TEXO THE BUILDERS,UDUPI vs. ACIT, CENTRAL CIRCLE-2, MANGALORE

Per Laxmi Prasad Sahu, Accountant Member :

, 1200/Bang/2025 Page 2 of 28 Shetty is the other partner in the assessee firm. The assessee filed return of income for the Assessment Year 2013-14 on 04.01.2014 declaring total income of Rs.1,28,680/- and for Assessment Year 2014-15 on 28.11.2014 declaring total income of Rs.6,38,700/-. The case was selected for scrutiny. Other case was reopened under section 147 of the Act. Notice under section 148 was issued on 07.02.2020 and other statutory notices were issued on different dates. On examination of the documents assessee has made cash payment of more than Rs.20,000/- towards expenditure incurred which are debited in the P & L A/c which is in violation of section 40A(3) of the Act for both the years and further addition was made under section 68 of the Act of Rs.8,26,000/- for the Assessment Year 2014-15. After considering the entire submissions, the AO assessed the total income for Assessment Year 2013-14 of Rs.40,53,080/- and for Assessment Year 2014-15 of Rs.1,65,00,980/- and passed Order on 26.09.2021.

Assessment Year 2013-14

1. Background of the Case 1.1. The appellant is a partnership firm which is engaged in the business of real estate development of residential and commercial buildings. Shri Nitish Kumar Shetty is the managing partner of and Smt. Shruthi K Shetty is the other partner of the firm. The appellant filed return of income for the said assessment year vide acknowledgement 859007050040114 declaring total income of Rs. 1,28,680/- and tax liability of Rs. 39,762/- which was discharged by way of TDS. 1.2. The Survey u/s 133A of the Act was conducted at the business premises of the appellant on 12.12.2017. During the course of survey, various incriminating material including books of accounts and documents were found and impounded. Subsequently, the case was selected for reassessment proceedings u/s 147 of the Act and notice u/s 148 was issued on 07.02.2020. 1.3. Subsequently the assessment proceedings was completed on 26.09.2021 with the assessed income of Rs. 40,53,080/- and a demand of Rs. 24,73,105/-. The break-up of the same is as under. Particulars Amount Total Income as per Return of Income 1,28,678 Add (i) Unaccounted cash receipts 1,00,000 (ii) Unaccounted cheque receipts 5,60,000 (iii) Cash payment disallowance u/s 40A(3) of 32,64,406 the Act Total Income assessed as per assessment order 40,53,084 u/s 147 1.4. The appellant aggrieved by the above addition and disallowance preferred an appeal before learned Commissioner of Income Tax (Appeals). During the course of the appeal proceedings the appellant submitted all the relevant details to substantiate the genuineness of the expense. However, the learned assessing officer considered the submissions of the appellant and granted relief to the extent of 27,45,176/- and confirmed the disallowance u/s 40A(3) of the Act of Rs. , 1200/Bang/2025 Page 4 of 28 6,72,380/- for the payments made on Sunday and the bank holidays and Rs. 3,41,850/- incurred for making labour payments. Aggrieved by this disallowance the appellant filed an appeal before Hon’ble Income Tax Appellate Tribunal.

2. Ground No. 2 & 3 Cash Payment Disallowance u/s 40A(3) of the Act Rs. 10,14,230/- 2.1. During the survey and assessment proceedings, it was observed by the department that there were lot of cash payments in excess of Rs. 20,000 to various parties towards purchase of materials, labour and other expenses. The learned Assistant Commissioner stated that payment in excess of Rs. 20,000/- is a violation of provisions of Section 40A(3) of the Act and disallowed the amount. It is submitted that the learned Assessing Officer has not doubted the genuineness of the transactions and business expediency. However, disallowance was carried out purely on the violation of provisions of section 40A(3) of the Act as stated above. 2.2. It is submitted that the provisions of section 40A(3) of the Act are not applicable to the present case. The detailed submissions are provided below and the provision of section 40A(3) of the Act is reproduced below for ready reference. Section 40A Expenses or payments not deductible in certain circumstances. (1) The provisions…… . . (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 payee cheque drawn on a bank or account payee bank draft, [or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds ten thousand rupees,] no deduction shall be allowed in respect of such expenditure. ….. 2.3. On perusal of above provisions, it can be understood that Section 40A(3) of the Act is a critical provision which aims at regulating the cash expenditure in business or profession. The primary agenda for introduction of this provision was to impose the cash payment limit on all the assessee and encourage the use of banking channels or other electronic mode more rigorously. Further, section 40A(3) of the Act must be read along with rule 6DD. The section must be read along with the rule which indicates that the provision are not intended to restrict the business activities. Section 40A(3) of the Act empowers the assessing officer to disallow the transaction which are not made as per the above terms specified. This payment terms were specified to evaluate whether the said expenditure is genuine and is incurred out of the disclosed income. Moreover, the section 40A(3) r.w.r 6DD have never excluded the consideration of business expediency, genuine and bona fide transactions out of the sweep of this section.

