Shri Mugunda Prakash vs. THE ASSISTANT COMMISSIONER O

Tax Case Appeal No.194 of 2022 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 02.08.2022 CORAM : THE HON'BLE MR. JUSTICE R. MAHADEVAN AND THE HON'BLE MR. JUSTICE MOHAMMED SHAFFIQ Tax Case Appeal No.194 of 2022 Shri Mugunda Prakash ... Appellant Vs. The Assistant Commissioner of Income Tax, Non Corporate Circle – 10(1) Income Tax Department, 121, Nungambakkam High Road, Chennai 600 034.

... Respondent

Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, 'A' Bench, Chennai, passed in I.T.A.No.708/Chny/2019, dated 09.03.2022 for the Assessment year 2015-16. For Appellant : Mr. S. Sridhar For Respondent : Mrs.V.Pushpa

Standing Counsel Page 1/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 J U D G M E N T (Judgment of the court was delivered by R. MAHADEVAN,J.) This Tax Case Appeal has been filed by the appellant / Assessee challenging the order dated 09.03.2022 passed by the Income Tax Appellate Tribunal, for the assessment year 2015-16, suggesting the following substantial questions of law : "1. Whether the provisions of section 40A(3) of the Act would be made applicable in the context of settlement of consolidated bills issued for accommodating the customers of the appellant who had credit facilities? 2. Whether the provisions of section 40A(3) of the Act was correctly made applicable for the settlement of the consolidated bills by reckoning the appellant as the purchaser of petroleum products in contra distinction to the purchase of petroleum products by the customers of the appellant? 3. Whether the basic conditions in section 40A(3) of the Act were satisfied on the factual matrix of the case? 4. Whether the commercial expediency limb in the proviso below section 40A(3A) of the Act could be considered as independent limb by carving out exceptions to the main disallowance provision in section 40A(3) of the Act.” 2. The necessary facts leading to filing of this Tax Case Appeal are as follows: The appellant/assessee, who is the proprietor of M/s.Sri Krishna Enterprises and M/s.Sri Krishna Transport, filed his return of income in Page 2/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 respect of the assessment year 2015-16, reporting total income of Rs.19,12,570/- on 30.09.2015. The case was selected for scrutiny assessment and accordingly, a notice under section 143(2) of the Income Tax Act, 1961 (in short, "the Act"), dated 28.07.2016, was issued on the appellant. After completing the assessment, the assessing officer passed an order on 26.12.2017 under section 143(3), determining the taxable total income at Rs.99,67,257/-, inter alia, by disallowing a sum of Rs.76,50,000/- being payments made by the assessee towards the purchase of petrol from the nearby petroleum retail outlets namely M/s.Velavan Agencies and M/s.Satya Agencies, as per Rule 6DD, as the same were paid in violation of the provisions of section 40A(3) of the Act envisaging disallowance of cash payments in excess of Rs.20,000/-. Challenging the order of assessment, the appellant / assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who, vide order dated 17.12.2018, dismissed the appeal by confirming the order of the assessing officer. Aggrieved over the same, the appellant went on further appeal in ITA.No.708/CHNY/2019 before the Income Tax Appellate Tribunal. By order dated 09.03.2022, the Tribunal while justifying the addition under section 40A(3) of the Act by the Page 3/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 assessing officer as affirmed by the CIT(A), dismissed the appeal. Therefore, this tax case appeal by the appellant / assessee. 3.Mr. S.Sridhar, learned counsel appearing for the appellant / assessee submitted that there was no purchase of petroleum product by the appellant exceeding Rs.20,000/- in cash, thereby violating the provisions of section 40A(3) of the Act. Adding further, the learned counsel submitted that the accommodation of the customers, who had credit facilities with the appellant in nearby petroleum pumps on certain dates, should be considered as commercial expediency in running the business, whereas the assessing officer erroneously considered the consolidated bills issued by the petrol pumps for the petroleum products sold to the appellant's customers, as purchases by the appellant by making payment in cash in excess of Rs.20,000/- and made addition under section 40A(3), while passing the assessing order relating to the assessment year in question. Without properly appreciating the same, the CIT(A) as well as the Tribunal also justified the addition made by the assessing officer by invoking section 40A(3) of the Act by presuming that the appellant had purchased petroleum products in cash Page 4/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 exceeding Rs.20,000/-. Therefore, the learned counsel sought to allow this appeal by setting aside the orders passed by the appellate authorities, with respect to addition of Rs.76,50,000/- under section 40A(3) of the Act. 4.Refuting the submissions so made on the side of the appellant, Mrs.V.Pushpa, learned Standing Counsel