SHRI ANANDKUMAR RAWATRAM JOSHI,SURAT vs. THE INCOME TAX OFFICER, WARD-2(2), SURAT

आदेश /O R D E R

PER O. P. MEENA, ACCOUTANT MEMBER: 1. These two appeals by the Assessee are directed against the two separate orders of learned of Commissioner of Income tax (Appeals) II Surat (in short the CIT (A)) dated 29.04.2014 for the assessment year 2007-08 and order dtd. 16.05.2014 for assessment year 2008-09.

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 2 of 22

I.T.A. No. 2112/Ahd/2014/A.Y. 2007-08 2. Ground no. 1 & 2 states that the Ld.AO erred in passing order under section 154 read with section 254 of the Act without providing any opportunity of being heard to the assessee as required under section 154 (3) of the Act, therefore, it is prayed that order passed by the AO under section 154 read with section 254 of the Act may please be quashed.

2008-09 was completed under section 143(3) of the Act by

making disallowance of total payments Rs. 58, 29, 830 u/s.

40A(3)(a) and Rs. 2, 68, 66, 115 under section 40A(3)(b) of the

Act respectively. As the assessee not brought any explanation on

record as to whether there was any business expediency or

exceptional and unavoidable circumstances necessitating such

payments otherwise than by account payee cheques. Accordingly,

disallowance of Rs. 58, 29, 830 was made under section 40A(3)(a)

of the Act on account of payment for the purchases during the

year and disallowance of Rs. 2, 68, 66, 115 was made under

section 40A(3)(b) of the Act in respect of liability incurred in A.Y.

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 3 of 22

2007-08 and payments were made to creditors during the year

under consideration out of opening balances brought forward.

The assessee went into appeal before CIT (A) but without any

success. The assessee further filed an appeal before the Tribunal.

The Tribunal has set-aside the order of the Assessing Officer

considering the plea of assessee that the assessee made

payments through an agent who was required to make further

payments in cash and that provisions of rule 6DD(k) was

applicable. Accordingly, the order was set-aside for consideration

the applicability of rule 6DD(k). The Tribunal has further directed

that even if the AO finds that rule 6 DD (k) is not applicable, then

disallowance under section 40A(3)(b) cannot be made in the

assessment year under consideration i.e. assessment year 2008-

09 for the reason that amendment brought in by Finance Act

2007 with effect from 01.04. 2008 will not be applicable for the

assessment year 2008-09. The Tribunal had interpreted that

amendment in the provisions of section 40 A (3)(b) will be

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 4 of 22

applicable in respect of expenditure incurred in assessment year

2008-09 and in subsequent years but will not be applicable in

respect of liability of expenditure incurred in assessment year

2007-08.

pursuance of the order of Tribunal, the assessment for

assessment 2008-09 was made and disallowance @ 20% of Rs.

2,68,66,115 under section 40A(3)(b) for the assessment year

2007-08 is made by passing order under section 154 by observing

that no notice under section 154 is required to be issued as the

assessee has been heard while passing assessment order for the

assessment year 2008-09 in set-aside proceedings. In view of

that matter, the learned Counsel contended that the Assessing

officer has passed an order under section 154 without providing

an opportunity of hearing to the assessee as required under

section 154 (3) of the Act. Therefore, it is urged before us that

the rectification order passed in violation of natural Justice

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 5 of 22

should be quashed. The learned Counsel by placing reliance on

the judgement of Hon`ble Punjab & Haryana High Court in the

case of CIT v. Smt. Shelly Passi [2013] 350 ITR 227 (P&H)

submitted that where the assessee has purchased goods and

deposited cash directly in bank account of seller, no disallowance

could be made in hands of payee –assessee. In the instant case,

the payments by way of cross cheque were deposited in bank

account of seller/ creditors hence, Rule 6DD (k) has no

application. The learned counsel for the assessee further relied

on the decision of Co-ordinate Bench of Kolkata tribunal in the

case of Rampada Panda v. ITO [2016] 65 taxmann.com 213 (Kol-

Trib) where the assessee has directly deposited the payments in

the bank account of supplier PF which has acknowledged by

concerned supplier by crediting it into ledger account of the

assessee and genuineness of these payments had also not been

doubted by revenue, provision of section 40A (3) could not be

made applicable. In the case of the assessee, payments are not

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 6 of 22

doubted and held that payments were directly made by cross

cheque to supplier/creditors. Hence, this case is squarely

applicable to present facts of the case.