, 1200/Bang/2025 Page 5 of 28 2.4. In the present case, the appellant is engaged in the business of real estate development and such activities are even carried out during the clock, even on Sundays and Saturdays and the appellant tend to procure the materials on Sundays and public holidays to avoid any break in the process of construction. Hence, the appellant made the payment in cash on second half of Saturday or Sunday which are non-working for banks, and such exception falls under Rule 6DD(j) and therefore, disallowance u/s 40A(3) of the Act should not be made. The breakup of payments made on non-working days of bank are provided as under.

2.5. It can be viewed from the above table that the appellant has made payment for procuring the materials for construction activity to avoid the break in the process of construction. Further, it can also be seen that the payment made involved individual invoices having amount less than 20,000/-. Considering this, the disallowance made by the learned revenue authorities u/s 40A(3) of the Act is not valid in law and the same is required to be deleted. 2.6. We rely on the decision of Hon’ble ITAT Delhi in case of Surya Merchants Ltd v. DCIT to 181/Del/2017. The relevant portion of judgement is reproduced below for reference.

11. So far as payments made on national holidays and bank holidays are concerned, the Ld. Counsel for the assessee drew the attention of the bench to the submissions made before the CIT(A) on various dates, copies of which are placed at page 13 to 24 of the paper book and submitted that when the same was brought to the notice of the CIT(A), the Ld. CIT(A) called for a remand report from the Assessing Officer. Although the Assessing Officer has not disputed the payment of Rs.39,12,033/- for A. Y. 2007-08, Rs.1,26,24,000/- for A. Y. 2008-09 and Rs.84,60,000/- for A. Y. 2009-10, on bank holidays, however, his objection was that assessee during the course of assessment proceedings / remand proceedings failed to prove the compulsion of such payments on bank holidays. Referring to the provisions of Rule 6DD(J) he submitted that the said provision provides that provisions of section 40A(3) will not be applicable where the payment was required to be made on a day on which the banks were closed on , 1200/Bang/2025 Page 6 of 28 account of holidays or strikes. He submitted that the assessee company is a developer of commercial and residential real estate projects, therefore, it is bound to complete the construction to offer the possession in agreed time to avoid penalties. The assessee, therefore, carries the construction activities round the clock even on Sundays and holidays. The assessee had procured the materials on Sundays and public holidays to avoid any break in the process of construction. He submitted that the customers generally visit the sites of the builders on holidays. Since the assessee received cash on holidays from the customers, therefore, payments were made to the suppliers on holidays for procurement of the materials. Therefore, in view of the availability of cash majorly on holidays, the assessee was bound to make cash payments of pending dues of the suppliers on the holidays itself. . . . The Assessing Officer in the remand report has admitted that such payments have been made on bank holidays. The provision of rule 6DD(J) provides that provisions of section 40A(3) shall not be applicable where the payment was required to be made on a day on which the banks were not open on account of holidays or strike. Since the assessee in the instant case has admittedly made the payments on a day on which the banks were not open on account of holidays and the Assessing Officer has also admitted that such payments were made on bank holidays therefore under the facts and circumstances of the case we are of the considered opinion that provision of section 40A(3) are not applicable to the payments made in excess of Rs.20,000/- on bank holidays which are as under :- 2.7. The above proposition is equally applicable to the facts of the present case where the payments are made on Saturdays after the bank timings which is end of the day to settle the debts. It is generally accepted practice in the state of Karnataka where the payments are made on Saturdays after the business timings. Hence, the disallowance on the mere ground that the payments were made on Saturday should not be accepted when the genuineness of such transactions was never doubted. 2.8. Further the appellant has incurred expenses towards payment for labourers. This payment is again incurred on the construction labourers who receives daily or weekly wages in cash due to non-availability of bank account. It is submitted that the wages paid to individual labour on 15 days basis do not exceed Rs. 20,000/- per day. The total amount of cash paid shown by the assessing officer is nothing but payment of cash to a person who maintain the labourers containing more than 15 or 20 persons. Therefore, each individual payment made to every labourer has to be seen for applicability of provision section 40A(3) of the Act. Hence, disallowance does not arise. The breakup the disallowance is given below 2.9. Further, it is a settled proposition that the genuineness of the expenses is required to be verified before making any disallowance u/s 40A(3) of the Act. In the instant case, the appellant has provided all the required explanations to establish the genuineness of the expenses such has labour registers, the breakup of the payments made on second Saturday. Further, it is required to be noted that the learned assessing officer has also not doubted on the genuineness of the payments. Hence, the disallowance made u/s 40A(3) of the Act is not valid in law. We further rely on the following decisions for the proposition. 2.10. It is further submitted that the learned CIT(A) has directed the learned assessing officer to allow all the labour payments since the individual payments of the labourers do not exceed Rs. 20,000/-. However, the learned assessing officer without following the directions of learned CIT(A), has disallowed the labour expenses. The relevant portion of the CIT(A) order is reproduced below 2.11. We rely on decision of Hon’ble ITAT Bangalore in case of Smt. Chandra Moolchand Jain, Bangalore vs Income Tax Officer, Ward- 6(2)(4)

