Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER D.S. SUNDER SINGH, Accountant Member:
This appeal is filed by the assessee against the order of the Commissioner of Income Tax(Appeals) [CIT(A)], Vijayawada vide I.T.A.No.147/CIT(A)/VJA/2014-15 dated 31.12.2015 for the assessment year 2011-12.
2 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
Originally, the assessee has filed as many as 11 grounds in appeal which are lengthy and argumentative. Subsequently, the assessee filed total 8 revised grounds.
During the appeal hearing, the Ld.AR submitted that Ground No.1 is general in nature which does not require specific adjudication.
Ground Nos. 4(a), 5, 6 and 7 are not pressed by the Ld.A.R, therefore, Ground Nos.4(a), 5, 6 and 7 are dismissed as not pressed.
Ground Nos. 2 to 4 and 4(k) are related to the additions made by the Assessing Officer (AO), invoking the provisions of section 40(A)(3) of the Income Tax Act, 1961 (hereinafter called as ‘Act’). During the assessment proceedings, the AO found that the assessee has made the payment of Rs.24,86,500/- to M/s ARCH Marketing, Navdurga Compound Building No.4, Ground Floor, GALA No.1A, Anjur Road, Village-VAL, Bhiwandi District, Thane otherwise than by crossed account payee cheque. Similarly in the case of M/s Haresh Orgo Chem, 23, Anant Building, 217 Shamaldas Gandhi Marg, Mumbai also paid an amount of Rs.29,75,000/- otherwise than by crossed account payee cheque. The AO further observed that the assessee issued self / bearer cheques to its employees for withdrawing cash from the bank and made the
3 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
cash payments to the above two concerns. On verification of the assessee’s bank accounts with State Bank of India, Chinnavutapalli branch with A/c No.30515831267 and State Bank of Hyderabad, Gannavaram with A/c No.62137722645 the AO found that the assessee has presented the bearer cheques, withdrawn the cash and made the payments in cash to the above two concerns. This trend was continued not in a single or couple of occasions, but throughout the year. The assessee has made the payments to the above concerns in as many as 63 occasions. Though the assessee has made the payments in cash, the account copies reflected the cheque numbers, thereby misdirecting the department as if the payments were made through account payee cheques or account payee demand draft. The assessee pleaded before the AO that the payments were made in cash to those concerns since the concerns have insisted for cash payments towards material supplied by them. The AO did not find any reason to accept the contention of the assessee that the payments were made in cash in exceptional circumstances, therefore, made the addition of Rs. 54,61,500/- comprising of the payments made to Haresh Orgo Chem and Arch Marketing.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) did not find any merit in the assessee’s
4 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
contention of exceptional circumstances and accordingly confirmed the addition of Rs.54,61,500/-. The assessee relied on the number of decisions before the Ld.CIT(A) which are as under : (a) Hon’ble High Court of Madhya Pradesh in the case of CIT Vs.Mahavir Stores 150 CTR (MP) Page 690(1998) (b) High Court of Punjab & Haryana in the case of CIT Vs. Avatar Singh & Sons 194 ITR 80 (1992) (P&H) The first appellate authority has considered the submissions of the assessee and called for the remand report and given an opportunity to the assessee to explain the reasons for payment in cash. After considering the remand report, the objections of the assessee for the remand report, the Ld.CIT(A) confirmed the addition. The observations of the Ld.CIT(A) are made available in para No.6 to 6.9 which are extracted for the sake of clarity and convenience as under : “6. I have perused all relevant details including reports of Assessing Officer and Appellant’s replies thereto and ITMR. 6.1. In the Form 3CD report column No.17(h)(B) i.e. Amount in admissible u/s 40A(3) r.w.rule 6DD it was mentioned “No such cases”. In Annexure B to clause 17(h)(B) of Form 3CD, it was submitted that a certificate had been obtained from the assessee that all the payments exceeding Rs.20,000/- were made by account payee cheques account payee bank drafts only, except for the payment made under the circumstances laid down under Rule 6DD of the IT Rules, 1962.
