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Facts
The assessee, Prashant Packaging Pvt. Ltd., filed its Income Tax Return for AY 2018-19, which was selected for limited scrutiny. The Assessing Officer (AO) disallowed Rs. 5,15,169/- under Section 40A(3) of the Income Tax Act for cash payment of bonus to employees, a decision subsequently confirmed by the CIT(A). The assessee then preferred an appeal before the Income Tax Appellate Tribunal.
Held
The Tribunal allowed the assessee's appeal, directing the AO to delete the disallowance made under Section 40A(3) of the Act. It was held that the bonus payment was made within the time allowed under the Payment of Bonus Act, 1965, and is deductible under Section 43B, given that the genuineness of the payments and the identity of the recipients were not disputed. The Tribunal emphasized that Section 40A(3) is a preventive measure against tax evasion and unaccounted money, which was not the case here.
Key Issues
Whether disallowance of cash bonus payments to employees under Section 40A(3) of the Income Tax Act is justified when the genuineness of the transactions and identity of the recipients are not disputed.
Sections Cited
Income Tax Act, 1961, Income Tax Rules, 1962, Finance Act, 1968, Section 143(3), Section 40A(3), Section 43B, Rule 6DD, Payment of Bonus Act, 1965
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Income Tax Appellate Tribunal, “DB” BENCH: PATNA
Before: Shri Rajesh Kumar& Shri Pradip Kumar Choubey]
ORDER / आदेश Per Pradip Kumar Choubey, JM:
This is the appeal preferred by the assessee against the order of Commissioner of Income Tax (Appeal)-NFAC, Delhi (hereinafter referred to as the Ld. CIT(A)] dated 24.10.2024 for AY 2018-19.
Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd.
Brief facts of the case of the assessee are that the assessee being a company filed its return of income for AY 2018-19 declaring total income of Rs. 84,55,050/-. The case of the assessee was selected for limited scrutiny on the issue of payment of bonus or commission to the employee and assessment order u/s 143(3) of the Act was passed by AO making disallowance u/s 40A(3) amounting to Rs. 5,15,169/- on account of cash bonus paid to the employees.
Aggrieved by the said order, the assessee preferred an appeal before the Ld. CIT(A) wherein also the appeal of the assessee has been dismissed.
Being aggrieved and dissatisfied the assessee preferred an appeal before us.
The Ld. Counsel challenges the very impugned order thereby submitting that the Ld. CIT(A) has confirmed the disallowance relying upon the provision of Section 40A(3) of the Act by holding that there has been sufficient time for the assessee to make bonus payment before Deepavali Festival through banking channel or any working date ignoring the reality that the bonus is a statutory liability and without disputing the genuineness and identity of the recipients i.e. the employees. The Ld. Counsel cited following decisions:
i) Decision of Hon’ble Calcutta High Court in the case of Girdharilal Goenka vs. CIT 179 ITR 122 (Cal) ii) CIT vs. CPL Tannery in 318 ITR page 179 iii) Gurdas Garg vs. CIT(A) & Ors. [2016] 6 ITR OL 101 (P & H) iv) Honey Enterprises vs. CIT [2016] 381 ITR 258 (Del) v) Union of India vs. Exide Industries Ltd. [2020] 425 ITR 1 vi) Decision of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT in [2022] 448 ITR 518 (SC)
Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. The Ld. Counsel draws the attention to the Tribunal over the judgment of Checkmate Services Pvt. Ltd. (supra) regarding the Payment of Bonus Act, 1965 and submitted that provision of section 43B have overriding effect over any other provision of general application and thus the deduction on account of payment of bonus shall be allowed on the basis of actual payment within statutory time limit under the relevant Statute i.e. Payment of Bonus Act.
Contrary to that the Ld. D.R supports the impugned order.
We have heard the Counsel of the respective parties. The only issue is for adjudication is that the payment made by cash. The Ld. CIT(A) has clearly held in this order is that total bonus payment of Rs. 5,45,443/- during FY 2017-18, bonus payment of Rs. 5,15,169/- have been paid to various employees in cash. On going over the order passed by the AO one thing is not in dispute that payees are not the new to the assessee and they are the employees of the assessee to whom salary payments are being made. So, identity of the payees and payment of bonus to them was not in dispute. The Hon’ble Calcutta High Court in the case of Girdharilal Goenka vs. CIT (supra) as cited by the assessee has held thus:
“The Income-tax Officer has to take a pragmatic view of the matter. The Income-tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive ; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques ; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed ; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances.”
