THE INCOME TAX OFFICER, FEROZEPUR vs. M/S REHMAT TRADERS, FEROZEPUR CANTT.

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER I.T.A. No. 454/Asr/2016 Assessment Year: 2010-11

Income Tax Officer Vs. M/s. Rehmat Traders, Ward-3(2), Ferozepur 159-P, Khalsa Gurdwara Street, Ferozepur Cantt. [PAN: AALFR 2409M] (Appellant) (Respondent)

Appellant by : Sh. Ajay Goyal, CIT-DR Respondent by: Sh. Sudhir Sehgal, Advocate Date of Hearing: 12.03.2018 Date of Pronouncement: 01.06.2018

ORDER Per Sanjay Arora, AM: This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals), Bathinda ('CIT(A)', for short) dated 20.06.2016, allowing the assessee’s appeal contesting its’ assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 04.03.2016 for Assessment Year (AY) 2010-11.

2 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders 3. The appellant, i.e., M/s. Rehmat Traders - a pro tempore partnership firm of nine (9) partners, headquartered at Muktsar, coming into existence on March 10, 2009 and having its longevity only till March 31, 2010, undertook the business of purchase and sale of country liquor, IMFL, beer, etc. for the financial year 2009- 10. During the year under consideration, the appellant-firm was allotted Excise licence for six (6) vends in Bathinda circle and four (4) in Muktsar circle. Accordingly, different branches were opened by taking premises on rent. The return of income for the said assessment year was subjected to the verification procedure under the Act, and income assessed at Rs. 11,30,640/- vide order dated 19/03/2013, as against the returned income of Rs. 9,80,640/- However, the said assessment was set aside vide order dated March 12, 2015 by the Principal Commissioner under the provisions of section 263 of the Act on the ground of it being erroneous and prejudicial to the interests of Revenue. Pursuant to the said revisional order, assessment was reframed on 04/03/2016 whereby an amount of Rs.3,64,24,760/- was disallowed for violation of sections 40A(3)/40A(3A) of the Act for making payments in cash to one Shri Gurbaksh Singh, proprietor M/s. Cheema Wines and to M/s. Unique Wines, against purchase of liquor for sale at the firm's allotted vends. It is this assessment that led to an appeal by the assessee impugning the said disallowance. The same having been since deleted by the ld. CIT(A) following the binding decision by the Hon’ble jurisdictional High Court in Gurdas Garg v. CIT (in ITA No. 413 of 2014 dated 16th July, 2015 [63 taxmann.com 289], the Revenue is in appeal, raising the following grounds:

‘1. The CIT(A) , Bathinda has erred in deleting the addition made u/s 40A(3) by holding the same as genuine and made on account of practical expediency without appreciating the fact that provisions of section 40A(3) read with Rule 6 DD of the Rules do not include "genuineness or business expediency." 2. The Ld. CIT(A), Bathinda has erred in placing reliance on the order of Hon'ble High Court in the case of Sh. Gurdas Garg without appreciating that the

3 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders Hon'ble High Court, in that case allowed the appeal of the assessee by observing that the cash payments made by the assessee were covered under the exception provided under Rule 6DD(j) of the Rules whereas clause (j) of Rule 6DD was omitted w.e.f. 25.07.1995. 3. The Ld. C1T(A), Bathinda has erred in not appreciating that the Hon'ble High Court, in the case of Sh. Gurdas Garg has admitted that it noticed the fact of omission of clause (j) from Rule 6DD at the time of writing the judgment after having pronounced- its order in open Court and that in view of these facts allowed parties to take up suitable proceedings including review of its judgment and that a petition seeking review of its order in Gurdas Garg has already been filed before the Hon'ble Punjab and Haryana High Court, which is pending. 4. The Ld. CIT(A), Bathinda has erred in allowing the appeal by relying upon the order of Punjab & Haryana High Court in the case of Sh. Gurdas Garg, whereas clause (j) of Rule 6DD was omitted w.e.f. 25.07.1995 and substituted by Rule 6DD that is presently in force by Income Tax (7th Amendment) Rule, 2008 w.e.f. AY 2009-10, which applies to the case of the assessee, which is for A.Y. 2010-11 and Rule 6DD as it now stands does not cover the assessee's case. 5. The Ld. CIT(A), Bathinda has erred by failing to appreciate that the cases and circumstances under which no disallowance can be made as provided in the 1st proviso to sub section (3) of Section 40A are prescribed under rule 6DD of Income Tax Rules 1962, that any expenditure of the amount exceeding twenty thousand rupees otherwise than by a crossed cheque/draft made to a person in a day shall be allowable u/s 40A(3) of the Act to the assessee only in cases and circumstances prescribed under Rule 6DD of the Rules specified from clause (a)| to (l), that the list is exhaustive and hence in a case not covered under various clauses of Rule 6DD, disallowance of expenditure exceeding twenty thousand rupees has to be made and was rightly made by the A.O. and that Section 40A(3) of the Act and Rule 6DD of the Rules have to be read together and not separately as suited the assessee. 6. The appellant craves leave to add or amend the grounds of appeal on or before the date of hearing of the appeal.’

