RANJAN DEBNATH ,KOLKATA vs. PRINCIPAL CIT - 9, KOLKATA , KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA [Before Shri J. Sudhakar Reddy, Accountant Member and Shri S.S. Godara, Judicial Member] I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath...................................................................................................................Appellant [PAN: ADTPD 2374 A] Vs. Pr. CIT-9, Kolkata.………….....................................…......………………………………….…Respondent Appearances by: Sh. Miraj D. Shah, A/R, appeared on behalf of the Assessee. Sh. Vijay Shankar , CIT(DR), appeared on behalf of the Revenue. Date of concluding the hearing : January 21st, 2020 Date of pronouncing the order : February 19th, 2020 ORDER Per J. Sudhakar Reddy, AM :- This is an appeal filed by the assessee directed against the order of the Principal Commissioner of Income Tax-9, Kolkata dated 26.03.2018 u/s 263 of the Income Tax Act, 1961 (‘the Act’ for short) for AY 2013-14. 2. The assessee is an individual and is engaged in three businesses namely, Trading in fish and fish food, Trading in plastic crates for fish and running of a petrol pump. The assessment was completed u/s 143(3) of the Act on 18.03.2016 by the AO determining the total income at ₹11,74,930/-. The Pr. CIT revised this order u/s 263 of the Act and he concluded as follows: “11. In this case before me, as the A.O. has passed the order without making enquiries or verification which should have been made by him before framing the assessment order, it amounts to incorrect assumption of facts and therefore, as held by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd v. CIT - (supra), , his order is erroneous. Further, such an action of the A.O. has led to loss of tax that has been treated as prejudicial to the interest of the revenue by the Hon’ble Calcutta High Court in Dawjee Dadabhoy & Co. [31 ITR 872 (Cal)]. Thus, it is held that the order passed by the A.O. u/s 143(3) dated 18/03/2016 is erroneous in so far as it is prejudicial to the interests of the revenue. 12. Under these circumstances, I am of the considered opinion that it is a fit case for invoking provisions u/s 263 of the I.T. Act. Thus, the case is being restored back to the file of A.O. u/s 263 on the issue of expenditure incurred in cash violating the provisions of Sec. 40A(3). While framing the assessment, the A.O. shall consider above mentioned issues and conduct necessary enquiries and verifications in this regard. Needless to add that the AO shall provide a reasonable opportunity of being heard to the assessee before finalising the assessment.”

2 I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath. 3. The ld. Counsel for the assessee submitted that the Tribunal may uphold the order of the Pr. CIT passed u/s 263 of the Act but by modifying the direction given to the AO by the Pr.CIT and directing the AO to follow the propositions of law laid down by this Tribunal in the case of Binod Kumar Burnwal vs. ITO, War-1(3), Kolkata reported in 2018 (12) TMI 1693 – ITAT Kolkata and Haridas Som vs. ITO, Ward-22(3), Kolkata reported in 2019 (9) TMI 685 – ITAT, Kolkata, as the genuineness of the purchases of plastic crates from steel industries is not in doubt and as the amounts in question were directly paid into the bank account of the supplier i.e. Supreme Industries. He requested that the directions given by the Pr. CIT to be modified. 4. The ld. DR on the other hand opposed the contentions of the ld. Counsel for the assessee and submitted that Section 40A(3) is not a disallowance on the fact as to whether the transactions in question are genuine or not and that no relief can be given on this ground and that it is only a technical requirement of payment that is to be mandatorily done by way of crossed cheques and not in cash. He submitted that even in the case where a cheque is not crossed, it was considered to be a payment in cash. He submitted that making cash payment directly to the bank account of the supplier is possible in the current banking scenario, but such an act does not fall within the exceptions provided in the Rule 6DD of the Income Tax Rules. In reply to the ld. Counsel for the assessee submitted that all those arguments are considered by coordinate bench of the Tribunal and the order was in favour of the assessee. He submitted that the propositions of law laid down by the ITAT are binding on the Income Tax Authority. 5. After hearing rival contentions, we find that the request of the assessee to modify the order of the ld. Pr. CIT u/s 263 of the Act dated 26.03.2018 is justified as the coordinate Bench of the Tribunal has on this very same issue have interpreted the provisions of Section 40A(3) of the Act and laid down certain propositions of law. This Bench of the Tribunal in the case of Binod Kumar Burnwal (supra) held as follows: “Disallowance u/s 40A(3) - AO as well as the ld. CIT(A) were of the opinion that such direct payment into the bank account of the seller is not covered by the exceptions specified in Rule 6DD of the Income Tax Rules, 1962 - HELD THAT:- 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 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 directly deposited cash in the bank account of the supplier M/s Pickme Feeds which fact is also acknowledged by the concerned supplier by crediting the said cash receipts in