Further the Hon’ble Delhi High Court in the case of Honey Enterprises vs. CIT (supra) wherein the Hon’ble Court has held thus:
“29. Before considering the rival contentions, it is necessary to observe (i) that there is no dispute as to the identity of the producers to whom cash payments have been made by the Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. Assessee; and (ii) that the payments were made bonafide and in consideration of a genuine transactions as advances either for processing the positives of the film or acquiring the rights of exhibition of feature films. Thus, indisputably, such payments were allowable as deduction being revenue expenses incurred wholly and exclusively for business. The only issue to be considered is whether the same have to be disallowed by virtue of Section 40A(3) of the Act because the same were made in cash.
Section 40A(3) of the Act as in force during the AYs 1992-93 and 1993-94 reads as under:- "(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Central Board of Direct Taxes issued a circular - being Circular No. 220 dated 31st May, 1977, inter alia, providing as under:- "4. All the circumstances in which the conditions laid down in rule would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are ; (i) The purchaser is new to the seller ; or (ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iii) The transactions and payments are made on a bank holiday ; or (iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller ; or (v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or (vi) Specific discount is given by the seller for payment to be made by way of cash.
CBDT further clarified that "the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule"
The ITAT had considered the above mentioned CBDT Circular and had rightly concluded that the circumstances as spelt out in CBDT Circular No. 220 (supra) were not exhaustive but were merely illustrative of situations where business exigencies required that the payments be made in cash. The ITAT also referred to the decision of the Gujarat High Court in Hasanand Pinjomal v. CIT: (1978) 112 ITR 134 (Guj.) wherein the Court had observed that the practicability would have to be judged from the angle of a businessmen and not the Revenue.
In the present circumstances neither the genuineness of the payment nor the identity of the payee is disputed. The only controversy that needs to be addressed is whether the ITAT's decision that such payments had been made by the Assessee on account of business exigencies is perverse.
In the present case, the AO does not dispute that the Assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights. The Assessee had also contended that such payments were made as the producers required the Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business.
In our view, the question whether the Assessee's business exigencies required payments to be made in cash, is a question of fact. The ITAT has returned a finding in favour of the Assessee and it is not possible to conclude that such finding is without any basis or any material on record. The ITAT's decision, thus, cannot be held to be perverse. Accordingly, the question of law is answered in favour of the Assessee and against the Revenue.
In view of the above, all appeals, both Revenue's as well as Assessee's are dismissed. The parties are left to bear their own costs."
Further the ld. Counsel of the assessee has also cited a decision passed by ITAT Patna Bench, Patna in the case of Infotica vs. ITO in SP NO. 04/Pat/2016 (a/o in which the issue of sustaining of disallowance u/s 40A(3) has been dealt with and the operative portion of this order are held thus:
Last issue this appeal raised by assessee is that Ld. CIT(A) erred in confirming the order of AO by sustaining the disallowance of Rs.4,13,63,240/- /s 40A(3) of the Act.
During the course of assessment proceedings, AO observed that assessee has made payment exceeding Rs.20,000/- against the purchase of goods for Rs. 4,13,63,240.00. Accordingly, Assessing Officer called upon assessee for invoking the provisions of Sec. 40A(3) of the Act but assessee failed to give any corroborative evidence. Therefore, AO disallowed the same and added to the total income of assessee. 16. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that payment was made in cash by exceeding Rs.20,000/- on account of commercial expediency. Further, assessee submitted that the parties to whom the purchases were made were identifiable and therefore the same cannot be subject-matter of addition u/s. 40A(3) of the Act. However, Ld. CIT(A) disregarded the claim of assessee by observing as under:- "20. In further submission, it was submitted that all the purchases and subsequent payments were made to M/s Infotica Solution which is a property concern of one of the partners Shri Pramod Kumar. It was submitted that M/s Infotica Solution has also filed its income tax and sales tax returns with audit report and complete purchase made by the appellant from this concern are verifiable. It was also contended that firm is a compendium name for individual partners. In this case, the appellant has made payments to one of the partners at which can be said to be transactions with oneself only and transfer of such cash is through book entries only. The appellant was under a bona fide belief hat such transactions with sister concern were permissible. Shri Pramod Kumar was the managing partner of the firm and also proprietor of Mis Infotica Solution, the other concern and was handling the cash of both the concerns. The transactions of sales and purchases represented genuine bona fide transactions. The Assessing Officer (AO) has observed in his Remand Report that the sales and purchases including sales to the appellant by Mis Infotica Solution were found to be verifiable. The appellant has submitted that in view of the judicial decision in the case of the Girdhari Lal Goenka (supra), no is under sectin40A(3) of the Income-tax Act, 1961 should be made.
Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. 21. Therefore, the gist of the submissions of the appellant is that the transactions are genuine and bona fide transactions and the same were made with a sister concern under bona fide belief. It was contended that the requirement of Section 404(3) of the Income- tax Act, 1961 was fulfilled and no disallowance was warranted.
I have considered the facts of the case, Rule 6DD of the Income Tax Act,1962 provides for circumstances which mitigate the rigors of Section 40A(3) of 22 I have considered the facts of the case. Rule 6DD of the Income-tax Act, HIG Jacome-tax Act, 1961. Clause (1) of this Rule as mentioned by the appellant so as above, earlier provided for exemption under exceptional and unavoidable circumstances and there was option before the assessee to show before the AO to his satisfaction hat such payments had been made under such circumstances. However, this Clause is no longer in operation in the assessment year under consideration...." The assessee, being aggrieved, is in second appeal before us 17. Before us Ld. AR reiterated the submission made before the Id. CIT(A) whereas Ld. DR for the Revenue relied on the order of authorities below. 18. We have heard the rival contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the AO has invoked the provision of section 40A(3) and accordingly disallowed a sum of Rs. 4,13,63,240.00 which was subsequently confirmed by the order of Id. CIT(A). Now the issue for our consideration arises so as to whether the disallowance under section 40A(3) is sustainable in the light of the facts & circumstances. From the perusal of facts of the case we find that admittedly the genuineness of the parties have not been doubted. The payment was made to the partner of the firm against the purchase of the goods. In such circumstances we find that there was no such exception in rule 6DD for allowing the payment in cash in the circumstances discussed above. We find the from the AY 2009-10, the earlier ceiling of Rs. 20,000.00 for cash payment per transaction as been amended. Now the ceiling of Rs. 20,000.00 will be aggregate in one day of all such transactions. The list provided under rule 6DD of the IT Rules is exhaustive and not inclusive. However, we also find from the order of lower autho genuineness of expenses has not been doubted. Therefore in our view, the provisions of section 40A(3) could not be made applicable to the facts of the instant if we go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provision was inserted by Finance Act 1968 with the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 06.07.1968 reiterates this view that "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 reasonableness of the payment. 19. In this regard, it is pertinent to get into the following decisions on the impugned subject:- Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC) "Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs.2,500 (Rs. 10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with Rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict business activities. There is no restriction on the assessee in his trading activities.
Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. 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 upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not 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 The Practicable or would have caused genuine difficulty to the payee. It is also open By 10th assessee to identify the person who has received the cash payment. Rule D provides that an assessee can be exempted from the requirement of payment a crossed cheque or crossed bank draft in the circumstances specified under 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." CIT vs CPL Tannery reported in (2009) 318 ITR 179 (Cal) "The second contention of the assessee that owing to business expediency. obligation and exigency, the assessee had to make cash payment for purchase of goods so essential for carrying on of his business, was also not disputed by the 10. The genuintry of transactions, rate of gross profit or the fact that the bonafide of the assessee that payments are made to producers of hides and skin are also neither doubted nor disputed by the AO. On the basis of these facts it is noi justified on the part of the AO to disallow 20% of the payments made u/s 404(3) in the process of assessment. We, therefore, delete the addition of Rs. 17,90,571/- and ground no.1 is decided in favour of the assessee." CIT vs Crescent Export Syndicate in of 2008 dated 30.7.2008 -Jurisdictional High Court decision "It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding Rs.20,000/- since it is not mode by crossed cheque or bank draft but by hearer cheques and has computed the payments falling under provisions to Section 40A(3) for Rs. 78,45.580/- and disallowea (@20% thereon Rs.15,69 116/ It is also made clear that without the payment being made by bearer cheque these goods could not have beer, procured and it would have LA hampered the supply of goods within the stipulated time. Therefore, the gemineness of the purchase nas been accepted by the Id. CIT(Appeal) which has so not been disputed by the department as it appears from the order so passed by the learned Tribunal. It further appears from the assessment order that either the Assessing Officer nor the CIT(Appeal) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine. Anupam