10. On appeal before the CIT(A), assessee contested that all these payments have been made on a bank holiday and therefore disallowance of the same could not have been made as it is covered by provisions of exceptions provided under Rule 6DD of the I.T. Rules. The ld. CIT(A) did not accept the above contention and held that assessee has failed to show that date on which purchases were made and cash is deposited happens to be a bank holiday. Even before us, assessee has though provided details of cash payment, but did not show the date on which cash is paid and that date happens to be a bank holiday. If that be so, 1200/Bang/2025 Page 8 of 28 disallowance could not have been made. Therefore if transactions is executed on a day on which there is a bank holiday, disallowance should not have been made u/s. 40A(3) of the Act. Further, the assessee has claimed that she has hired a person as she is a women and amount was given to that person who has made cash payment to the sellers of gold & bullion and therefore the situation is covered clearly by clause (k) of Rule 6DD of the I.T. Rules. These argument was not examined by the ld. CIT(A). On careful consideration of the arguments and judicial precedents cited before us, the claim of assessee is that assessee has given cash to her employee who is the supervisor or the agent who in turn made payment to the sellers of the gold and therefore the same would not fall within the scope of section 40A(3) of the Act in view of the decision of Hon'ble Calcutta High Court in the case of S.K. Joynal Abedin v. CIT. It was also the claim of assessee that part of jewellery and bullion is purchased by assessee was shown as stock in trade and the provisions of section 40A(3) were not applicable. For this proposition assessee relied on the decision of Delhi High Court in the case of PCIT v. Prosperous Buildcon Pvt. Ltd. The assessee has further relied on the decision of Delhi High Court in the case of Rajesh Kumar v. CIT, 157 taxmann.com 311 stating that if the assessee proves the genuineness of the transaction, disallowance could not have been made u/s. 40A(3) of the Act. On careful consideration, all these issues have not been considered by the ld. lower authorities, therefore, we restore the whole issue back to the file of ld. AO with a direction to the assessee to substantiate that the payment made to 61 parties on bank holiday, the payment was made by the agent and further the business exigency also demanded payment of cash. The ld. AO may examine the above contentions of the assessee for which onus would be on the assessee to prove so and then the AO will decide the issue afresh. Accordingly, all the grounds of appeal of the assessee are restored back to the file of the ld. AO with the above direction. 2.12. We rely on decision of Hon’ble ITAT Bangalore in case of M/S. Amrut Distilleries Private vs Deputy Commissioner Of Income Tax to 950/Bang/2023 ; "The terms of section 40A(3) are not absolute. Consideration 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 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 , 1200/Bang/2025 Page 9 of 28 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 trans- actions." The said decision of the Hon'ble Supreme Court was also cited by the Mumbai Bench of the ITAT in Arihant Traders vs. ACIT (ITA No. 442/Mum/2019) where their Honours, even in a case where the payments made to the individual truck drivers exceeded the threshold limit of Rs.35,000/- observed as follows: "In the present case, the payment made by the assessee to the individual truck driver has not been disputed. It is not the case of Department that the payments made by the assessee are not genuine or the payees are not identifiable. The assessee has sufficiently explained the circumstances under which the payments have been made to the truck drivers in cash. The assessing officer made disallowance by taking a pedantic view of the cash transactions. Where cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable; no disallowances under section 40A(3) is warranted. Thus, in view of the facts of case and various decisions discussed above, we do not find any error in the findings of Commissioner (Appeals) in deleting disallowances of Rs. 60,73,403 made by the assessing officer under section 40A(3) of the Act. We concur with the findings of Commissioner (Appeals). Accordingly, ground Nos. 1 and 2 raised by the Department in appeal are dismissed." In the present case too, the genuineness of the payments have not been called into question, but the allegation is merely that the payments were made to the same person in the same day, for which reasons have been assigned in detail. In the circumstances, it is prayed that no disallowance under Sec.40A(3) be sustained. 2.13. We rely on decision of Hon’ble ITAT Delhi in case of Geo Connect Ltd. v. Deputy Commissioner of Income-tax Delhi – Trib [2023] 149 taxmann.com 456. The relevant portion of judgement is reproduced below:

13. In case of A. Daga Royal Arts (supra), the Coordinate Bench while dealing with identical issue has observed that even after amendment of Rule 6DD(j), the legal exposition propounded by the Hon'ble Supreme Court regarding consideration of expediency and other relevant factors cannot be considered to be diluted as the rules framed by way of delegated legislation cannot override the substantive legislation in form of section 40A(3) which has not changed its character. Following observations of the Coordinate Bench would be of much relevance: "

27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has 1200/Bang/2025 Page 10 of 28 been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance.

28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to M/s A Daga Royal Arts, Jaipur Vs ITO, Jaipur curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions." 2.14. We rely on decision of Hon’ble ITAT Jaipur in case of A. Daga Royal Arts v. Income-tax Officer, Ward- 2(2), Jaipur [2018] 94 taxmann.com 401 (Jaipur - Trib.). The relevant portion of judgement is reproduced below: 43. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that the identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee's bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute , 1200/Bang/2025 Page 11 of 28 books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act. In the result, the appeal of the assessee is allowed. 2.15. We rely on decision of Hon’ble High Court of Punjab & Haryana in case of Gurdas Garg v. Commissioner of Income-tax (Appeals), Bathinda High Court of Punjab and Haryana [2015] 63 taxmann.com 289 (Punjab & Haryana) 8. The respondent's case is also supported by the judgment of the Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11. After referring to Rule 6DD, the Supreme Court held:— "7. In our opinion, there is little merit in this contention. Section 40-A(3) must not be read in isolation or to the exclusion of Rule 6-DD. 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 40-A (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 disclosed sources. The terms of Section 40-A(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 40-A(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 6-DD 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 40-A(3) and Rule 6-DD 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. [See: Mudiam Oil Company 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."

, 1200/Bang/2025 Page 12 of 28 9. At the cost of repetition, the Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency.

10. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act. 2.16. We rely on the decision of Hon’ble ITAT Jaipur in case of Brother Pharma (P.) Ltd. V. Income tax Officer, Ward 4(2), Jaipur [2017] 82 taxmann.com 234 (Jaipur - Trib.) 15. We have heard the rival contentions of both the parties and perused the material available on the record. Prima facie it appears that the assessee has paid salary in excess to Rs. 20,000/- and violated the provisions of Section 40A(3) of the Act but it is also revealed that these payments were pertained to salary for the months of May to August. The genuineness of the payments has not been doubted. The employees were insisted upon casfannexh payments only, therefore, to maintain the good relation with them, the company paid cash salary for various months. The Hon'ble Rajasthan High Court in the case of Harshila Chorida (supra) has held that exceptional condition mentioned in Rule 6DD are not exclusive. This was the business expediencies of the company to pay in cash, therefore, we do not find that these payments are covered U/s 40A(3) of the Act. Accordingly, the addition confirmed by the ld CIT(A) is deleted. Hence, this ground of assessee's appeal is allowed.

2.17. We rely on the decision of Hon’ble ITAT Delhi in case of Income Tax Officer, Ward -52(1), new Delhi [2021] 124 taxmann.com 563 (Delhi - Trib.) 35. A similar view is expressed by the High Court of Calcutta in Giridharilal Goenka's case (supra), where it was observed that (at p. 128): "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 of each particular case in exercising his 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 strike 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 , 1200/Bang/2025 Page 13 of 28 facts and circumstances of 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.

37. In the result, the appeal of the revenue is dismissed on all the grounds.

2.18. In order to disallow the expenditure u/s 40A(3) of the Act the appellant must have incurred such expenditure through unaccounted means, or the authorities are not able to identify the genuineness of expenditure. In the present case, the appellant has incurred genuine expenditure and has produced all the relevant information in support of the expenditure. It is also to be noted that it is impracticable to conduct business like construction without incurring the cash payments as the main means for operation is labours and material purchases. In view of the above submissions, it is prayed that the Hon’ble Tribunal be pleased to allow the appeal of the appellant.