3 I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath. the ledger account of the assessee and the same ledger account has been obtained by the Learned AO u/s 133(6) directly from the concerned supplier M/s Pickme Feeds. It is also pertinent to note that in the case of Smt. Harshila Chordia v. ITO 2006 (11) TMI 117 - RAJASTHAN HIGH COURT had held that the exceptions contained in Rule 6DD of Income-tax Rules are not exhaustive and that the said rule must be interpreted liberally. - Decided in favour of the assessee.” 6. In the case of Haridas Som (supra) this Bench followed the propositions of law laid down by the coordinate Bench of the Tribunal in the case of Sri Manoranjan Raha vs. ITO /2016 (1) TMI 359- ITAT Kolkata and held that the impugned disallowance provision does not apply in case of overwhelming evidence of genuineness of payments coupled with business exigencies which may go beyond the prescribed Rule 6DD of the Income Tax Rules, 1962. We extract the same for ready reference:

“3. The only issue to be decided in this appeal is as to whether the disallowance u/s 40A(3) of the Act could be made in the facts and circumstances of the case amounting to Rs. 1,14,52,363/- (60,50,890 + 54,01,473). 4. The brief facts of this case is that the assessee is a distributor of Hutch Sim Cards and derives income from trading of wholesale and retail sale of mobile sets and top up charges apart from distribution commission for sim cards under the name and style of ‘Shibani Hutch Communication’, a proprietary concern. The assessee had also shown interest income on fixed deposits and Kisan Vikas Patras. The books of account were not produced by the assessee before the Learned AO in spite of several opportunities provided to him. The assessee had entered into an Associated Distributor Agreement with Shri.Amit Dutta who is the distributor of Hutch sim cards had appointed assessee as the Associate Distributor. Pursuant to this agreement, the assessee would purchase sim cards from Shri.Amit Dutta and sell the same to customers and assessee would derive distributor commission at an agreed rate. The Learned AO during the course of assessment proceedings found that there is a violation of section 40A(3) of the Act in respect of payments made by the assessee to the main distributor of Hutch Sim Cards Mr.Amit Dutta. The Learned AO obtained information u/s 133(6) of the Act from Mr.Amit Dutta and obtained the ledger account of the assessee as appearing in the books of Mr.Amit Dutta. The Learned AO observed that the assessee had made total purchases from Mr.Amit Dutta to the tune of Rs. 1,51,94,459/- and made cash payments exceeding Rs 20,000/- in a day in violation of section 40A(3) of the Act to the tune of Rs. 60,50,890/- during the Asst Year under appeal. A show cause notice dated 20.8.2010 was issued by the Learned AO to the assessee in this regard. Detailed submissions were made before the Learned AO by the assessee on 19.10.2010 explaining the facts and the legal stand taken by the assessee on the impugned issue. Sri Amit Dutta had also deposed before the Learned AO u/s 131 of the Act confirming the receipt of monies in cash from the assessee and further stated that he had persuaded the assessee to pay only in account payee cheques to get away from the rigours of section 40A(3) of the Act, but the assessee continued to make certain payments in violation of section 40A(3) of the Act. The Learned AO relying on all these facts sought to disallow a sum of Rs. 60,50,890/- u/s 40A(3) of the Act. 4.1. On first appeal, the Learned CITA upheld the addition of Rs. 60,50,890/-made by the Learned AO and further sought to disallow another sum of Rs. 54,01,473/- towards cash payments made for purchases thereby enhancing the assessment by Rs. 54,01,473/- Aggrieved, the assessee is in appeal before us by raising the several grounds. Though the assessee had raised several grounds in his appeal, the central ground revolves only around disallowance u/s 40A(3) of the Act. Hence all the grounds are taken up together for the purpose of adjudication herein. 4.2. The Learned AR reiterated the facts stated before the lower authorities. He argued that the genuineness of the cash payments made by the assessee is not disputed by the revenue and hence no disallowance u/s 40A(3) of the Act could be made. He argued that the assessee has

