative and the Assess ing Officer has to take into account the surrounding circumstances, considerations of bus inessexped iency and the facts of each particular case in exerc is ing h is discretion either in favour or against the assessee’. It was also held that the Income-tax Officer should take a practical approach to the problem and str ike a balance between the direction of law and hardship to the assessee." 36. The circular and judgments unequivocally intend at allowing the expenses owing to genuineness of the payment and contingency of the business . Hence , keeping in view the provisions of the Act, Rules and the above judgments and having examined the issue and the peculiar facts and circumstances o f the case , on finding that the assessee is merely facilitator and intermediary in the transaction and his receipts assessable to tax constitute the margin between the price obtained and further paid but not the entire receipts which stands further passed on to the two ticketing agencies , we hereby hold that the provisions u/s 40A(3) are not attracted.” 9. Since, in the case on hand, the genuineness of payment had not

been admitted. Accordingly, respectfully following the above judgment, I

allow the appeal of the assessee.

Order pronounced on 24.06.2026.

Sd/- (Laxmi Prasad Sahu) Accountant Member Dated: 24.06.2026 AK, Sr. P.S.

13 ITA No. 909/KOL/2026 M Chandra & Company Copy of the order forwarded to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. CIT(DR)

//True copy// By order

Assistant Registrar, Kolkata Benches