Representative supported the order of the AO on the ground that

the opportunity was provided during the course of assessment

proceedings for assessment year 2008-09, hence, there was no

need to provide further opportunity of being heard, while passing

the order under section 154 of the Act.

fact and observation of the AO made in the body of order under

section 154 that the rectification order under section 154 has

been passed without giving an opportunity of being heard to the

assessee. the provision of section 154 (3) reads as us under:-

(3) An amendment, which has the effect of enhancing an assessment68 or reducing a refund or otherwise increasing the liability of the assessee 69[or the deductor] 70[or the collector], shall not be made under this section unless the authority concerned has given notice to the assessee 69[or the deductor] 70[or the collector] of its intention so to do

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 7 of 22

and has allowed the assessee 69[or the deductor] 70[or the collector] a reasonable opportunity of being heard.

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 8 of 22

hearing is necessary before passing any order. We find that it is pre-decision hearing standard of norm of rule of audi alteram partem. We find that in this instant case, the assessee was not given proper hearing. Therefore, we are of the view that the assessee must be given one more opportunity of hearing and to represent his case. Therefore, in exercise of power conferred under Rule 28 of Tribunal Rules, we restore this appeal for any assessment year 2007-08 to the file of the ld. Assessing Officer for allowing proper opportunity of being heard in accordance with law. We find that the Hon`ble Punjab & Haryana High Court in the case of CIT v. Smt. Shelly Passi [2013] 350 ITR 227 (P&H) held that where the assessee has purchased goods and deposited cash directly in bank account of seller, no disallowance could be made in hands of payee –assessee. In the instant case, the payments by way of cross cheque were deposited in bank account of seller/ creditors hence, Rule 6DD (k) has no application. Further, the Co-ordinate Bench of Kolkata tribunal in the case of Rampada Panda v. ITO [2016] 65 taxmann.com 213 (Kol-Trib) where the assessee has directly deposited the payments in the bank account of supplier PF which has acknowledged by concerned supplier by crediting it into ledger account of the

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 9 of 22

assessee and genuineness of these payments had also not been doubted by revenue, provision of section 40A (3) could not be made applicable. . In the case of the assessee, payments are not doubted and held that payments were directly made by cross cheque to supplier/creditors. Hence, this case is squarely applicable to present facts of the case. This aspect was not examined by the AO while making scrutiny for the assessment year 2008-09. Hence, we direct the AO to examine this aspect in the light of ratio laid down in aforesaid judgements. Further. we also observe that the AO did not issue summons under section 131 to Shri Manoj Kumar Sharma, Agent, for examination even if the assessee has demanded. Therefore, the issue is set-aside to the file of the AO for allowing opportunity of being heard and examining the case in the lines as indicated above. Nevertheless, to mention that the assessee will cooperate in the appeal proceedings and file necessary evidences on which he wants to rely upon. 8. In the result, the appeal of the assessee for the A.Y.2007- 08 in I.T.A. No. 2112/Ahd/2015 is allowed for statistical purposes.