5 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
Perusal of bank account revealed that most of the withdrawals for payment were by way of self/ bearer cheques and not by account payee cheques/ account payee bank Drafts. Some details of bank account are as follows: SBH, Gannavaram Branch, Account No.62137722645 Debit Sl.No Value date Details Cheque No. Amount 1. 04/08/2010 Cash Cheque paid to M. Sinivasa 548564 70,000 2. 11/08/2010 Cash Cheque paid to self 548567 1,00,000 3. 04/09/2010 Cash cheque 548577 40,000 4 . 17/09/2010 Cash cheque 548845 40,000 5. 23/09/2010 Cash cheque 548849 50,000 6. 01/10/2010 Cash Cheque paid to self 548853 2,00,000 7. 06/10/2010 Cash Cheque paid to self 548961 1,00,000 8. 08/10/2010 Cash Cheque paid to self 548962 25,000 9. 14/12/2010 Cash Cheque paid to self 549140 6,50,000
From the above, it could be noted that except for a very few debits, all other payments were by way of bearer cheques and not account payee cheques. Hence there is clear violation of provisions of section 40A(3) of the Act by the Appellant. 6.2 It is not disputed by the Appellant that cash payments exceeding Rs.20000/- were made to M/s. Arch Marketing to the tune of Rs.24,86,500/- and to M/s. Haresh Orgo Chem to the tune of Rs.29,75,000/- as mentioned in the assessment order. When Assessing Officer verified several entries in Bank pass books, then appellant admitted that it had presented self/ bearer cheques in these bank accounts, withdrawn the cash and made cash payments to the above two concerns. Since payments were made otherwise than by account payee cheques or account payee drafts in respect of above two concerns, much reliance cannot be placed on the confirmation given by these two concerns as these receipts were not routed through banking channels. From the details furnished by Appellant as well as in the assessment order, the following could be noticed.
6 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
Payment exceeding Total quantum Period Party to whom paid Rs.20,000/- paid No. of occasions 15/04/2010 to 36 M/s Arch Rs.24,86,500/- 13/09/2010 Chemicals 03/04/2010 to 27 M/s Haresh Orgo Rs.29,75,000/- 07/08/2010 Chem Though Appellant certified that all the payments relating to expenditure covered u/s40A(3) were made by account payee cheques drawn on a bank or account payee bank draft vide column No. 17(h)(A) of Form 3CD report, it is not so in respect of above 63 transactions. Further violation of provisions of section 40A(3) is also self evident. The authority has to be satisfied whether the payments in violation of the provisions under section 40A(3) had to be made under urgent and exceptional circumstances. In the case of CIT Vs Assam Tribune (Gauhati) 221 ITR 488, Hon’ble Gauhati High Court held that even if transaction is entered in the books of other party, unavoidable circumstances have to be proved by Appellant. In the case of Associated Engg. Enterprise Vs. CIT(Gauhati) 216 ITR 366, similar view was held that not merely genuineness of transaction, but existence of circumstances warranting cash payment must be proved.
6.3 In the case of Aggarwal Steel Traders Vs. CIT (P&H) 250 ITR 738, it was held that assessee must produce confirmatory letter from other party as proof for insisting on cash payment.
6.4 The relevant extract from the Board Circular No.220 dated 31/05/1977is reproduced below for the sake of convenience. [108 ITR (st) 8&9]
“It can be said that it would generally satisfy the requirements of rule 6 DD(J), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of this address sales tax number/ PAN, if any, for the purposes of proper identification to enable the ITO to satisfy himself about the genuineness of the transaction. The ITO will however record his satisfaction before allowing the benefit of rule 6DD(j)”
6.5. In the case of T.G.Mutha Vs. ITO (ITAT, Pune) 54 ITD 460 it was held as follows :
"The provision of Section 40A(3) has been enacted with a view not only to eliminating or minimizing bogus claim of expenditure and Unaccounting of receipts and incomes, but also to facilitate
7 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
assessments by the department. In that context, it would amount to frustrating / defeating the legislature object of the enactment, if the claims of deduction of expenditure were allowed merely on the basis that the transaction was genuine, payment was genuine and the identity of the party was not doubted".
6.6. in this case, the Appellant's explanation is that the parties (numbering two) insisted on cash payment. But no evidence (Viz the two suppliers issued any certificate to the effect that they had insisted on cash payments since they wanted money for their business requirements) was placed to corroborate this claim in respect of both parties involving transactions on as many as 63 occasions.