Tele Services vs ITO in (2014) 43 taxmann.com 199 (Guj) "Section 40.1(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962- Business disallowance - Cash payment exceeding prescribed limits (Rule 6DD(J)-Assessment year 2006-07 Assessee was working as an agent of Tata Tele Services Limited for distributing mobile cards and recharge vouchers-Principal company Tata insisted that cheque payment from assessee's co-operative bank would not do, since realization took longer time and such payments should be made only in cash in their bank account If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation - Assessee, therefore, made cash Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. payment - Whether in view of above, no disallowance u/s 40A(3) was to be made in respect of payment made to principal - Held, yes [Paras 21 to 23) (in favour of the assessee) Sri Laxmi Satyanarayana Oil Mill va CIT reported in (2014) 49 taxmann.com 363 (Andhrapradesh High Court) "Section 404(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income tax Rules, 1962- Business disallowance - Cash payment exceeding prescribed limit (Rule 6DD) - Assessee made certain payment of purchase of ground mit in cash exceeding prescribed limit - Assessee submitted that her mode payment in cash because seller insisted on that and also gave incentives and discounts Further, seller also issued certificate in support of this - Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3) Held, yes [Para 23] [In favour of the assessee]" CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) In this case the court upheld the view of the tribunal in not applying section 40A(3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee. 19.1 It is pertinent to notice that the primary object of enacting section 40A(3) was two folds, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration. In the instant case, the labours were paid by the bearer cheque only in their respective name only. 19.2. The Hon'ble Apex Court in the case of CTO vs Swastik Roadways reported in [2003] 3 SCC 640 had held that the consequences of non-compliance of Madhyapradesh Sales Tax Act, which were intended to check the evasion and avoidance of sales tax were significantly harsh. The court while upholding the constitutional validity negated the existence of a mens rea as a condition necessary for levy of penalty for non-compliance with such technical provisions required held that "in the consequence to follow there must be nexus between the consequence that befall for non-compliance with such provisions intended for preventing the tax evasion with the object of provision before the consequence can be inflicted upon the defaulter." The Hon'ble Supreme Court has opined that the existence of nexus between the tax evasion by the owner of the goods and the failure of C & F agent to furnish information required by the Commissioner is implicit in section 57(2) and the assessing authority concerned has to necessarily record a finding to this effect before levying penalty u/s 57(2). Though in the instant case, the issue involved is not with regard to the levy of penalty. but the requirement of law to be followed by the assessee was of as technical nature as was in the case of Swastik Roadways (3 SCC 640) and the consequence to fall for failure to observe such norms in the present case are much higher than which were prescribed under the Madhya Pradesh Sales Tax Act. Apparently, it is a relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the Circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. We hold that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to Assessment Years: 2018-19 Prashant Packaging Pvt. Ltd. check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions. Admittedly, this is not the case in the facts of the assessee herein. The assessee had issued bearer cheques in the name of respective labours which is evident from the additional details submitted by the assessee and placed on page 2 to 6 of the additional details. It is also pertinent to note that the Hon'ble Rajasthan High Court in the case of Smt. Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Raj) had held that the exceptions contained in Rule6 DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the addition made u/s 40A(3) of the Act. Accordingly, this ground of the assessee is allowed.”
In the present case the appellant has paid the bonus within the time allowed under Payment and Bonus Act, 1965. The same is deductible u/s 43B as it has been held by the Hon’ble apex Court in the case of Checkmate Services Pvt. Ltd.. Going over the facts of the case as well as cited decision as discussed above, we do not have any hesitation to allow the appeal of the assessee thereby directing the AO to delete the addition made u/s 40A(3) of the Act.
The other issues are consequential in nature and need not be adjudicated.
In the result, the appeal filed by the assessee is allowed.
Order is pronounced in the open court on 21st April, 2025
Sd/- Sd/- (Rajesh Kumar /राजेश कुमार) (Pradip Kumar Choubey /�द�प कुमार चौबे) Accountant Member/लेखा सद�य Judicial Member/�या�यक सद�य Dated: 21st April, 2025 SM, Sr. PS Copy of the order forwarded to:
1. 1. Appellant- Prashant Packaging Pvt. Ltd, 0, Ganga Ghat lane, Mahendru, Patna- 800006.
2. Respondent – DCIT/ ACIT, Circle-2, Patna 3. Ld. CIT(A)-NFAC, Delhi 4. Ld. Pr. CIT- , Patna 5. DR, Patna Bench, Patna