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 10 of 22

I.T.A. No. 2135/Ahd/2014/A.Y. 2008-09

made are relates to A.Y. 2007-08 and part pertains to A.Y. 2008-

09, being considered together. Succinctly facts are that the

return of income for A.Y. 2008-09 was filed on 30.09.2008

declaring total income of Rs.3,31,140/- wherein original

assessment was made under section 143 (3) on 27. 12. 2010 by

making an disallowance of Rs. 58, 29, 830/- under section

40A(3)(a) and making disallowance of payments of Rs.2,68,

66,115/- under section 40A(3)(b). The assessee has filed appeal

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 11 of 22

before CIT (A) wherein a plea was made that payments were

made through an agent Shri Manoj Sharma , who demanded cross

cheques as he was required to make payments in cash hence,

Rule 6DD(K) was applicable. However, this plea was rejected by

CIT (A). The assessee further went in appeal before Tribunal,

wherein vide order dated 18.11.2011 in I.T.A.

No.1833/Ahd/2011/A.Y.08-09 has set-aside the issue to the file

of the AO - by observing as under:

“We are not satisfied on this aspect that merely cheques were issued in the name of suppliers, non-existence of agent is proved. Regarding furnishing of evidence also, we feel that in the interest of justice, one more opportunity should be provided to bring the required evidence on record and hence, we set-aside the order of ld. CIT (A) on both the issue i.e. regarding disallowance under section 40A (3) for both expenses incurred during the present year and also of the expenses incurred during earlier year or years to the file of the AO for fresh decision. The assessee has to bring required evidence on record in support of this

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 12 of 22

contention that there was an agent and the payments were made by the assessee as per the direction of the agent and hence, Rule 6DD(k) is applicable, After providing adequate opportunity to the assessee, the AO shall pass necessary order as per law on this aspect.”

Assessing officer for examining the applicability of rule 6 DD (k)

for the addition of Rs. 58, 29, 830/-under section 40A(3)(a) of

which payment was made during the financial year 2007-08

relevant to assessment year 2008-09 and the disallowance of

Rs.2, 68,66,115/-being payment made out of opening balance as

on 01.04.2007, with a direction that even if he finds that rule

6DD (k) is not applicable, then also, no disallowance or addition

is called for in the present year i.e. A.Y. 2008-09 in respect of

the payments of Rs. 2,68,66,115 as the same pertains to A.Y.

2007-08 in which the liability was incurred as per the provisions

of section 40A(3) as applicable to assessment year 2007-08. It

was further directed that the AO shall first decide the

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 13 of 22

applicability Rule6DD (k) with regard to these payments also and

if it is found that rule 6DD(k) is not applicable, even then also no

disallowance is called for in the present year out of opening

balance and the addition in this regard shall be made in that

year, in which the liability was incurred by applying the provision

of section 40A(3) which was applicable to the assessment year

2007-08. In the light of these directions of Tribunal, the AO

passed the impugned assessment order under appeal. Before the

AO, it was claimed that the payment was made through the

agent named as Mr. Manoj Sharma, hence, payments are covered

under Rule 6DD(k). In view of this matter, the AO asked to the

assessee to produce Shri Manoj Sharma for examination vide

letter dated 14.02.2013, but the assessee has failed to produce

Shri Sharma on the ground that they are not dealing with him

now, and asked the AO to issue summons him directly vide

submissions dated 28.03.2013 as reproduced by the AO in the

body of assessment order, but the AO did not chose to do so. The

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 14 of 22

assessee has also filed a confirmation Ltd. dtd. 30.05.2011 from

Shri Manoj Sharma wherein it was contended that Shri Manoj

Sharma has admitted that he has received cross cheques from the

assessee for making cash payments to suppliers from whom the

assessee has purchased goods. However, the AO concluded that

there was no agent as claimed by the assessee. With regard the

applicability of Rule 6DD (k), the AO noted that as per Rule 6DD

(k) “the disallowance would not be made in a case, where the

payments is made by any person to his agent who is required to

make payment in cash for goods or services on behalf of such

person”, in the present case, the payments could not be made by

agents as cheques issued by the assessee were deposited in

different accounts. Hence, Rule 6DD (k) is not applicable.

Accordingly, the AO proceeded to disallowance the amount of Rs.