4.1 Contesting the disallowance under section 40A(3)/(3A) of the Act, it was asseverated by the ld. counsel for the assessee, Sh. Sehgal, Advocate, that the said provision did not apply to the appellant in-as-much as all the transactions of cash payments for purchase of liquor were made by each vend (branch) independent of each other against separate permits issued by the Excise and Taxation Department.

4 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders The sale bills bore the necessary permit number allotted to each vend. Submissions were made to emphasize that the appellant firm duly recorded all the purchases so made in separate books maintained for each branch. Separate vend-wise purchase was justified on the ground of the Excise regulation prohibiting mixing or interlacing of the stock of one vend with the other. Separate trading and profit and loss account of each vend was stated to have been prepared, though a consolidated operating statement (of all the branches) was prepared at the close of the year, which accounts were audited as per the requirement of the Act for filing the return of income. In sum, the cash transactions beyond the specified limit on a single day had arisen only as the purchases made by the individual vends were clubbed/ reckoned together. If the said cash payments for the purchase of liquor were taken separately and independently for each vend, then the circumstance for non- deduction of such expenses, as ordained by the provisions of section 40A(3)/(3A), would not arise. In addition to the aforesaid argument, the impugned disallowance was assailed as being repugnant to the stipulations of the first proviso to section 40A(3A) which prohibited disallowance in such cases and under such circumstances as may be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. It was pleaded that since the genuineness of the cash payments for purchase of excisable goods were not in doubt, and the identity of the payee firmly established, no disallowance was called for. For the aforesaid proposition, heavy reliance was placed on a recent judgement of the Hon’ble jurisdictional High Court in Gurdas Garg v. CIT (supra). In the said judgment, he averred, it stands held that once the transactions and the genuineness thereof is not questioned, a case is clearly made out for business expediency, and in such circumstances the provision of section 40A(3)/(3A) could not be invoked.

5 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders 4.2 It was, however, brought to the notice of Sh. Sehgal that the decision by the Hon'ble jurisdictional High Court in the case of Gurdas Garg (supra), relied upon by the ld. CIT(A) as squarely covering the issue at hand, stands since recalled by the Hon'ble Court on a review petition filed by the Revenue, which was in fact outstanding for disposal at the time of passing the impugned order, even as noted by the ld. CIT(A) at para 7 ( pg. 11) of his order. That, in fact, defined the Revenue’s case before us. Conceding thereto, being a matter of fact, he would however add that the prescription of the circumstances under first proviso to section 40A(3A) are in addition to that stipulated under rule 6DD of the Income Tax Rules, 1962 (the ‘Rules’ hereinafter). We could not disagree more in-as-much as the excepting circumstances, which would, where obtaining, operate to exclude section 40A(3)/(3A), are only that as prescribed as per rule 6DD of the Rules. The reading of the first proviso afore-referred makes this abundantly clear. In fact, as would be patent from a reading of the erstwhile Rule 6DD(j), the consideration of genuineness of the expenditure and/or that of the payments there-against was never a qualifying attribute even there-under. The reason is simple. Even as observed by the Bench during hearing, a non-genuine expenditure would stand to be ousted for allowance at the very threshold, i.e., under the section under which the deduction for the same in the computation of business income is being claimed, viz., s. 37(1) (for purchases, and any revenue expenditure generally), etc. The genuineness of an expenditure or of payment made in its respect, as also argued by the ld. DR, is not a relevant consideration for invoking section 40A(3)/(3A), which only seeks to regulate the mode of payment - nothing more and nothing less, i.e., of an otherwise allowable or admissible expenditure. It is not meant for tax realization, but to check evasion of tax, as is also apparent from Circular No. 3/2008 dated 12.03.2008 (299 ITR (St.) 8) and Circular no. 01/2009 dated 27.03.2009 (310 ITR (St.) 42), extracted by the ld. CIT(A) at paras 5 and 6 of his order. The matter in

