MURLI DHAR UPADHYAY,JAIPUR vs. ITO WARD 6(3), JPR, JAIPUR

3. Violation of Natural Justice: Under the facts and circumstances of the case Ld. CITA(A) grossly erred in confirming the impugned assessment proceedings/order as the 3 same has been framed in violation of the principles of natural justice without granting to the assessee a fair, proper and reasonable opportunity including without issuing specific/proper SCN to the assessee.

4. Under the facts and circumstances of the case Ld. CIT(A) grossly erred in confirming the action of Ld. AO in disallowing of Rs. 5,99,520/- u/s 40A(3) of the act, and Rs. 1,00,000/- on 4 account of disallowances of lump sum expenses without appreciating the facts available on records and without considering them in their true perspective and sense therefore complete addition should be deleted.

5. Succinctly, the facts as culled out from the records are that the assessee is engaged in the business of distribution of milk of Jaipur dairy to the milk booths. He had filed his ITR for the relevant year, declaring total income of Rs.7,11,090/-. The case of the assessee was selected for scrutiny through CASS for verification of “Cash deposited during demonetization period” The assessee was issued various notices on this issue, which were duly replied to the satisfaction of the AO. Assessment was finally completed u/s 143(3) of the I.T. Act assessing income at Rs.14,10,610/- after making addition on account of disallowance u/s 40A(3) of Rs.5,99,250/- and a further lump sum disallowance of Rs.1,00,000/- out of various expenses. Penalty proceedings u/s 270A(1) of the I.T. Act was also initiated.

1. Initiation and complete proceeding is illegal; Under the facts and circumstances of the case Ld. CITA(A) grossly erred in confirming the invalid and illegal action of Ld. AO while complete assessment proceeding including initiation u/s 143(2) is illegal, invalid and without jurisdiction and barred by limitation hence may kindly be quashed.

2. Violation of Natural Justice; Under the facts and circumstances of the case Ld. CITA(A) grossly erred in confirming the impugned assessment proceedings/order as the same has been framed in violation of the principles of natural justice without granting to the Sh. Murli Dhar Upadhyay, jaipur. assessee a fair, proper and reasonable opportunity including without issuing specific/proper SCN to the assessee.

3. Under the facts and circumstances of the case Ld. CIT(A) grossly erred in confirming the action of Ld. AO in disallowing of Rs. 5,99,520/- u/s 40A(3) of the act, and Rs. 1,00,000/- on account of disallowances of lump sum expenses without appreciating the facts available on records and without considering them in their true perspective and sense therefore complete addition should be deleted.

4. That the appellant reserves his right to add, amend or alter the grounds of appeal on or before the date of appeal hearing. Written Submission Ground No. 1 & 2; No Show Cause Notice before making addition At the outset it is important to mention here that the addition made by the Ld. AO, initially, was not the subject matter of this impugned proceeding as the same was initiated for scrutiny through CASS on the issue “cash deposit during demonetization period”. Whereas the addition made by the Ld. AO on account of disallowance of expenditure on lump-sum basis and; On account of cash payment made to the identified seller (Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd. (Jaipur Dairy)) through established transaction after the demonetization before demonization period i.e. within the period of 18/04/2016 to 07/05/2016. The ledger of the Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd. (Jaipur Dairy) is annexed at PB 57-58. Further apropos to this ground we submit that in this case the Ld. AO has grossly erred in law and facts in making addition without issuing specific show cause notice before making addition u/s 143(3) of the act which is mandatory requirement of law in the eyes of natural justice which also a fundamental right of the assessee therefore complete disallowance as well as addition should be deleted. By observing the assessment order and complete assessment proceedings it is revealed that whatever information sought from Ld. AO have been submitted by the assessee appellant in due course and before making additions as made by the Ld. AO, he did not issue any Show Cause Notice to the assessee. The additions as made by the Ld. AO completely arbitrary and vague in the air, if during the course of assessment proceedings the Ld. AO asks to produce such specific information or issue a SCN such additions could not have been made.