58,29,830 under section 40A(3)(a) for the assessment year 2008-

09 and Rs. 2,68,66,115 disallowance under section 40A(3)(b) for

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 15 of 22

the assessment year 2007-08 by way of passing order under

section 154 of the Act.

CIT (A). The CIT (A) noted that the AO has made disallowance of

Rs.58,29,830 in A.Y. 2008-09 and disallowance @ 20% of

payments of Rs. 2,68,66,115 in relation to A.Y. 2007-08 by

passing order under section 154 of the Act. However, the

assessee has challenged the disallowance of Rs. 58,29,830, but

also challenged by way of additional ground for total amount of

Rs. 3,26,95,945 considering in contravention of section 40A(3) of

the Act. The CIT (A) observed that “Rule 6DD(k)-provides for

exception to section 40A(3) that where the payments is made by

any person to his agent who is required to make payment in cash

for goods or services on behalf of such person.” In the present

case, the appellant has claimed that Mr. Manoj Sharma was his

agent. However, cheques have not been issued by the assessee in

favour of Mr. Manoj Kumar Sharma. The payments has been made

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 16 of 22

by cross cheque in favour of creditors/ suppliers and not in the

name of Mr. Manoj Sharma. These cross cheques are not account

payee cheques as required under section 40A (3) of the Act.

There is no endorsement on backside of these cheques by the

payee, which means that only a creditor/supplier of the

appellant could authorize discounting of cheques through shroffs

or could make endorsement. The so called agent, Mr. Manoj

Sharma, has no authority to endorse such cheques or get them

discounted through shroffs. Therefore, in the present case, it

cannot be said that the appellant had made payments to Mr.

Manoj Sharma, as he could not discounted the cheques or

endorsed the cheques issued in the name of others parties. The

CIT (A) further observed that the confirmation of Mr. Manoj

Sharma says that he has obtained the cheques but it is fallacy as

the cheques have been issued in the name of creditors

/suppliers, hence, he could not get discounted of endorsed the

cheques. Further, the appellant has not produced Mr. Manoj

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 17 of 22

Sharma for examination, nor the payment of commission charged

@0.5% for the service, as agent has been debited by the assessee

in its books of accounts. Therefore, the confirmation does not

establish that Mr. Manoj Sharma was his agent. Even if it assumed

that Mr. Manoj Sharma was his agent, even that payment is not

covered by Rule 6DD (K) as it requires when the payment is made

to agent. Here the cheques have been issued in the name of

creditors/ suppliers. The CIT (A) also observed that if the

appellant has made full amount by cross cheque to creditors and

creditors have received payments after deduction of 0.5%

commission, it means that the commission has been deducted

from sale proceeds receivable by those parties. This in turn

means that Mr. Manoj Sharma has acted an agent for creditors

/suppliers and not for the appellant. The CIT (A) held that the AO

examined both the payments of Rs. 58,29,830 made during year

and Rs. 2,68,66,115 paid during year out of opening balance as

on 01.04.2007 under Rule 6DD(k) and consequently, made

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 18 of 22

disallowance of Rs. 58,29,830 during year and 20% of Rs.

2,68,66,115 during A.Y. 2007-08 assessment order direction of

Tribunal by passing order under section 154 of the Act. Further,

the assessee has accepted order under section 154 and only

challenged the calculation mistake of disallowance against the

order under section 154 in appeal before CIT (A), which has been

allowed by CIT (A). In view of this matter, the findings of the AO

were upheld.