appearing for the respondent contended that after examining the materials placed before the same, the authorities below have rightly disallowed the claim of Rs.76,50,000/- made by the assessee. The learned counsel further submitted that though the assessee contended that there was no single payment that exceeded Rs.20,000/- and they were on different times within the date and hence, they cannot be restricted as stated in the statutory provisions, they did not produce any documentary evidence to substantiate that these payments were made in the course of business expediency or emergency or that of an exceptional circumstances as provided in Rule 6DD of the Income Tax Rules and therefore, the authorities below are justified in making the disputed amount as addition by invoking the provisions of section 40A(3) of the Act. Thus, the learned counsel submitted that there is no requirement to interfere with the orders passed by the authorities below in this regard. Page 5/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 5.Heard both sides and perused the materials placed before this court. 6.The issue involved in this appeal is only in respect of addition of Rs.76,50,000/- by the authorities below, by applying the provisions of section 40A(3) of the Act. 7.Admittedly, the appellant/ assessee made cash payments for purchase of petrol from two agencies viz., M/s.Velavan Agencies and Sri Satya Agencies, on different dates, in excess of Rs.20,000/-, which is in violation of section 40A(3) of the Act. They failed to explain any business expediency, due to which, cash payments were made for the disputed purchases, nor they produced any documentary evidence. Therefore, the assessing officer disallowed the claim of Rs.76,50,000/- made by the assessee, which was also confirmed by the appellate authorities, in the light of the provisions of section 40A(3) of the Act. For better appreciation, the relevant findings of the authorities below are quoted below: Assessing Officer “...Assessee vide letter dated 13/12/2017 was asked to show cause why the payment made by cash should not be disallowed. In response assessee has submitted a statement detailing the transactions. The statement was Page 6/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 captioned as 'credit purchase statement of accounts of supplier'. Along with the statement, confirmation from suppliers was also attached by the assessee, but there was no explanation for cash purchase. In the absence of reasoning or circumstance specified in Rule 6DD of the income tax rules, 1962 payment for the said purchase is disallowed and added to the income of the assessee.” CIT(A) “9.1. The appellant has paid Rs.76,50,000/- to two dealers. The entire amount has been paid in cash. There are no extraordinary circumstances that forced the appellant to make payment in cash. The case laws relied on by the appellant are in the context of cash payments which had to be made on emergency situations where bank transactions were not possible. These dealers are the regular vendors for the appellant. There is a running account with each one of them. In order to circumvent the provisions of Section 40A(3), the appellant has obtained receipts of amounts below Rs.20000/-. Even in the books of accounts, the relevant ledger was captioned as 'Credit purchase statement of accounts of supplier'. It is clear from the facts that the appellant was in the habit of purchasing the petrol regularly and was subsequently making lump-sum payments in cash periodically. Accordingly, the transactions are entered into the account books. It is not a case of making payment below Rs.20,000/- and accounting it in the books as such on the date of transaction. Disallowance of Rs.76,50,000 has been rightly made and the same is confirmed.” ITAT 9.On identical facts, the Madras Jurisdictional High Court in the case of “N.Mohammed Ali Vs. Income Tax Officer, Ward -VII (2), Chennai reported in [2016] 65 taxmann.com 189 (Madras) has held as under: “16.... 17.Question No.3:- As we have stated earlier, the third question relates to the applicability of the provisions of section 40A(3). Section 40A deals with expenses or payments not deductible in certain circumstances. Under sub-section (3) of section 40A, any expenditure incurred by an assessee, if made to a person in a day, otherwise than by way of an account payee cheque drawn on a bank or account payee in excess of Rs.20,000/-, no deduction can be allowed. The details furnished in the show cause notice dated 18.2.2005 by the Commissioner show that the Page 7/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 assessee had admittedly made payments of Rs.1,00,000/- on three different dates viz., 1.10.1999, 14.10.1999 and 20.10.1999. The assessee had made payments of Rs.2,00,000 on 31.10.1999, 2.11.1999 and 3.11.1999. All those payments are indicated in the books of accounts of the assessee to have been made to a supplier by name "Standard Fireworks". Similarly payments have been made to another supplier by name "Sivakasi Fireworks". Since the name of one supplier mentioned in the books of accounts of the assessee himself to whom a payment of more than Rs.20,000/- had been made on everyone of those days, the contingencies stipulated in sub-section (3) of section 40A have arisen. Hence, the third question is answered against the assessee. 