6.7. The payments made for purchases would also be covered by the word "expenditure' (Attar Singh Gummukh Singh Vs. ITO (SC) 191 ITR 667). Section 40A(3) has been enacted for strict enforcement. Except making a claim that its case was covered under exceptional circumstances under Rule 6DD, Appellant did not provide any evidence of exceptional or unavoidable circumstances in this case (regular, periodical purchase of raw materials for production of aqua and Poultry feed supplements) which rendered making of payments by account payee cheques /account payee bank drafts impracticable or rendered cash payments unavoidable or out of sheer necessity. 6.8. In the case of DCIT Vs. Vijay Kumar Ramesh Chand & Co (ITAT Pune) 108 ITD 626 it was held that exception under Rule 6DD(k) is only to an agent of the assessee and the employee of the assessee is not an agent. 6.9 In view of the above, the submission of Appellant is not convincing. In my view, appellant had not discharged its burden of proof to establish exceptional and unavailable circumstances in each one of 63 occasions (involving bearer cheque / self cheque transactions) mentioned supra. Therefore, there is clear violation of provisions of section 40A(3) of the Act read with rule 6DD of IT Rules. Hence payment to the tune of Rs.54,61,500/- is hit by provisions of section 40A(3) of the Act, I therefore, confirm the addition of Rs.54,61,500/-.
Aggrieved by the order of the Ld.CIT(A), the assessee carried the matter to the Tribunal. During the appeal hearing, the Ld.AR submitted that
8 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
the assessee is operating at Chinnavutapalli village and there are no banking facilities in Chinnavutapalli. The banks are located in Gannavaram, which is 5 Km away from Chinnavutapalli and 25 Km away from Vijayawada. Since there is no banking facility available in the said village, the assessee maintained two bank accounts each at Gannavaram and Vijayawada. The main activity of the firm is to manufacture veterinary food supplements and the business is to purchase and sale of raw material and finished goods dealt with on credit basis. Due to financial hardship during the previous year relevant to the assessment year under consideration, the assessee could not make the payments to the creditors on time, hence the trade creditors had insisted for bi-weekly cash payments in order to procure their raw material in Andhra Pradesh. Accordingly, the respective payments were made by withdrawing the amounts from the respective banks duly obtaining the receipt cum vouchers, wherein the details of bearer cheques were mentioned for their convenience. It was also stated that the trade creditors have offered a competitive rate in delivery of the goods in case of cash payments or DD. The Ld.AR further submitted that there are two partners in the assessee’s firm who are frequently touring, leaving blank signed cheques with the employees who in turn made the payment to the employees of both the concerns as and when the
9 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
representative of the suppliers visited the firm by withdrawing cash from the respective bank account. Further, the Ld.AR submitted that for transfer of amount through RTGS /NEFT signature of the partners are required, therefore, the assessee did not resort to payment by RTGS / NEFT. The Ld.AR submitted that the payment made to the above two concerns in cash is covered under exceptional circumstances, therefore, requested to allow the expenditure as deduction and delete the addition made by the AO. The Ld.AR also argued that the payment is covered by Rule 6DD(k) of Income Tax Rules.
On the other hand, the Ld.DR submitted that the assessee is carrying on the business at Chinnavutapalli and there is a bank operating in Chinnavutapalli village which is evident from the assessment order and the assessee is also having bank account in Chinnavutapalli with A/c No.30515831267. In this case, the assessee has made the payments to both the concerns on 63 occasions which shows that the assessee is in the regular habit of making cash payments instead of complying with the statutory requirements. There were no compelling or exceptional circumstances in the assessee’s case for making the cash payments. The Ld.DR further invited our attention to para No.6.1 of the Ld.CIT(A)’s order,
10 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
wherein, in the Form 3CD, it was reported that no payment exceeding Rs.20,000/- was made otherwise than by account payee cheque which is contradicting fact and misdirecting the AO. In all the occasions, the assessee has withdrawn the cash by self cheque and shown as payment through cheque which is also misdirecting the department. Since there are no exceptional circumstances, the case is not covered by Rule 6DD and Rule 6DD(k) of the IT Rules, 1962. Accordingly, submitted that there is no reason to interfere with the order of the Ld.CIT(A).