Assessment Year 2014-15

3. Background of the Case 3.1. The appellant is a partnership firm which is engaged in the business of real estate development of residential and commercial buildings. Shri Nitish Kumar Shetty is the managing partner of and Smt. Shruthi K Shetty is the other partner of the firm. The appellant filed return of income for the said assessment year vide acknowledgement 426378211281114 declaring total income of Rs. 6,38,700/- and tax liability of Rs. 2,02,551/- which was discharged by way of TDS and advance tax. 3.2. The Survey u/s 133A of the Act was conducted at the business premises of the appellant on 12.12.2017. During the course of survey, various incriminating material including books of accounts and documents were found and impounded. Subsequently, the case was selected for reassessment proceedings u/s 147 of the Act and notice u/s 148 was issued on 07.02.2020. 3.3. Subsequently the assessment proceedings was completed on 26.09.2021 with the assessed income of Rs. 1,65,00,980/- and a demand of Rs. 1,10,87,617/-. The break-up of the same is as under. Particulars Amount Total Income as per Return of Income 6,38,700 Add (iv) Unaccounted cash receipts 9,30,600 (v) Unaccounted cheque receipts 8,26,000 19,87,857 , 1200/Bang/2025 Page 14 of 28 (vi) Contract from receipts from Shanti 1,21,17,822 Sadana (vii) Cash payment disallowance u/s 40A(3) of the Act Total Income assessed as per assessment order 1,65,00,980 u/s 147 3.4. The appellant aggrieved by the above addition and disallowance preferred an appeal before learned Commissioner of Income Tax (Appeals). During the course of the appeal proceedings the appellant submitted all the relevant details to substantiate the genuineness of the expense. However, the learned assessing officer considered the submissions of the appellant and granted relief to the extent of 70,98,483/- and confirmed the disallowance u/s 40A(3) of the Act of Rs. 37,42,684/- for the material payments, Rs. 11,57,443/- incurred for making labour payments and Rs. 29,27,555/- for making payments on Saturday. Aggrieved by this disallowance the appellant filed an appeal before Hon’ble Income Tax Appellate Tribunal.

4. Ground No. 2 & 3 Cash Payment Disallowance u/s 40A(3) of the Act Rs. 78,27,682/- 4.1. During the survey and assessment proceedings, it was observed by the department that there were lot of cash payments in excess of Rs. 20,000 to various parties towards purchase of materials, labour and other expenses. The learned Assistant Commissioner stated that payment in excess of Rs. 20,000/- is a violation of provisions of Section 40A(3) of the Act and disallowed the amount. It is submitted that the learned Assessing Officer has not doubted the genuineness of the transactions and business expediency. However, disallowance was carried out purely on the violation of provisions of section 40A(3) of the Act as stated above. 4.2. It is submitted that the provisions of section 40A(3) of the Act are not applicable to the present case. The detailed submissions are provided below and the provision of section 40A(3) of the Act is reproduced below for ready reference. Section 40A Expenses or payments not deductible in certain circumstances. (1) The provisions…… . . (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 payee cheque drawn on a bank or account payee bank draft, [or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds ten thousand rupees,] no deduction shall be allowed in respect of such expenditure. ….. 4.3. On perusal of above provisions, it can be understood that Section 40A(3) of the Act is a critical provision which aims at regulating the cash 1200/Bang/2025 Page 15 of 28 expenditure in business or profession. The primary agenda for introduction of this provision was to impose the cash payment limit on all the assessee and encourage the use of banking channels or other electronic mode more rigorously. Further, section 40A(3) of the Act must be read along with rule 6DD. The section must be read along with the rule which indicates that the provision are not intended to restrict the business activities. Section 40A(3) of the Act empowers the assessing officer to disallow the transaction which are not made as per the above terms specified. This payment terms were specified to evaluate whether the said expenditure is genuine and is incurred out of the disclosed income. Moreover, the section 40A(3) r.w.r 6DD have never excluded the consideration of business expediency, genuine and bona fide transactions out of the sweep of this section. 4.4. In the present case, the appellant is engaged in the business of real estate development and such activities are even carried out during the clock, even on Sundays and Saturdays and the appellant tend to procure the materials on Sundays and public holidays to avoid any break in the process of construction. Hence, the appellant made the payment in cash on second half of Saturday or Sunday which are non-working for banks, and such exception falls under Rule 6DD(j) and therefore, disallowance u/s 40A(3) of the Act should not be made. The breakup of payments made on non-working days of bank are provided in the paper book. 4.5. It can be viewed from the above table that the appellant has made payment for procuring the materials for construction activity to avoid the break in the process of construction. Further, it can also be seen that the payment made involved individual invoices having amount less than 20,000/-. Considering this, the disallowance made by the learned revenue authorities u/s 40A(3) of the Act is not valid in law and the same is required to be deleted. 4.6. We rely on the decision of Hon’ble ITAT Delhi in case of Surya Merchants Ltd v. DCIT to 181/Del/2017. The relevant portion of judgement is reproduced below for reference.

