DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 5(3), MUMBAI, MUMBAI vs. SANGHVI DHANRUPJI DEVAJI & CO., MUMBAI

11. We have heard the counsels for both the parties, perused the material placed on record on record, judgments cited before us and also the orders passed by the revenue authorities. From the records we noticed that additions u/s 40A(3)(a) of the Act was made by the AO on the ground that assessee had made cash purchases above Rs. 20,000/- amounting to Rs. 21,97,711/-. However, the same was deleted by Ld. CIT(A) by its detailed order by observing as under: 7.1 The AO has noted that the assessee has made cash purchases above Rs.20,000/- amounting to Rs.21,97,711/- during the year under consideration and hence the same has been disallowed by him u/s.40A(3) of the Act.

7.1.1 During the course of appellate proceedings, the assessee contended that it has made purchases of old gold ornaments against the sales made to the same person on the same day. The assessee further submitted that against the said sale, only the difference is received after setting off the price towards the purchase of old gold ornaments and similarly, if sale value is lower than the purchase cost of old gold ornaments, the net payment is made and which is always below Rs.20,000/-. The assessee stated that this is a common practice followed in the industry by the retail gold jewellers wherein the old gold ornaments is exchanged against the new gold ornaments and the difference amount is paid or received to/from the customer. The assessee also submitted that it has not made payment exceeding Rs.20,000/- to a customer in a day and thus, there is no contravention of provisions of Section 40A(3)(a) of the IT Act. The assessee has also submitted the details of corresponding sales made against purchases of old gold ornaments of 44 items as per the list given by the AO in the assessment order. Further, the assessee has relied on the judgment of Hon'ble ITAT Chennai in the case of Deputy Commissioner of Income- tax, Company Circle 1(3) vs Kirtilal KalidasJewellers (P.) Ltd. reported in [2012] 27 taxmann.com 341.

7.1.2 Facts of the case and submission of the assessee have been examined. From the details filed by the assessee, it is seen that the assessee has not made payment exceeding Rs.20,000/- to a customer in a day. It is seen that the purchases made of old gold ornaments are against the sales made by the assessee to the same person on the same day and against the said sale, only the difference received by the assessee after setting of the price towards the purchase old gold ornaments. Further, I found that the case of the assessee is covered by exceptions provided in Clause (d) of Rule 6DD which gives the alleviating circumstances where rigours of Section 40A(3) are not attracted. The same is read as under: d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; 7.1.3 Further, the Hon'ble ITAT, Chennai in case of Deputy Commissioner of Income- tax, Company Circle I(3) vs Kirtilal Kalidas Jewellers (P.) Ltd. reported in [2012] 27 taxmann.com 341 has held that "where the payments were effected to a customer on account of adjustment resulting out of an exchange of old jewellery with new Jewellery, then it does get covered under the exception clause (d) of Rule 6DD."

7.1.4 In view of the facts of the case and decision of Hon'ble ITAT, Chennai referred above, disallowance of Rs.21,97,711/- made by the AO u/s.40A(3) of the IT Act is deleted.