We have heard both the parties and perused the material placed on record. In this case, the assessee has made the payments on 36 occasions to the ARCH Marketing with aggregate payment of Rs.24,86,000/- and to Haresh Orgo Chem on 27 occasions with aggregate payment of Rs.29,75,000/-. All the payments were made exceeding Rs.20,000/- and the entire payment was made for expenditure relating to purchases of raw material. Both the recipients i.e. ARCH marketing and Haresh Orgo Chem are business entities having bank accounts. As per the record, they are the regular suppliers of material to the assessee. When both the parties are having bank accounts and the regular customers, there is no reason to make the cash payment in excess of Rs.20,000/-. The assessee should have
11 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
regard for the statutory obligations and it is obligation on the part of the assessee to comply with the statutory requirements. On perusal of the transactions of the assessee, it is observed that the assessee is in the regular habit of making cash payments, in violations of provisions of section 40A(3) of the Act. The assessee claimed to have made the payment to agents, but, in fact cash payments were made to the employees of the business entities and it is settled issue that the employees are not the agents. To treat a person as an agent, there should exist a principal and agent relationship but not the employer and the employee relationship. In this case, the payments were made to the employees. We have already held that employee is not an agent. The submission of the Ld.AR that the partners have left the signed blank cheques with the employees of the firm, who had drawn the cash by self or bearer cheques and paid the amounts to the employees of the suppliers as and when they visited the assessee’s firm is neither convincing nor satisfactory. Since, both the firms are having bank accounts, the assessee can make the payment by crossed account payee cheque in accordance with the provisions of 40A(3) of the Act or through NEFT or RTGS, the contention of the assessee that signatures of the partners are required for RTGS or NEFT cannot be a valid explanation and the assessee has to make suitable arrangements for complying with the
12 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
statutory requirements. The assessee also appears to have written in the accounts with cheque number to show that the payments were made through cheques to divert the attention of the AO. Further audit report in Form 3CD also reported that no payment was made otherwise than by crossed cheque exceeding Rs.20,000/- which shows that the assessee has submitted false report misdirecting the AO and diverting the attention of the AO. The payment was neither made on holidays nor on Sundays or beyond the banking hours to claim the exemption under rule 6DD. The assessee relied on the Rule 6DD(k) of IT Rules also as per which the payment made to agent is covered under exceptions, but in the instant case, the Ld.AR submitted before the Ld.CIT(A) and also before us that the payment was made to the employee and the employee is not an agent as decided by the Hon’ble ITAT Pune in the case of DCIT Vs. Vijay Kumar Ramesh Chand & Co. (2007) (208 ITD 626). Since the assessee could not establish with the relevant evidences that the payment was made in cash in excess of Rs.20,000/- in exceptional circumstances, we do not find any reason to interfere with the Ld.CIT(A) and the same is upheld and the case is squarely covered by the decision of Hon’ble Supreme Court in Attar Singh Gurmukh Singh Vs. ITO and other case laws relied upon by the Ld.CIT(A). With regard to the assessee’s reliance on Rule 6DD(k), we have already
13 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
held that the payment made to employee cannot be treated as payment to agent. The Ld.AR did not bring any other case law of High Court / Apex Court to support it’s contention. Accordingly, the appeal of the assessee on this issue is dismissed.
Ground No.8 is related to the disallowance of Rs.2,33,122/- out of the processing charges. During the assessment proceedings, the AO found that the assessee has debited an amount of Rs.2,33,122/- towards processing charges and found that most of the expenditure charged under the head represents expenditure incurred towards wages. The AO asked for the proof of payment and the assessee submitted self made vouchers and the AO was of the view that some of the vouchers are not amenable for verification and does not contain the details such as name of the recipient, date of payment, signature of the recipient etc. Therefore, the AO disallowed 10% of the expenditure amounting to Rs.2,33,122/- which was agreed by the Ld.AR during the course of assessment proceedings. However, the assessee carried the matter to the CIT(A) and the Ld.CIT(A) observed that the assessee did not produce any evidence even before the first appellate authority to support the expenditure. Therefore, the Ld.CIT(A) confirmed the addition.
14 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
Aggrieved by the order of the Ld.CIT(A), the assessee carried the matter to the Tribunal. During the appeal hearing, the Ld.AR argued that the entire expenditure was processing charges and vehemently opposed the order of the Ld.CIT(A). During the appeal hearing, the Ld.AR did not place any evidence to establish the genuineness of expenditure. It is observed from the assessment order that in many of the vouchers, the details required for verification such as date, name of the recipient, date of payment, signature of the recipient etc. was not made available. Therefore, the Ld.AR has agreed for the addition before the AO. Before the Ld.CIT(A) also, the assessee did not produce any evidence, therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the assessee on this ground is dismissed.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 16th November, 2018.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 16.11.2018 L.Rama, SPS
15 I.T.A. No.114 /Viz/2016 M/s Pharma Bio Solutions, Chinnavutapalli
आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. अपीलाथी / The Appellant – M/s Pharma Bio Solutions, (Formerly named as M/s Padmaja Laboratories) Chinnavutapalli 2. प्रत्यार्थी / The Respondent–Income Tax Officer, Ward-1(2), Vijayawada 3. The Pr.CIT, Vijayawada 4. The Commissioner of Income Tax (Appeals), Vijayawada 5. धिभागीय प्रधिधिधि, आयकर अपीलीय अधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडा फ़ाईल / Guard file
आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM