SRI JANARTHANA SPINNING MILLS,COIMBATORE vs. ACIT, COIMBATORE

आदेश / O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER This is an appeal filed by the Assessee directed against the order of the Commissioner of Income Tax (Appeals)-3, Coimbatore (‘CIT(A)’ for short) dated 16.11.2015 for the Assessment Year (AY) 2011-2012.

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The brief facts of the case are as under: 2.

The appellant namely Sri Janarthana Spinning Mills is a

Partnership firm constituted under the Partnership Act. It is

engaged in the business of spinning cotton. The return of income for

the AY 2011-12 was filed on 26.09.2011 disclosing total income of Rs.

1,67,89,015/-. Against the said return of income, the assessment was

completed by the Assistant Commissioner of Income Tax, Salary

Circle I, Coimbatore (hereinafter called “AO”) vide order dated

26.03.2014 passed u/s. 143(3) of the Income Tax Act, 1961 (in short

‘the Act’) at total income of Rs. 2,28,32,255/-. While doing so, the AO

made the following additions:-

a) Disallowance of Depreciation on windmill : 2,03,87,136/-

b) Disallowance of purchase expenses u/s.40A(3) : 28,17,587/- c) Disallowance of Commission given to M/s, Balakrishnan Minor HUF : 2,00,000/- u/s.40A(2)(b)

Being aggrieved, an appeal was preferred before ld. CIT(A), 3.

who vide impugned order partly allowed the appeal by deleting the

addition on account of disallowance of depreciation on windmill and

confirmed the additions made by the Assessing Officer u/s.40A(3) of

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the Act of �28,17,587/- and disallowance of commission of �2,00,000/-

paid to Balakrishnan Minor HUF.

the appellant is in appeal before us in the present appeal.

Ground No.2 relates to disallowance of purchase expenses of 5.

�28,17,587/- made u/s.40A(3) of the Act. During the assessment

proceedings, the Assessing Officer on verification of the ledger

account of the assessee found that the following payments were

made by the partners of the assessee firm directly to the parties by

otherwise than account payee cheque or payee bank draft.

Sl. Name of Creditor/ Nature Mode of Bills or Payment of payment credit made No. Supplier raised by Transact the ion creditor 1 M/s.Sai Cotton Cotton Paid by 390150 390150 Corporation. supplier partner Smt. Jayamani directly to parties 2 M/s. Saradevi Cotton Cotton --do-- 455098 455098 Enterprises supplier 3 M/s. Venkataramana Cotton Paid by 381430 381430 Traders supplier the partner V. Balakrishn an to the party 4 M/s. Jagadamba Traders Cotton Paid by 584605 584605 supplier the partner

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Smt. Rampriya to the party 5 M/s. Soundarya Cotton Paid to the 617301 617301 Industries partner V. Balakrishn an to the party 6 M/s.Vijayalakshmi traders Cotton Paid by 389003 389003 supplier the partner Smt. Rampriya to the party

Therefore, the Assessing Officer disallowed the same under the

provisions of Section 40A(3) of the Act. Even before the ld. CIT(A), it

is submitted that trade credit balance of the parties from whom

purchases were made were transferred to partners account who in

turn made payments to the parties. Thus, it was submitted that there

is no violation of Section 40A(3) of the Act, in as much as, the firm

had not made any payments in cash to the parties. However, the ld.

CIT(A) has rejected the above arguments and accordingly confirmed

the addition. Even before us, it is submitted that the provisions of

Section 40A(3) of the Act cannot be applied to the facts of the present

case, as assessee firm had not made any cash payments directly to

the parties. It is further submitted that it was not possible for the

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assessee to sort out the disputes with the parties, hence the partners

had taken up the responsibility of resolving the disputes. Ld.

Authorised Representative also submitted that book adjustment was

not made with the intention of overcoming the provisions of Section

40A(3) of the Act. Ld. Authorised Representative further submitted

that in term of provisions of Section 40A(3) of the Act, if the payments

are made otherwise than modes prescribed u/s.40A(3) of the Act then

payments should be deemed to be income of the assessee of the

previous year in which the cash payments are made. In the instant

case, the payments were made to the suppliers by the partners of the

assessee in the subsequent years and therefore the question of

addition for the year under consideration does not arise.

submitted that provisions of Section 40A(3) of the Act are squarely

attracted and the lower authorities had rightly made the addition.

We heard the rival submissions and perused the material on 7.

record. The only issue in the present grounds of appeal relates to the

disallowance under the provisions of Section 40A(3) of the Act.

Undisputedly, the payments for purchases are made in cash to the

tune of �28,17,587/-. It is the contention of the assessee that

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provisions of Section 40A(3) of the Act have no application in as much

as, the credit balance of the parties were transferred to the partners

account and partners in turn settled the claims of the parties in cash.

Since assessee firm has not paid cash, the provisions of Section 40A(3)

of the Act have no application. We are afraid this submission of the

assessee cannot be accepted for the reasons that undisputedly, the

payees had received money in cash and thereby defeating the very

purpose of enacting the provisions of Section 40A(3) of the Act. The

Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh vs.