11. So far as payments made on national holidays and bank holidays are concerned, the Ld. Counsel for the assessee drew the attention of the bench to the submissions made before the CIT(A) on various dates, copies of which are placed at page 13 to 24 of the paper book and submitted that when the same was brought to the notice of the CIT(A), the Ld. CIT(A) called for a remand report from the Assessing Officer. Although the Assessing Officer has not disputed the payment of Rs.39,12,033/- for A. Y. 2007-08, Rs.1,26,24,000/- for A. Y. 2008-09 and Rs.84,60,000/- for A. Y. 2009-10, on bank holidays, however, his objection was that assessee during the course of assessment proceedings / remand proceedings failed to prove the compulsion of such payments on bank holidays. Referring to the provisions of Rule 6DD(J) he submitted that the said provision provides that provisions of section 40A(3) will not be applicable where the payment was required to be made on a day on which the banks were closed on , 1200/Bang/2025 Page 16 of 28 account of holidays or strikes. He submitted that the assessee company is a developer of commercial and residential real estate projects, therefore, it is bound to complete the construction to offer the possession in agreed time to avoid penalties. The assessee, therefore, carries the construction activities round the clock even on Sundays and holidays. The assessee had procured the materials on Sundays and public holidays to avoid any break in the process of construction. He submitted that the customers generally visit the sites of the builders on holidays. Since the assessee received cash on holidays from the customers, therefore, payments were made to the suppliers on holidays for procurement of the materials. Therefore, in view of the availability of cash majorly on holidays, the assessee was bound to make cash payments of pending dues of the suppliers on the holidays itself. . . . The Assessing Officer in the remand report has admitted that such payments have been made on bank holidays. The provision of rule 6DD(J) provides that provisions of section 40A(3) shall not be applicable where the payment was required to be made on a day on which the banks were not open on account of holidays or strike. Since the assessee in the instant case has admittedly made the payments on a day on which the banks were not open on account of holidays and the Assessing Officer has also admitted that such payments were made on bank holidays therefore under the facts and circumstances of the case we are of the considered opinion that provision of section 40A(3) are not applicable to the payments made in excess of Rs.20,000/- on bank holidays which are as under :- 4.7. The above proposition is equally applicable to the facts of the present case where the payments are made on Saturdays after the bank timings which is end of the day to settle the debts. It is generally accepted practice in the state of Karnataka where the payments are made on Saturdays after the business timings. Hence, the disallowance on the mere ground that the payments were made on Saturday should not be accepted when the genuineness of such transactions was never doubted. 4.8. Further the appellant has incurred expenses towards payment for labourers. This payment is again incurred on the construction labourers who receives daily or weekly wages in cash due to non-availability of bank account. It is submitted that the wages paid to individual labour on 15 days basis do not exceed Rs. 20,000/- per day. The total amount of cash paid shown by the assessing officer is nothing but payment of cash to a person who maintain the labourers containing more than 15 or 20 persons. Therefore, each individual payment made to every labourer has to be seen for applicability of provision section 40A(3) of the Act. Hence, disallowance does not arise. The breakup the disallowance is given in paper book at page no. __ , 1200/Bang/2025 Page 17 of 28 4.9. Further, it is a settled proposition that the genuineness of the expenses is required to be verified before making any disallowance u/s 40A(3) of the Act. In the instant case, the appellant has provided all the required explanations to establish the genuineness of the expenses such has labour registers, the breakup of the payments made on second Saturday. Further, it is required to be noted that the learned assessing officer has also not doubted on the genuineness of the payments. Hence, the disallowance made u/s 40A(3) of the Act is not valid in law. We further rely on the following decisions for the proposition. 4.10. It is further submitted that the learned CIT(A) has directed the learned assessing officer to allow all the labour payments since the individual payments of the labourers do not exceed Rs. 20,000/-. However, the learned assessing officer without following the directions of learned CIT(A), has disallowed the labour expenses. The relevant portion of the CIT(A) order is reproduced below 4.11. We rely on decision of Hon’ble ITAT Bangalore in case of Smt. Chandra Moolchand Jain, Bangalore vs Income Tax Officer, Ward- 6(2)(4)