Sh. Murli Dhar Upadhyay, jaipur. For better understanding we are reproducing the relevant portion of section 143(3) of the act :- “On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:” It is pertinent to mention that from the plain reading of the abovementioned section it is clear that the Ld. AO is required to issue a SCN to the assessee, if he is not inclined to accept the return submitted by the assessee and if he wants to modify the assessment from the return. In this case the Ld. AO violated the principle of natural justice by not providing the opportunity of being heard to the assessee and ignored the trite law that unless a statutory provision either specifically ignores or by necessary implication excludes the application of principle of natural justice. And the requirement of giving reasonable opportunity is generally read into the provision of a statue, particularly when the order has adverse civil consequences for the party affected. Here it is also notable that Ld. CBDT has put a mandatory condition upon Ld. AO regarding following the principle of Natural justice in order to issue show cause notice before making any proposed addition through their Instruction No. 20/2015 dated 29/12/2015 (refer para 4 of instruction). Our aforesaid view is supported by the following decisions:- In the matter of Zenith Processing Mills vs Commissioner Of Income Tax Dated 28 September, 1995 Hon’ble Gujarat High court held as follows:- “It is inherent part of s. 143(3) that where the AO is not inclined to accept the return submitted by the assessee and if he wants to modify the assessment from the return a show cause notice is required to be given to the assessee. Giving of this opportunity will include opportunity to rectify procedural defect, if any, which are directory in nature. If we examine the matter from that point of view we are satisfied that in the present case, the claim made by the assessee was, though not admissible for want of auditor's report on record yet the same was allowed under a mistake by the AO leaving no opportunity to the assessee to complete the requirements. The condition of non-fulfilment of requirement under sub-s. (6A) was made known to the assessee during the proceedings under s. 263 although the assessee asked for an opportunity to Sh. Murli Dhar Upadhyay, jaipur. produce the auditor's report to fulfil the requirement under s. 80J (6A) the CIT ought to have afforded an opportunity to the assessee to furnish that proof and then examined the admissibility of the claim in the light of the proof furnished.” In the matter of M/S Sahara India (Firm),Lucknowvs Commissioner Of Income Tax, Central-I & ... on 11 April, 2008 the Hon’ble supreme Court held as follows:- “15. Thus, it is trite that unless a statutory provision either specifically or by necessary implication excludes the application of principles of natural justice, because in that event the Court would not ignore the legislative mandate, the requirement of giving reasonable opportunity of being heard before an order is made, is generally read into the provisions of a statute, particularly when the order has adverse civil consequences for the party affected. The principle will hold good irrespective of whether the power conferred on a statutory body or tribunal is administrative or quasi-judicial.” Ground No. 3 (A) Genuineness of the transactions because payment made to identified person Apropos to this ground it is submitted that the assessee being an authorised distributor of Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd. (Jaipur Dairy), supplies milk to the authorised booths of Jaipur Dairy. During the year under consideration it is submitted that the assessee made purchase of Rs. 18,87,29,849.55and out of this purchase only the following payments was disallowed by the Ld. AO u/s 40A (3)/ Rule 6DD of the act for making payment to Jaipur Dairy :- Date Amount Remarks 18/04/2016 23,240/- Payment made due to business expediency on the direction made by the Jaipur dairy. 22/04/2016 5,18,500/- The said amount paid in cash to Jaipur dairy, after bank hours, due to net work outage in the assessee’s bank. Certificate from Jaipur dairy is annexed at PB 54. Certificate from ICICI is annexed at PB 56. 03/05/2016 31,000/- Payment made due to business expediency on the direction made by the Jaipur dairy. 07/05/2019 26,780/- Payment made due to business expediency on the direction made by the Jaipur dairy. Payment made due to business Total 5,99,250/- Sh. Murli Dhar Upadhyay, jaipur. expediency on the direction made by the Jaipur dairy. Form the amount of addition made it is clear that the cash payment disallowed u/s 40A(3) constitute only 0.31 % of the total purchase made by the assessee. Further it is important to mention that to which payment was made is a Govt. entity, thus its identity and genuineness is not questionable. Since the identity of the seller and genuineness of the transactions are fully established and the Ld. AO have not raised any doubt over the genuineness of the payments and it is submitted that where the genuineness of the payments are not doubted by the Ld. AO, no disallowance u/s 40A(3) could be made. In order to continue business operation effectively, assessee had no other option but to make the payment in cash. Cash payments were made from the disclosed sources being the amount collected from authorised dairy booths of Jaipur dairy. Had the assessee denied the cash payment looking to the provisions of sections 40A(3), the business operation of the assessee got affected badly as the Jaipur dairy does not supply milk to the assessee without depositing the complete collection/payment form dairy booth. In such circumstances, in the business interest and to run the business effectively, the assessee had chosen to make the payments in cash. The payment has been made out of the explained sourcesi.e cash collected from dairy booths of Jaipur dairy.

(B) Payment made according to circular dated 31/05/1997 as issued by CBDT [220 {F. No. 206/17/76-IT (A-II)] Under the facts and circumstances of the case the Ld. AO was not justified in making the addition of Rs. 5,99,520/- on account of disallowance under section 40(A)(3) without appreciating the fact that the payment made by the assesse to an identified person.

The Ld. AO ignored the fact that the identity of the person, from whom the said payment was made, was clearly established and made to an identified Govt. entity i.e. Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd. (Jaipur Dairy). The fact that the identity of the person was identifiable and not fictitious, will automatically exonerate the assessee.

