R. THIRUVENGADAM vs. THE ASSITANT COMMISSIONER OF

Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 1/14 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 09.04.2019 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARI AND THE HON'BLE MR.JUSTICE C.V.KARTHIKEYAN Tax Case Appeal No.156 of 2019 Mrs.R.Thiruvengadam ... Appellant ..Vs.. The Assistant Commissioner of Income Tax Circle-I, Pondicherry ... Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai, dated 15.09.2017 made in I.T.A.No.1617/Mds/2017 for the Assessment Year 2011-2012. For Appellant : Mr.B.Ramana Kumar For Respondent : Ms.K.G.Usha Rani Senior Standing Counsel

---- http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 2/14 J U D G M E N T (Delivered by DR.VINEET KOTHARI,J) The Assessee Mr.R.Thiruvengadam has filed this Appeal under Section 260A of the Income Tax Act, 1961 (for brevity “the Act”) raising the purported Substantial Questions of Law arising from the order passed by the learned single member of the Tribunal, rejecting the Appeal filed by the Assessee for the Assessment Year 2011-2012 and upholding the disallowance of Rs.25,02,938/-, which was partially reduced by the learned Commissioner of Income Tax (Appeals) on account of cash payments made by the Assessee involved in the business of Real Estate for the purchase of two lands at Chinnamudaliar Chavady and Odiayampattu respectively by the Assessee in the Assessment Year in question. 2. The disallowance was made by the Assessing Authority in the Assessment Order dated 27.02.2014 under Section 40A(3) of the Act for the Assessment Year 2011-2012 which disallows cash expenditure over Rs.20,000/- and since the Assessee made the cash payments for these purchase of lands for aggregate sum of Rs.25,02,938/-, in violation of Rule 6DD of the Income Tax Rules 1962. The learned CIT http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 3/14 (Appeals), however, granted partial relief to the Assessee to the extent of Rs.2,10,958/-, which was incurred towards the costs of stamp paper and registration charges for the purchase of two lands in question. The further Appeal to Tribunal also failed with the following observations made by the Tribunal: "There is no case for the assessee that it was constrained to make cash payments under any of the circumstances coming within Rule 6DD. Insistence by sellers for cash does not get covered under any of the clauses in Rule 6DD. In taking the view, that Section 40A(3) of the Act will cover even payments made for acquiring stock-in-trade, lower authorities are fortified by the judgment of the Hon'ble Apex Court in the case of Attar Singh Gurmukh Singh Vs.ITO 191 ITR 667. As it is often said equity and tax does not always made good friends. In the circumstances, I am of the opinion that lower authorizes were justified in applying Section 40A(3) of the Act to the subject transanctions. I do not find any reason to interfere. 5.In the result, appeal of the assessee is dismissed. " 3. The learned Counsel for the Assessee Mr.B.Ramana Kumar submitted before us that Section 40A(3) of the Act does not apply to the facts and circumstances of the present case as his the lands in question were purchased by him for personal purpose as Capital http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 4/14 Assets and not in the ordinary course of business. Therefore,there was no expenditure claimed in the computation of income for the Assessment Year 2011-2012 and therefore the said Provisions of Section 40A(3) do not apply to such purchase of Capital Assets for personal purpose. In the alternative, the learned counsel for the Assessee submitted that the enquiry with regard to the applicability of Rule 6DD was not held by the learned Assessing authority before whom the Assessee even though produced the confirmation letters of two sellers but he did not afford any opportunity to prove the genuineness of the transaction in question and holding it to be payment made in exceptional circumstances under Rule 6DD wherein such disallowance Under Section 40A(3) could not have been made. 4.The learned counsel for the Revenue Mrs.K.G.Usha Rani, in support of the impugned Order submitted that Section 40A(3) is clearly applicable to the Assessee in the present case as the Assessee himself had admitted before the Assessing Authority by way of a letter which is quoted in the Assessment Order that he had purchased two lands in question for the purpose of business and the Assessee was admittedly involved in the business of Real Estate and therefore such http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 5/14 purchases were certainly an expenditure incurred for purchase of stock in trade in the course of business and since admittedly cash payment was also made in Violation of Rule 6DD of the Act, therefore, the disallowance in the hands of the Assessee was perfectly justified. She also opposed the request of remand to the Assessing Authority at this stage. 5. The learned counsel for the Assessee has relied on the following Judgments to support his legal contentions: (i) Commissioner of Income Tax Vs. Chaudhary and Co. [(1996) 217 ITR 431 (Allahabad)]. (ii) CIT Vs. Alpha Toyo Ltd.[(2008) 194 Taxman 427] (iii) Attar Singh Gurmurkh Singh Vs. Income Tax Officer[(1991) 191 ITR 667 (SC)] 6. Having considered the rival submissions made at the bar, we are not impressed by the first submission made by the learned counsel for the Assessee that the provisions under Sections 40A(3) does not apply to the facts and circumstances of the present case. The http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 6/14 provisions of Section 40A(3) of the Act,which are quoted below clearly apply to the facts and circumstances of the present case. The expenditure incurred for purchase of lands which is nothing but a Stock in Trade for the Assessee who is engaged in the business of Real Estate and such expenditure in cash without establishing the exceptional circumstances covered under Rule 6DD is certainly disallowable expenditure in the hands of the Assessee. The provisions of Section 40A(3) of the Act are extracted hereunder for ready reference: "Expenses or payments not deductible in certain circumstances. 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession." ...... (3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payeee cheque drawn on a http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 7/14 bank or account payeee bank draft, [or use of electronic clearing system though a bank account, exceeds ten thousand rupees] no deduction shall be allowed in respect of such expenditure." 7. The contention of the learned counsel for the Assessee that no separate deduction in respect of the purchase of two lands in question was claimed in the computation of total income, eventhough, these purchases were debited in the Profit & Loss Account of the Assessee which was produced during the course of argument before us for perusal, is a misconceived contention and deserves to be rejected. It is only Net profit as per the Profit and Loss Account which is taken to the computation of total income for the Assessment Year in question along with income from other sources, if any. After computation of Gross Total income, the Deductions under Chapter VI A Section 80C etc of the Act can be made to arrive at the Net taxable income. Once, the deduction has been claimed by debiting the costs of these lands in the Profit and Loss Account, there is no question of separately claiming these deductions in the "Computation of Income", where only the Net Profit deducted from the Profit and Loss Account is reflected. Merely because the lands in question were http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 8/14 purchased as Goods or Stock-in-Trade during the course of business is not sold during the year itself and is included in the closing stock, such contingency does not take it out from the definition of expenditure incurred by the Assessee, as employed under Section 40A(3) of the Act. Therefore, the said submission raised by the Assessee does not hold any water which is liable to be rejected and the same is accordingly rejected. 8. Coming to the second submission raised by the learned Counsel for the Assessee, we do not find any detailed discussion by any of the three authorities below on the applicability of Rule 6DD to the purchase of the two lands in question by the Assessee. The Rule 6 DD quoted by the Tribunal in its impugned order enumerates certain circumstances where even cash payment made by the Assessee in exceptional circumstances over Rs.20,000/- should be allowed as expenditure. For example, where the payment required to be made on the day on which the banks were closed either on account of holiday or strike; where the payment is made by a person to his agent who is required to make payment in cash for goods or services on behalf of such person; where the payment is made in a village or town, which http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 9/14 on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business/profession or vocation, in any such village or town.