10. On appeal before the CIT(A), assessee contested that all these payments have been made on a bank holiday and therefore disallowance of the same could not have been made as it is covered by provisions of exceptions provided under Rule 6DD of the I.T. Rules. The ld. CIT(A) did not accept the above contention and held that assessee has failed to show that date on which purchases were made and cash is deposited happens to be a bank holiday. Even before us, assessee has though provided details of cash payment, but did not show the date on which cash is paid and that date happens to be a bank holiday. If that be so, disallowance could not have been made. Therefore if transactions is executed on a day on which there is a bank holiday, disallowance should not have been made u/s. 40A(3) of the Act. Further, the assessee has claimed that she has hired a person as she is a women and amount was given to that person who has made cash payment to the sellers of gold & bullion and therefore the situation is covered clearly by clause (k) of Rule 6DD of the I.T. Rules. These argument 1200/Bang/2025 Page 18 of 28 was not examined by the ld. CIT(A). On careful consideration of the arguments and judicial precedents cited before us, the claim of assessee is that assessee has given cash to her employee who is the supervisor or the agent who in turn made payment to the sellers of the gold and therefore the same would not fall within the scope of section 40A(3) of the Act in view of the decision of Hon'ble Calcutta High Court in the case of S.K. Joynal Abedin v. CIT. It was also the claim of assessee that part of jewellery and bullion is purchased by assessee was shown as stock in trade and the provisions of section 40A(3) were not applicable. For this proposition assessee relied on the decision of Delhi High Court in the case of PCIT v. Prosperous Buildcon Pvt. Ltd. The assessee has further relied on the decision of Delhi High Court in the case of Rajesh Kumar v. CIT, 157 taxmann.com 311 stating that if the assessee proves the genuineness of the transaction, disallowance could not have been made u/s. 40A(3) of the Act. On careful consideration, all these issues have not been considered by the ld. lower authorities, therefore, we restore the whole issue back to the file of ld. AO with a direction to the assessee to substantiate that the payment made to 61 parties on bank holiday, the payment was made by the agent and further the business exigency also demanded payment of cash. The ld. AO may examine the above contentions of the assessee for which onus would be on the assessee to prove so and then the AO will decide the issue afresh. Accordingly, all the grounds of appeal of the assessee are restored back to the file of the ld. AO with the above direction. 4.12. We rely on decision of Hon’ble ITAT Bangalore in case of M/S. Amrut Distilleries Private vs Deputy Commissioner Of Income Tax to 950/Bang/2023 ; "The terms of section 40A(3) are not absolute. Consideration 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 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 trans- actions." The said decision of the Hon'ble Supreme Court was also cited by the Mumbai Bench of the ITAT in Arihant Traders vs. ACIT (ITA No. 442/Mum/2019) where their Honours, even in a case where the , 1200/Bang/2025 Page 19 of 28 payments made to the individual truck drivers exceeded the threshold limit of Rs.35,000/- observed as follows: "In the present case, the payment made by the assessee to the individual truck driver has not been disputed. It is not the case of Department that the payments made by the assessee are not genuine or the payees are not identifiable. The assessee has sufficiently explained the circumstances under which the payments have been made to the truck drivers in cash. The assessing officer made disallowance by taking a pedantic view of the cash transactions. Where cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable; no disallowances under section 40A(3) is warranted. Thus, in view of the facts of case and various decisions discussed above, we do not find any error in the findings of Commissioner (Appeals) in deleting disallowances of Rs. 60,73,403 made by the assessing officer under section 40A(3) of the Act. We concur with the findings of Commissioner (Appeals). Accordingly, ground Nos. 1 and 2 raised by the Department in appeal are dismissed." In the present case too, the genuineness of the payments have not been called into question, but the allegation is merely that the payments were made to the same person in the same day, for which reasons have been assigned in detail. In the circumstances, it is prayed that no disallowance under Sec.40A(3) be sustained. 4.13. We rely on decision of Hon’ble ITAT Delhi in case of Geo Connect Ltd. v. Deputy Commissioner of Income-tax Delhi – Trib [2023] 149 taxmann.com 456. The relevant portion of judgement is reproduced below:

13. In case of A. Daga Royal Arts (supra), the Coordinate Bench while dealing with identical issue has observed that even after amendment of Rule 6DD(j), the legal exposition propounded by the Hon'ble Supreme Court regarding consideration of expediency and other relevant factors cannot be considered to be diluted as the rules framed by way of delegated legislation cannot override the substantive legislation in form of section 40A(3) which has not changed its character. Following observations of the Coordinate Bench would be of much relevance: "

27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance.