The object of the introduction of this sub-section 40A (3) was explained in a circular of the Board vide Circular No. 6P, dated 6th July, 1968 as follows; “ sub-section (3) of new section 40A makes a provision for the disallowance of expenditure incurred in business and profession for which payment is made in an amount exceeding Rs. 2,500/- otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. This provision will apply in respect of payments made after a Sh. Murli Dhar Upadhyay, jaipur. date to be notified by the Government, being a date not later that 31st March 1969. This provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the department as to the identity of the payee and the reasonableness of the payment.”

Thereby in given case both the payments have been made to an identified person, which is govt. entity i.e. Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd. hence such transaction should not be objectionable in the eye of law. In support of our above said contention we are relaying on the following judgements: Identical Matter; In the matter of vrindavanlal Gupta V/S ITO Jaipur dated 25/01/2018 (ITA No. 321/JP/2017) hon’ble ITAT JAIPUR hold that : In this matter the assessee made payment in cash of Rs. 59,30,000/- to the JaipurZilaDugdhUtpadakSahakariSangh Ltd. (Jaipur Dairy).

2.1 “During the course of hearing the ld.AR of the assessee prayed that the lower authorities have erred in disallowing the cash payments of Rs. 59.30lacsmade to M/s. Jaipur ZilaDugdhUtpadakSahakariSangh Ltd u/s 40A(3) of the Act by the assessee. The ld.AR of the assessee filed the written submission which has been taken into consideration. 2.2 On the other hand, the ld. DR supported the orders of the lower authorities. 2.3 We have heard the rival contentions and perused the materials available on record. In this case, the AO observed that the assessee made payments of Rs. 1,14,64,000/-on various dates (page 2 of assessment order) toM/s. Jaipur ZilaDugdhUtpadakSahakariSangh Ltd (Saras Diary), Jaipur in violation of provisions of section 40A(3) of the I.T. Act, 1961. The AO further noted that assessee made payments of Rs. 55,34,000/-on bank holidays which are excluding the purview of sec 40A(3) of the I.T. Act, 1961. The AO thus disallowed the payments of Rs. 59.30 lacs in violation of provisions of sec 40A(3) of the Act and added the same to the total income of the assessee by observing as under:- ‘’Considering the facts of the case and Rule 6DD of the Act, the exemption is only allowed for the day on which the banks were closed either on account of holiday or strike.

Further the plea of the assessee depositing the cash on Monday is not considered as the Monday has not been considered in exclusion. In the light of the above, following expenses in excess of twenty thousand in a day incurred in cash is disallowed and added to the total income of the assessee u/s 40A(3):-

S.N. Date of payment Amount Paid 1. 20-05-2013 500000 2. 27-05-2013 300000 3. 03-06-2013 600000 4. 24-06-2013 550000 5. 15-07-2013 300000 6. 22-07-2013 450000 7. 16-08-2013 250000 8. 09-09-2013 700000 9. 01-10-2013 480000 10. 7-10-2013 600000 11. 14-10-2013 600000 12. 18-10-2013 600000 5930000 In first appeal, the ld. CIT(A) has confirmed the action of the AO. The assessee is an individual and is engaged in transporting milk from M/s. Jaipur ZilaDugdhUtpadakSahakariSangh Ltd (Saras ) to various Saras Dairy booths on commission basis i.e. @ Rs.49.90 per litre. The work of the assessee included in taking milk from Saras Dairy and distribution of the same to various Saras Dairy booth sand also collection of money from booths and paying the same to Saras Dairy. On such collection of money, the assessee was entitled for commission @ Rs. 49.90 per litre. It is noted that in the case of the assessee the identity of the recipient M/s. Jaipur ZilaDugdhUtpadakSahakariSangh Ltd (Saras Dairy) is well established to whom the entire payment of Rs. 59.30 lacs has been made by the assessee. It is noted that in the entire assessment order there is nota single word doubting the genuineness of payments or questioning the payments in any other way. The assessee collected payments from the dairy booths and got commission @ Rs. 49.90 paise per litre. Thus the assessee was in fact working as an agent on commission basis. Therefore, the payments did not require to be disallowed in his hands. There is no iota of doubt regarding the genuineness of the payments. The Hon'ble Rajasthan High Court in the case of Smt. Harshila Chordiavs ITO (2008) 298 ITR 349 held as under:- Held: (i) that there was no dispute about the genuineness of the transactions and the payment and identity of the receiver were established. The conclusion reached by the Commissioner (Appeals) was correct and the Tribunal by ignoring the scope of clause(j)ofrule6DDasexplainedbytheBoard’sCircularhad erred in reversing the finding reached by the Commissioner (Appeals). The addition of Rs. 40,13,000/- could not be made under section 40A(3).’’ In the case of Anupam Tele Services vs ITO (2014), 366 ITR 122, the Hon'ble Gujarat High Court observed as under:- ‘’The terms of section 40A(3) arenot absolute and other relevant factors are not excluded. Genuine andbonafide transactions are taken out of the sweep of the section.’’ Moreover, the contract of this work is in existence since2006 but no such disallowance was made in earlier years. Taking into consideration the above facts and circumstances of the case and the case laws in the case of Smt. Harshila Chordiavs ITO and Anupam Tele Services vs ITO (supra), it is observed that the ld. CIT(A) has erred in disallowing the payment of Rs. 59.30 lacs to the assessee. Thus the solitary ground of the assessee is allowed. 3.0 In the result, the appeal filed by the assessee is allowed.” In M/s A Daga Royal Arts, JaipurVs ITO, Jaipur [ITA No. 1065/JP/2016] wherein it was held that:

"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 HarshilaChordia (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 section 40(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 40(3) of the Act." In case of GurdasGarg vs. CIT(A), Bathinda (supra), the matter which came up for consideration before the Hon'ble Punjab & Haryana High Court, the facts of the case are parimateria to the instant case and the ratio of the said decision clearly applies in the instant case. In that case, the facts of the case were that the assessee was engaged in trading in properties and during the course of assessment proceedings, the AO observed that there are transactions where the payments have been made in excess of Rs. 20,000/- in cash which were disallowed u/s 40A(3) of the Act. The Hon'ble High Court held that rule 6DD(i) is not exhaustive of the circumstances in which the proviso to section 40A(3) is applicable and it only illustrative. The Hon'ble High Court refers to the decision of the Hon'ble Rajasthan High Court in case of Smt. HarshilaChordia v. ITO (Supra) and the decision of Hon'ble Supreme Court in Sh. Murli Dhar Upadhyay, jaipur. case of Attar Singh Gurmukh Singh v. ITO (Supra). The High Court further observed that the Id. CIT(A) has given a finding that the identity of the payee i.e. vendors in respect of land purchase by the appellant was established, the sale deeds were produced, the genuineness thereof was accepted and the amount paid in respect of each of these agreement was satisfied before the Stamp Registration Authority and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not attracted. The Hon'ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions and it is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market and therefore it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to settle the deals. The Tribunal did not doubt this case.The Tribunal, however, held that the claim for deduction was not sustainable. In view of Section 40A(3) as the payments which were over Rs. 20,000/- were made in cash.TheHon'ble High Court accordingly observed that "the Tribunal has not disbelieved the transactions or the genuineness thereof nor has it disbelieved the fact that payments having been made. More importantly, 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." Disallowance of expense for Rs. 1,00,000/- on lump-sum basis; (A) No invocation of Section 145(3) – Rejection of books mandatory before estimation/disallowance The Ld. AO has not recorded any dissatisfaction with the correctness or completeness of the books of account maintained by the assessee. The books have not been rejected u/s 145(3) of the Income Tax Act, 1961. In the absence of such rejection, the AO cannot make an ad-hoc disallowance of expenses merely on estimate or suspicion. In the absence of rejection of books, the accounts are deemed to be acceptable, and no lump-sum disallowance can be made arbitrarily.

Further it is pertinent to mention that there is no significant variation in the expense of the assessee on year on year basis. (B) No defects pointed out in books or vouchers The assessee has maintained proper books of account, and no specific defect in the vouchers or books has been highlighted by the Ld. AO. In such circumstances, the disallowance of ₹1,00,000 on a lump-sum basis is purely arbitrary and not supported by law.

Sh. Murli Dhar Upadhyay, jaipur. To support we are relaying on the following case laws: In the matter of Danayya Shavaputrayya Math D S Math, Contractor, VijayapurHon’ble ITAT hold that: “9.3 In view of the above precedents, we are inclined to hold that the adhoc disallowance is not justified without rejecting the books of accounts of the assessee. Accordingly, the grounds of assessee are allowed.

10. We note from the order of the CIT(A) that from erred in dismissing the appeal without giving a proper finding on the issues raised. The provisions of the Act make it clear that once an appeal is preferred before the CIT(A), then in disposing of the appeal, he is obliged to make such further inquiry that he thinks fit or direct the Assessing Officer to make further inquiry and report the result of the same to him as found in Section 250(4) of the Act. Further Section 250(6) of the Act obliges the Sh. Murli Dhar Upadhyay, jaipur. CIT(A) to dispose of an appeal in writing after stating the points for determination and then render a decision on each of the points which arise for consideration with reasons in support. Thus, once the assessee file an appeal under Section 246A of the Act, it is not open to him as of right to withdraw or not press the appeal. In fact the CIT(A) is obliged to dispose of the appeal on merits.

Order pronounced in the open Court on 16/09/2025.