Tribunal. The learned Counsel by placing reliance on the

judgement of Hon`ble Punjab & Haryana High Court in the case

of CIT v. Smt. Shelly Passi [2013] 350 ITR 227 (P&H) submitted

that where the assessee has purchased goods and deposited cash

directly in bank account of seller, no disallowance could be made

in hands of payee –assessee. In the instant case, the payments by

way of cross cheque were deposited in bank account of seller/

creditors hence, Rule 6DD (k) has no application. The learned

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 19 of 22

counsel for the assessee further relied on the decision of Co-

ordinate Bench of Kolkata tribunal in the case of Rampada Panda

v. ITO [2016] 65 taxmann.com 213 (Kol-Trib) where the assessee

has directly deposited the payments in the bank account of

supplier PF which has acknowledged by concerned supplier by

crediting it into ledger account of the assessee and genuineness

of these payments had also not been doubted by revenue,

provision of section 40A (3) could not be made applicable. In the

case of the assessee also, payments are not doubted and held

that payments were directly made by cross cheque to

supplier/creditors. Hence, this case is squarely applicable to

present facts of the case. Further, the AO did note examine Shri

Manoj Sharma by issuing summons under section 131 of the Act,

even though specifically requested by the assessee.

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 20 of 22

section 154(3) of the Act in respect of disallowance pertaining to an amount of Rs. 2,68,66,115/-. This disallowance were examined by the AO while making assessment for A.Y. 2008-09. It is the case of the assessee that the payments of Rs. 58,29,830 were examined with reference to payments made through an agent, however, the assessee could not produce the said agent. Now the assessee has claimed that payments were made directly to creditors by the assessee through cross cheques given to agent. Therefore, placing reliance on the judgement of Hon`ble Punjab & Haryana High Court in the case of CIT v. Smt. Shelly Passi [2013] 350 ITR 227 (P&H) it has been held that where the assessee has purchased goods and deposited cash directly in bank account of seller, no disallowance could be made in hands of payee –assessee. In the instant case, the payments by way of cross cheque were deposited in bank account of seller/ creditors hence, Rule 6DD (k) has no application. The learned counsel for the assessee further relied on the decision of Kolkata tribunal in the case of Rampada Panda v. ITO [2016] 65 taxmann.com 213 (Kol-Trib) where the assessee has directly deposited the payments in the bank account of supplier PF which is acknowledged by concerned supplier by crediting it into ledger

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 21 of 22

account of the assessee and genuineness of these payments had also not been doubted by revenue, provision of section 40A (3) could not be made applicable. In the case of the assessee, payments are not doubted and held that payments were directly made by cross cheque to supplier/creditors. Hence, this case is squarely applicable to present facts of the case. However, this aspect has not been examined by the AO. Nor the AO has examined Shri Manoj Kumar Sharma by issuing summons under section 131 of the Act as requested by the assessee. Therefore, as we have set-aside the assessment for the assessment year 2007-08. Therefore, it would be in the fitness of things and in the interest of justice that one more opportunity of being heard is allowed to the assessee on entire disallowances i.e. disallowance for both assessment year involved [i.e. A.Y.2007-08 and A.Y. 2008-09]. In the light of above facts and circumstances, and law position, we are of the considered opinion that the entire issue needs to be re-evaluated or re-visited by the AO on the line of the ratio as laid down in the case of CIT v. Smt. Shelly Passi [2013] 350 ITR 227 (P&H) and Rampada Panda v. ITO [2016] 65 taxmann.com 213 (Kol-Trib) where the assessee has directly deposited the payments in the bank account of supplier PF which

Anand Kumar Joshi v. Income-tax Officer 2(2) Surat/I.T.A. No.2112 & 2135/Ahd/2014/A.Y.:07-08 & 08-09 Page 22 of 22

is acknowledged by concerned supplier by crediting it into ledger account of the assessee and genuineness of these payments had also not been doubted by revenue, provision of section 40A (3) could not be made applicable. The AO will also examine Shri Manoj Kumar Sharma after issuing summons under section 131 of the Act or on production by the assessee. Accordingly, we set- aside this issue to file of the AO for making de-nova assessment on this point to the file of the Assessing Officer for allowing proper opportunity of being heard in accordance with law. Nevertheless, to mention that the assessee will cooperate in the assessment proceedings and file necessary evidences on which he wants to rely upon. 16. In the result, the appeal of the assessee for the

assessment year 2007-08 and A.Y. 2008-09 are allowed for

statistical purposes.