6 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders fact stands dealt with and explained at considerable length by the Tribunal per its special bench decision in ITO v. Kenaram Saha and Subhash Saha [2009] 116 ITD 1 (Kol)(SB); and more recently in Gurdas Garg v. Asst. CIT (in ITA No. 456/Asr/2013, dated 28/2/2014) (also referred to by the ld. CIT(A)) and Asst. CIT v. Darshan Kumar Mahajan (in ITA No. 566/Asr/2016, dated 18.04.2018), from which we therefore draw support. In fact, the matter stands squarely covered by the several decisions by the Hon'ble High Courts, including that by the Hon'ble jurisdictional High Court, as in Hari Chand Virender Paul v. CIT [1983] 140 ITR 148 (P&H) (also referred to by the special bench). Rather, as afore-stated, even under the erstwhile rule 6DD(j) - which has undergone amendments from time to time (the latest being its substitution w.e.f. AY 2009-10), it is not the genuineness of the expenditure or of the payments there-against – in which case there is no need to travel to s. 40A(3), that is relevant, but circumstances such as ‘impracticability of payment’; ‘exceptional and unavoidable circumstances’; or ‘genuine difficulty’ (that may arise), that were the saving or accentuating circumstances leading to the payment made in contravention of the provision being excluded for disallowance. The same, it may be noted, itself implies – if there is any doubt with regard thereto, that is, that the provision is only applicable to genuine expenditure which is otherwise allowable in computing business income. The decision by the Hon’ble High Court in Gurdas Garg (supra) would thus not be of no assistance as the said decision itself stands since recalled by the Hon’ble High Court on finding that the r. 6DD(j) as cited before it stands since substituted. This position was fairly conceded to by the ld. AR during hearing.

4.3 Coming to the facts of the case, we find a conflict in the findings by the AO as well as the ld. CIT(A) qua commercial expediency. While the AO states that the same has not been shown in any manner, i.e., as to how it was not practical to

7 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders make the payment through the banking channel; the ld. CIT(A) justifies the same on the basis of the dealership being temporary in nature in-as-much as the licence for the trade was issued to the appellant-firm only for a year, and that, as stated, not making the payment in cash would have caused unnecessary delay and additional financial burden by way of bank charges, besides loosing out on discount/rebate, which are routinely deducted in the purchase invoices. Though there is no material on record to justify the same, we refuse to be drawn into this controversy, finding it irrelevant in the absence of its’ prescription under rule 6DD, even as we cannot help wondering as to how in the days of electronic payments could discount be insisted upon for payment only in cash, which is both risky and time consuming. A nominal advance of the payment being made, per cheque, equal to the payment to be made on a single day, avowedly not exceeding Rs. 20,000/-, would imply that payment to that extent stands received, which could then be repeated each day, entitling thus the purchaser to the discount on its daily purchase. In other words, the argument is devoid of business rationale and sense, as is the plea of the cash payments being made before the banking hours, i.e., opening of the bank (in the morning). Why, the assessee has also pleaded absence of bank account at Bathinda as among the reasons, which is plainly frivolous in-as-much as it is the assessee, operating as many as 5 vends thereat, who has to open a bank account; having already a bank account with Punjab & Sind Bank at Muktsar - the location of the sixth vend. We, therefore, are hardly impressed with the said pleas, besides finding them irrelevant.

4.4 Be that as it may, we find some merit in the assessee’s claim of each vend being managed separately, i.e., by one (or more) partner/s, with each vend maintaining separate accounts. If, therefore, each vend is maintaining separate books of account, having thus a separate account with the supplier, liable for

8 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders payments thereto, i.e., against purchases made by it, and there is no interlacing of management, including purchase and sale; we discern a valid justification for not clubbing the payments made by each vend to the common supplier/s. This is as excise rules would be applicable vend-wise; each responsible for maintaining its’ stock, as well as the stock record. Though any discrepancy would make the firm liable for any difference in the excise, with each partner of the firm being severally as well as collectively liable therefor, there is sound justification for the partners initially segregating their duties, so that each is responsible for the stock as well as the finances of the vend allotted to him. Each vend would under the circumstances, maintaining its’ accounts separately, would not know if the payment by another to the common supplier stands made or not, and in what amount. Though the accounts of the assessee would have to be consolidated as at the year-end, with in fact it being the assessee-firm to whom the excise license has been granted by the Excise Department, it is each vend (a separate business enterprise), albeit belonging to same entity, that is to make the payments. As such, therefore, we find substantial basis for reckoning the payments for the purposes of u/s. 40A(3)/(3A) separately for each vend. Needless to add, this consideration would have no application where there is transfer of cash, stock, etc. from one vend to another, in which case there is a common link/management, including of cash, with the payments to the supplier being therefore monitored at the group level. Like-wise, if there is an interlacing of management, as where the purchases (for each vend) are decided at the group level. The matter, in view of the foregoing, is accordingly restored to the file of the Assessing Officer for factual verification and adjudication on the basis of the factual findings in light of our observations aforesaid. The onus to prove its claims, we may add, would be on the assessee. We decide accordingly.

9 ITA No.454/Asr/2016(AY 2010-11) ITO v. Rehmat Traders 5. In the result, the Revenue’s appeal is partly allowed. Order pronounced in the open court on June 01, 2018 Sd/- Sd/- [ (N. K. Choudhry) (Sanjay Arora) Judicial Member Accountant Member Date: 01.06.2018 /GP/Sr. Ps. Copy of the order forwarded to: (1) The Appellant: ITO Ward-3(2), Ferozepur (2) The Respondent: M/s. Rehmat Traders, Ferozepur Cantt. (3) The CIT(A), Bathinda. (4) The CIT concerned. (5) The CIT-DR, I.T.A.T.