18.Question No.4:- The fourth question revolves around business expediency. This question has arisen for consideration in view of the proviso found in sub-section (3) of section 40A. At this stage, it would be relevant to extract sub section (3) as well as proviso to sub-section (3) which reads as under:- ... 19.As seen from the proviso, the question in relation to sub-section (3) has to be examined with reference to the three things indicated in the proviso. They are (1)the nature and extent of banking facilities (2)considerations of business expediency and (3)other relevant factors. 20.In other words, under sub-section (3), where an assessee incurs an expenditure which involves payment of more than Rs.20,000/- to a single person on a single day, he is not entitled to any deduction in respect of such expenditure. The rule under sub section (3) is not very rigid. It admits of three exceptions, which are narrated in the proviso. If an assessee could prove that having regard to the nature and extent of banking facilities, or having regard to the consideration regarding business expediency or having regard to the other relevant factors, it would not be possible for him to make payments by way of cheque or demand draft, the assessee would, still, be entitled to deduction. Therefore, it is for the assessee to prove the existence of (1)nature and extent of banking facility that compelled him to make payment in cash (2)consideration of business expediency that compelled him to make payments in cash and (3)any other relevant factors that would justify such a payment. 21.In the case on hand, the books of accounts maintained by the assessee reflected that payments were made to three different suppliers. One was Standard Fireworks, the second was Indira Prints Pack and the third supplier was Sivakasi Fireworks. But, insofar as, Indira Prints Pack is concerned, payment was less than Rs.20,000/-. Therefore, that has not led to any problem. But, insofar as the other two suppliers are concerned, the books of accounts reflect that payments in excess of Page 8/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 Rs.20,000/- to each one of those two suppliers was made on a day to day basis..... 22.In response to the show cause notice, the assessee submitted that they were not purchasing crackers from the companies themselves, but, were purchasing the crackers from the agents and retailers in the villages.... 23.But, unfortunately, the books of accounts do not disclose (1)either that payments were made to agents of those suppliers or (2)that such payments were made in bits and pieces. The table which we have extracted above shows the consolidation of payments made on every day to everyone of those suppliers. Sub-section (3) uses even the expression "aggregate of payment made to a person in a day". Therefore, any amount of explanation that the assessee gave in response to the show cause notice, could not have gone against the very entries made in the books of accounts. 24.We are not for a moment to be understood to suggest that the books of accounts should have been more carefully drawn. All that we are suggesting is that atleast the names of the agencies or agents or retailers to whom payments were made on a day to day basis, on behalf of the original manufacturers should have been mentioned. In the absence of any specific detail, the vague statements made in response to the show cause notice, cannot offset the entries made in the books of accounts. Therefore, we cannot find fault with the conclusion reached either by the Commissioner or by the Tribunal in this regard. Hence, the fourth question of law is answered against the assessee." 10.In view of the above, we do not find any merit in the submissions of the learned counsel for the Assessee on the issue of addition made u/s.40A(3) of the Act, on account of the cash purchases by the Assessee. Accordingly, the order of the CIT(A) on this issue is confirmed. 8.This court is of the view that the authorities below have analysed the factual matrix in detail in line with the legal principles connected thereto and correctly rendered the aforesaid findings, which warrant no interference. Page 9/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 9.In such view of the matter, there are no questions of law arisen to be decided herein. Hence, this Tax Case Appeal fails and is dismissed. No costs. [R.M.D.,J.] [M.S.Q.,J.] 02.08.2022

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Index : Yes / No To 1.The Income Tax Appellate Tribunal, 'A' Bench, Chennai, 2.The Asst. Commissioner of Income Tax, Non Corporate Circle-10(1), Chennai. 3. The Commissioner of Income Tax (Appeals)-12, Chennai. Page 10/11 https://www.mhc.tn.gov.in/judis Tax Case Appeal No.194 of 2022 R. MAHADEVAN, J and MOHAMMED SHAFFIQ, J. msr Tax Case Appeal No.194 of 2022

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