, 1200/Bang/2025 Page 20 of 28 28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to M/s A Daga Royal Arts, Jaipur Vs ITO, Jaipur curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions." 4.14. We rely on decision of Hon’ble ITAT Jaipur in case of A. Daga Royal Arts v. Income-tax Officer, Ward- 2(2), Jaipur [2018] 94 taxmann.com 401 (Jaipur - Trib.). The relevant portion of judgement is reproduced below: 43. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that the identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee's bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act. In the result, the appeal of the assessee is allowed. 4.15. We rely on decision of Hon’ble High Court of Punjab & Haryana in case of Gurdas Garg v. Commissioner of Income-tax (Appeals), Bathinda , 1200/Bang/2025 Page 21 of 28 High Court of Punjab and Haryana [2015] 63 taxmann.com 289 (Punjab & Haryana) 8. The respondent's case is also supported by the judgment of the Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11. After referring to Rule 6DD, the Supreme Court held:— "7. In our opinion, there is little merit in this contention. Section 40-A(3) must not be read in isolation or to the exclusion of Rule 6-DD. 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 40-A (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 disclosed sources. The terms of Section 40-A(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 40-A(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 6-DD 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 40-A(3) and Rule 6-DD 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. [See: Mudiam Oil Company 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."

, 1200/Bang/2025 Page 22 of 28 10. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act. 4.16. We rely on the decision of Hon’ble ITAT Jaipur in case of Brother Pharma (P.) Ltd. V. Income tax Officer, Ward 4(2), Jaipur [2017] 82 taxmann.com 234 (Jaipur - Trib.) 15. We have heard the rival contentions of both the parties and perused the material available on the record. Prima facie it appears that the assessee has paid salary in excess to Rs. 20,000/- and violated the provisions of Section 40A(3) of the Act but it is also revealed that these payments were pertained to salary for the months of May to August. The genuineness of the payments has not been doubted. The employees were insisted upon casfannexh payments only, therefore, to maintain the good relation with them, the company paid cash salary for various months. The Hon'ble Rajasthan High Court in the case of Harshila Chorida (supra) has held that exceptional condition mentioned in Rule 6DD are not exclusive. This was the business expediencies of the company to pay in cash, therefore, we do not find that these payments are covered U/s 40A(3) of the Act. Accordingly, the addition confirmed by the ld CIT(A) is deleted. Hence, this ground of assessee's appeal is allowed. 4.17. We rely on the decision of Hon’ble ITAT Delhi in case of Income Tax Officer, Ward -52(1), new Delhi [2021] 124 taxmann.com 563 (Delhi - Trib.) 35. A similar view is expressed by the High Court of Calcutta in Giridharilal Goenka's case (supra), where it was observed that (at p. 128): "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 of each particular case in exercising his 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 strike a balance between the direction of law and hardship to the assessee."

, 1200/Bang/2025 Page 23 of 28 4.18. In order to disallow the expenditure u/s 40A(3) of the Act the appellant must have incurred such expenditure through unaccounted means, or the authorities are not able to identify the genuineness of expenditure. In the present case, the appellant has incurred genuine expenditure and has produced all the relevant information in support of the expenditure. It is also to be noted that it is impracticable to conduct business like construction without incurring the cash payments as the main means for operation is labours and material purchases. In view of the above submissions, it is prayed that the Hon’ble Tribunal be pleased to allow the appeal of the appellant.

Date Particular Amount (Rs.) Engineer work charges 18.01.2013 21.250 01.08.2012 Labour development cess 99,000 26.02.2013 Mahaganapathi Steel 2,00,000 Professional 21,600 31.01.2013 3,41,850 Total

9. Considering the rival submissions and on perusal of entire material available on record and Orders of authorities below, we noted that during the reassessment proceedings it was observed that assessee has made cash , 1200/Bang/2025 Page 25 of 28 payments on working days on Sundays as well as on non banking days. As per direction of the learned CIT(A) the AO verified and noted that assessee has made payments on the bank working days. The learned Counsel strongly supported the payments made and stated that genuineness of the payments are not doubted and therefore relying on the judgments cited by him submitted that the addition made under section 40A(3) of the Act is not justified and the payments were made on the bank holiday days. After going through the entire submissions of the assessee we noted that assessee has made payment of Rs.3,41,850/- as per the above table for the Assessment Year 2013-14. We have also verified date of payments. We noted as under:

Date Day Particular Amount(Rs.) Engineer work charges 18.01.2013 Friday 21.250 01.08.2012 Wednesday Labour development cess 99,000 26.02.2013 Tuesday Mahaganapathi Steel 2,00,000 Thursday Professional 21,600 31.01.2013

, 1200/Bang/2025 Page 28 of 28 15. In the result, we dismiss grounds raised by the assessee.