4 I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath. made payment to his agent Mr.Amit Dutta and hence payments would fall under the exception provided in Rule 6DD(k) of the IT Rules. In response to this, the Learned DR vehemently supported the orders of the lower authorities. 4.3. We have heard the rival submissions and perused the materials available on record. We find that the payments made by cash in violation of section 40A(3) of the Act have been duly acknowledged by the recipient Shri.Amit Dutta who had deposed before the learned AO and confirmed the fact of receipt of monies in cash. Hence the genuinity of payments made by the assessee stands clearly established beyond doubt. Even for the amounts enhanced by Learned CITA in the sum of Rs. 54,01,473/-, the genuineness of the payments and the necessity to incur the said expenditure for the purpose of business of the assessee was never disputed by the Learned CITA. We hold that since the genuinity of the payments made to the parties is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case. It will be pertinent to 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 6.7.1968 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.” 4.4. In this regard, it is pertinent to get into the following decisions on the impugned subject:- Attar Sineh Gurmukh Sineh 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. 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 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.” CIT vs CPL Tannery reported in (2009) 318ITR179 (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 AO. The genuinity 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 not justified on the part of the AO to disallow 20% of the payments made u/s 40A(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 ITA No. 202 of 2008 dated 30.7.2008 - Jurisdictional High Court decision

5 I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath. “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 made 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 disallowed @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 been procured and it would have hampered the supply of goods within the stipulated time. Therefore, the genuineness of the purchase has been accepted by the Id. CIT(Appeal) which has also 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 neither the Assessing Officer nor the CIT(Appeal) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine. ” Anuvam Tele Services vs ITO in (2014) 43 taxmann.com 199 (Guj) “Section 40A(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 payment -Whether in view of above, no disallowance under section 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 Satvanaraxana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhravradesh Hieh Court) “Section 40A(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 nut in cash exceeding prescribed limit - Assessee submitted that her made 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) 350ITR 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. 4.5. It is pertinent to note that the primary object of enacting section 40A(3) was two fold, 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 nonobservation 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. 4.6. The Hon’ble Apex Court in the case of CTO vs Swastik Roadways reported in (2004) 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 Supreme Court has opined that the existence of nexus between the tax evasion by the owner of

6 I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath. 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 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 payments made in cash to Shri. Amit Dutta had been duly acknowledged by him in an independent deposition given by him before the Learned AO which was admittedly taken behind the back of the assessee. 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) 298ITR 349 (Raj) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally. 4.7. The assessee has also given the income tax assessment particulars of Amit Dutta before the Learned AO. Moreover, the Learned AO himself had taken deposition from Sri Amit Dutta u/s 131 of the Act wherein he had confirmed the receipt of monies in cash as well as by cheque / DD from the assessee. Hence the acknowledgement of the payments made by the assessee by the payee is proved beyond doubt. The assessee had also stated that the payee had duly included these payments as his receipts in his returns. We adopt the above extracted detailed reasoning mutatis mutandis to delete the impugned Section 40A(3) disallowance of ₹49,43,544/-. 7. This assessee’s appeal is allowed.” 7. With the above discussion we modify the impugned order of Pr. CIT and direct the AO to follow the propositions of law laid down by the Tribunal in the case of Binod Kumar Burnwal (supra) and Haridas Som (supra) and not to disallow payments u/s 40A(3) if the same are genuine.

Kolkata, the 19th February, 2020.

Sd/- Sd/- [S.S. Godara] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated: 19.02.2020 Bidhan

7 I.T.A. No. 1372/Kol/2018 Assessment Year: 2013-14 Ranjan Debnath. Copy of the order forwarded to: 1. Ranjan Debnath, 2, Bacharpara Road, Thakurpukur, Kolkata-700 063. 2. Pr. CIT-9, Kolkata. 3. CIT(A) 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. (sent through e-mail)