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 10/14 circumstances enumerated in Section 6DD of the Rules. 10. From the perusal of the records including the Assessment order and Appellate order unfortunately we do not find any discussion by any of the authorities neither the detailed circumstances in which such cash payment was made by the Assessee who wanted to produce the confirmation letters from the dealers of the lands and for the reasons not known to them it was not allowed to do so nor the finding of the Appellate Authority, showing non application of mind to the exceptional circumstances of Rule 6DD and why the same do not apply to the transaction of the purchase of lands in question. Apparently there was no reason for the Assessing Authority for not affording an opportunity to the Assessee to produce not only the confirmation letter from the sellers but also to examine the sellers themselves, by which the Assessee could have established the exemptions of Rule 6DD of the Act. 11. We feel that perhaps the miscarriage of justice might have resulted in cutting short of the assessment procedures by the http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 11/14 Assessing Authority. The Appellate Authority have just put their imprimatur without discussing any details. Such lack of diligent assessment exercise by the fact finding bodies opens all the doors for the flow of the work in the constitutional Courts, which is not desirable. It is settled legal position that the fact finding arrived at by the final fact finding body is binding on the High Court, while considering the Substantial Questions of Law under Section 260 A of the Act. Therefore,such finding of fact has to be fair, transparent, reasonable and speaking. Any doubt about diligent exercise undergone by the Assessing Authority without undertaking the exercise under the provisions of the Act and Rules, as it has unfortunately happened in the present case, prompts us to remand the case to the Assessing Authority even at this belated stage. But we do not find adequate alternative to the same, as this Court cannot obviously undertake this exercise of finding of fact here. 12. According the present Appeal filed by the Assessee is allowed for statistical purposes, without answering the Substantial Questions of Law raised by remanding the case back to the Assessing Authority to examine the issue of applicability of Rule 6DD of the Act http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 12/14 in the facts and circumstances of the present case by affording due and reasonable opportunity to the Assessee in this regard. The said exercise can be completed within six months from today. The Assessee shall adduce evidence without seeking any adjournment from the Assessing Authority and the Assessee or his authorized representative shall appear before the Assessing Authority in the first instance on 02.05.2019. No order as to costs.

(V.K.,J.) (C.V.K.,J.)

09.04.2019 Index : Yes/No Internet : Yes/No arr http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 13/14 To 1. The Assistant Commissioner of Income Tax, Circle-I, Pondicherry. 2. Commissioner of Income Tax (Appeals), Puducherry. 3. Income Tax Appellate Tribunal 'B' (SMC) Bench, Chennai. http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 14/14 DR.VINEET KOTHARI, J. and MR.C.V.KARTHIKEYAN, J. arr T.C.A.No.156 of 2019 09.04.2019 http://www.judis.nic.in Judgment in T.C.A.No.156 of 2010 dt. 09.04.2019

[Mr.R.Thiruvengadam Vs. The Asst.Commissioner of Income Tax] 15/14 http://www.judis.nic.in