M/S. ARIHANT TRADERS,NAVI MUMBAI vs. ACIT-28(1),, NAVI MUMBAI

This appeal has been filed by the assessee against the order dated 11.01.2019 passed by the Commissioner of Income Tax (Appeals)-26 (for short ‘the CIT(A) Mumbai, for the assessment year 2014-15, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee firm having income from business, filed its return of income for the assessment year under consideration declaring total income at Rs. 51,18,155/-. Since, the case was selected for scrutiny, the AO issued notice u/s 143 (2) and 142 (1) of the Act. In response thereof Shri Nitin Parekh, partner attended from time to time and filed the details called for. It was noticed that during the year relevant to the assessment year under consideration, the assessee had made payments to the transporters in cash under the heading transportation (inward) in its ledger accounts. Accordingly, AO asked the assessee to show cause as to why the Assessment Year: 2014-15 amount of Rs. 5,52,455/- should not disallowed u/s 40A(3) of the Act. The assessee contended that the amount paid to the transporters forms the part of the amount payable to the farmers. The said amounts were paid to the transporters on behalf of the farmers under their instructions. The AO rejected the contention of the assessee and disallowed the claim of the assessee and made addition of the said amount to the income of the assessee. The AO also made addition of Rs. 2,50,660/- on account of excess interest paid to its partners and determined the total income of the assessee at Rs. 59,21,270/-. Assessee challenged the assessment order before the Ld. CIT (A). The Ld.CIT (A) partly allowed the appeal of the assessee, however, confirmed the addition of Rs. 5,52,455/- made on account of disallowance u/s 40A(3) of the Act. Still aggrieved, the assessee is in appeal before this Tribunal. 3. The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- “1. Because, the CIT (A) has erred in law and on facts in upholding the disallowance u/s 40A(3) on account of payment to transporters amounting to Rs. 552,455/- made by the AO. 2. Because, the CIT (A) has erred in law and on facts in ignoring the binding precedence cited during the appellate proceedings.”

Before us, the Ld. counsel for the assessee submitted that the assessee is a trader in onion and potato. As a matter of practice, the farmers used send the produce from villages through transporters arranged by them after giving advance. The farmers also used to send the Bill along with goods showing balance amounts to be paid as transport charges to the transporter by the assessee on behalf of the farmers. The assessee used to deduct the said amounts from the sale proceeds. In the present case, the assessee had made payment of Rs. 5,52,455/- to 13 such transporters above Rs. 35,000/- in cash. Since, the payments were made to the farmers for purchase of agriculture goods, it is covered under rule 6DD(e) being payment for the purpose of agriculture produce. The Ld. counsel further submitted that the assessee has submitted vouchers showing payments to the transporters, Assessment Year: 2014-15 copies of bills from transporters mentioning the freight charges and copies of bills issued by the farmer mentioning therein the advance given to the transporter along with lorry No., details of produce etc. The Ld. counsel placing reliance on the decision of the Pune Bench of the ITAT in the case of ITO vs. M/s Dhanshree Ispat, dated 31.05.2017, submitted that in the said case, the Tribunal has dismissed the appeal filed by the revenue and decided the similar issue in favour of the assessee. The Ld. counsel further pointed out that the Pune Bench of the Tribunal has decided the said issue in the light of the ratio laid down by the Hon’ble Supreme court in the case of Attar Singh Gurmukh Singh vs. ITO 191 ITR 667 (SC), the Hon’ble Rajasthan High Court in the case of Harshila Chordiya vs. ITO 298 ITR 349 (Rajasthan) and the Hon’ble Punjab and Haryana High Court in the case of Gurudas Garg vs. Commissioner of Income Tax 63 taxman.com 289 (Punjab & Haryana). The Ld. counsel further submitted that the issue involved in the present case is similar to the issue raised in the cases referred above, the same is covered in favour of the assessee. Since, the impugned order passed by the Ld. CIT (A) is contrary to the decision of the Pune Bench of the Tribunal, the same is liable to be set aside.

In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. 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 40A(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 undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not Assessment Year: 2014-15 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 transactions. ( Mudiam Oil Company v. ITO [1973] 92 ITR 519 (AP)). If the payment is made by a crossed cheque drawn on a bank or 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.”

The Hon‟ble Rajasthan High Court in the case of Smt. Harshila Chordia Vs. Income Tax Officer (supra) deleted the disallowances made u/s. 40A(3) by observing that no disallowance u/s. 40A(3) could be made by taking a hyper technical view where the transactions are genuine.

The Hon‟ble Punjab and Haryana High Court in the case of Gurdas Garg Vs. Commissioner of Income Tax (supra) while considering similar issue where disallowances u/s. 40A(3) was made deleted the disallowance by observing that where genuineness of transaction made in cash in excess of Rs.20,000/- was not disbelieved by authorities, the same cannot be disallowed u/s. 40A(3) of the Act.

In the present case, the payment made by the assessee to the individual truck driver has not been disputed. It is not the Assessment Year: 2014-15 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 bonafide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable; no disallowances u/s. 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 of Income Tax (Appeals) in deleting disallowances of Rs.60,73,403/- made by the Assessing Officer u/s. 40A(3) of the Act. We concur with the findings of Commissioner of Income Tax (Appeals). Accordingly, ground Nos. 1 and 2 raised by the Department in appeal are dismissed.