M/S. PIPRANI EQUIPMENT PVT. LTD,AHMEDABAD vs. THE ITO, WARD-3(1)(2), AHMEDABAD

The A.O. held that since the payments to these persons were made in cash and in violation of the provisions of section 40A(3) of the Act read with Rule 6DD of the Income Tax Rules,1962( in short Rules) the same were not allowable. During the course of assessment proceedings, the assessee contended that the purchasers as well as sellers were mostly roadside mini freight carrier owners & uneducated persons and most of them did not have any banking channel and the sellers insisted on cash payment immediately so that they could purchase another vehicle or meet with some urgent financial needs. The assessee made the cash payments to these vendors as they were not known, trust was not built up and they were not ready to allow the use of third party bank accounts. The A.O., however, rejected these contentions and held that the exceptions provided in Rule 6DD of the Rules are not applicable to the transactions made by the assessee. He accordingly made disallowance of Rs.37,01,314/- after considering the submissions made by the assessee.

Before the ld.CIT(A), the assessee reiterated his contentions and also filed additional evidences ,being affidavit of the seller of the vehicles with their identity proofs. All the deponents categorically stated that they did not have any bank account in any bank. Further, the assessee explained the mode in which he conducted his business stating that since he was dealing in small motor vehicles by way of purchases from whosoever and wherever it was available, it was necessary for him to deal through procurement agents and the impugned transaction of purchase of vehicles in cash in the present case had been undertaken through one such agent Shri Mohansinh Rawat. All details of the said person were furnished 4 and on the direction of the AO he also appeared for examination and confirmed to the AO of having received cash from the assessee for making payment to the sellers of vehicles in cash. The assessee further relied on various judgments of Hon’ble High Courts in support of its contentions that having proved genuineness of the transaction no disallowance under section 40A(3) was warranted. The ld.CIT(A) considered the allowability of assesses claim the impugned transactions not being covered u/s 40A(3) of the Act in the light of Rule 6DD of the Rules, which prescribed circumstances in which the payment in cash could be made without inviting any disallowance under section 40A(3) of the Act. He found that the assessee’s explanation fit only in two circumstances mentioned in the rule viz. (i) in clause ‘g’ where payment made in village or town not served by the bank is specified to be exempt from rigour of section 40A(3) of the Act; and (ii) in clause (k) which stipulates payment made in cash by any person to his agent who is required to make further payment in cash on behalf of the assessee. Referring to both clauses, he found that the assessee’s case did not fit into either, since in both the cases . He found the assesses case as not fitting into clauses-g of Rule 6DD noting that where the assessee operated from and where the sellers resided both were serviced by the banks. As for applicability of clause (k) he found that it was not proved beyomd doubt that the agent who received cash from the person selling vehicles was required to make payment in cash for goods and services on behalf of such persons to third person. His finding on para 5.1 to 5.4 of the order is as under:

Before us, the ld.counsel of the assessee reiterated the contentions made before the lower authorities, pointing out that by filing affidavits of the sellers who had sold the vehicles to him against cash receipts and giving all their details including identity proofs the genuineness of the transactions had been established by him. He further pointed out even the agent who had acted on his behalf for procuring these vehicles had confirmed the fact of receipt of cash from the assessee for making payments to these persons before the AO. The ld.counsel for the assessee contended therefore that the assessee having proved genuineness of the transaction, there is no scope for making any disallowance under section 40A(3)

We have heard rival contentions gone through the orders of the authorities below and also case laws referred to before us. The issue before us related to the disallowance of expenses incurred in cash as per the provision of section 40A(3) of the Act. It is not disputed that before the ld.CIT(A) the assessee had furnished all evidences to prove genuineness of the transaction by giving all details of the seller of the vehicles, their names, address, identity proof and also furnished their affidavits affirming on oath that they had received cash on selling vehicles to the assessee, besides also stating that they had no bank account. It is also fact on record that the assessee had explained that he had purchased these vehicles through an agent, Shri Mohansingh Rawat, who was produced before the AO in remand proceedings, and the AO had examined him, when the said person had confirmed having received cash from the assessee for making payment in cash for purchases made from these very persons. We find that the ld.CIT(A) has upheld disallowance for the reason that circumstances in which the payment in cash was made by the assessee did not fall in any of the specified circumstances under Rule 6DD of IT Rules which notifies circumstances which are exempt from rigour of section 40A(3) of the Act.

As is evident, the Rule specifies that where payment for expenses are made by a person to an agent who is required to make payment in cash on behalf of such person, then rigours of section 40A(3) are not applicable. In the present case, the Revenue does not dispute the fact that the assessee had made payment in cash not directly to the seller, but through his agent i.e. he had paid cash to the agent, who in turn paid to the seller for procuring vehicles from them. There is no finding of the Ld.CIT(A) to the effect that the agent was not genuine .Further it is a fact on record that the agent had appeared before the AO and confirmed the said fact to him that he had acted as agent for the assessee in the impugned transactions taking cash from him for making payment further to the sellers. The 11 sellers on affidavits have stated that they did not have any bank account and had therefore insisted on receiving money in cash. It is amply clear that the situation envisaged in clause (k) of Rule 6DD is clearly satisfied in the present case, and therefore, the assessee is entitled to be exempt from the rigours of section 40A(3). The ld.CIT(A), we find has mis-appreciated/misunderstood clause (k) of Rule 6DD of the Rules. The ld.CIT(A) we find has stated inapplicability of clause (k) by stating that it has not been proved beyond doubt that the agent who received cash from the person selling vehicles was required to make payment in cash for goods or services on behalf of such person to third party, which means that the ld.CIT(A) has understood clause (k) to mean that the agent should be receiving cash from the sellers. But this cannot be the interpretation since sellers are not required to make any payment. It is the buyer who is required to make payment. Therefore, interpretation of clause (k) by the Ld.CIT(A) makes no sense at all. Even otherwise, in view of the above, we hold that the assessee has sufficiently demonstrated existence of circumstance specified in clause (k) of Rule 6DD to be eligible for exemption from the rigours of section 40A(3) of the Act. Accordingly, disallowance made by invoking section 40A(3) of the Act of Rs.37,01,314/- is directed to be deleted. This ground of appeal is allowed.

In the result, the appeal of the assessee is allowed.