ITO, 191 ITR 667 wherein it was decided that when there is direct

payment to the payees in cash, the provisions of Section 40A(3) of the

Act are attracted. Relevant para of the judgment is abstracted below:-

‘’Originally, section 40A(3) required payments in respect of expenditure, which exceeded Rs. 2,500 to be made by a crossed cheque or a crossed bank draft. On failure to do so, the payments made were disallowed in the computation of income. In order to remove hardship to smaller assessees, the Amending Act, 1987, has raised this ceiling to Rs. 10,000. Section 40A(3) begins with a non-obstante clause. It is an overriding provision which operates in spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head "Profits and gains of business or profession". The Legislature has thus made it clear that the provisions of section 40A will apply in supersession of other contrary provisions of the Act relating to the computation of income. Sub-section (3) empowers the assessing officer to disallow, as a deduction, any expenditure in respect of

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which payment is made of any sum exceeding Rs. 10,000 otherwise than by a crossed cheque or crossed bank draft. Rule 6DD of the Income-tax Rules, 1962, refers to cases and circumstances in which payment of a sum exceeding Rs. 10,000 may be made otherwise than by a crossed cheque or by a crossed bank draft. The rule so far as it is relevant reads: "6DD. Cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise than by, a crossed cheque drawn on a bank or by a crossed bank draft.-No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely: ... (j) in any other case, where the assessee satisfies the Assessing Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft- (1) due to exceptional or unavoidable circumstances ; or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Assessing Officer as to the, genuineness of the payment and the identity of the payee." As to the validity of section 40A(3), it was urged that, if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or a crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorising levy of tax on an assumed income would be a restriction on the right to carry on business, besides being arbitrary. 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

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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 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 a 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’’.

Furthermore, what is not directly permitted cannot be indirectly

permitted. Therefore, we do not find any reason to interfere with the

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orders of the lower authorities. Thus, ground of appeal No.2 filed by

the assessee stands dismissed.

Balakrishnan Minor (HUF) u/s.40A(2) (b) of the Act for �2,00,000/-.

The Assessing Officer disallowed the commission payment of

�2,00,000/- paid to Balakrishnan Minor (HUF) under the provisions of

Section 40A(2)(b) of the Act for two reasons, first there was no proof

of rendering any services by the Balakrishnan Minor (HUF) and

secondly the services stated to have been rendered only in individual

capacity.

confirmed the addition for want of evidence of services rendered.

Being aggrieved, the appellant is in appeal before us in the 10.

present appeal. The ld. Authorised Representative submitted that the

Assessing Officer was not justified in making the addition without

brining on record what is the fair market value of the services

rendered.

On the other hand, the ld. Sr. Departmental Representative 11.

placed reliance on the orders of lower authorities.

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record. It is settled position of law that commission payment cannot

be allowed as deduction in the absences of any evidence on record

establishing rendition of services. In this connection, reliance can be

placed on the decision of Bangalore Bench of the Tribunal in the case

of M/s. 3M India Ltd., vs. Asst. CIT, LTU, in IT(TP)A 725/Bang/2011

dated 13/05/2016, wherein it was held as follows:-

‘’The onus lies on the assessee to prove that the services are actually rendered by the AE. In this context, we may point out to the decision in the case of Hon’ble Supreme Court in the case of Laxmi Narayan Madanlal vs. CIT (86 ITR 439) wherein it was held as follows The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Thus, for allowability of this kind of expenditure, condition sine qua non is proof of actual services rendered. The co-ordinate bench of the Tribunal, to which one of us i.e. the Accountant Member is the author of the order, in the case of M/s.B Fouress Pvt. Ltd. vs. DCIT in ITA Nos.847 & 847/Bang/2014 dated 30/12/2015 held as follows:

....................Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. We may further add that the Hon’ble Supreme Court in the case of CIT Vs Imperial Chemical Industries (Ind.) Pvt. Ltd (1969) 74 ITR 17 has unequivocally held that the burden of proving that a particular expenditure had been aid out or incurred wholly and exclusively for the purpose of business entirely lies on the assessee. The discharge of the burden had to be effective and meaningful and not to cover up by merely book entries and paper work. The mere fact of payment of commission by account payee cheques and compliances with the TDS provisions shall not alone enable the assessee to claim deduction unless and amount has been expended wholly and exclusively for the purpose of business.

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“13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payment having been made by account payee cheques cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s

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Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been established between the assessee and M/s Ram Agencies. It seems a bit out of place that the parties entered into an oral business relationship involving such huge amounts of money over a period of time”. 13, The Co-ordinate Bench of Delhi in the case of Printer House Pvt.Ltd. Vs DCIT (Del.) authored by Accountant Member, after referring to the above precedence on this issue held as follows: “Thus, having regard to the ratio laid down in the above cases that in the absence of proof in support of the services rendered by the commission agent, no commission can be allowed as a deduction. Therefore, we dismiss the appeal filed by the assessee and allow the appeals filed by the revenue”. 14. In the present case, the learned CIT(A) had not examined any evidence to show that the agents have actually rendered their services. The learned CIT(A) had totally misdirected himself by examining the issue from the angle of tax deducted at source and he had failed to examine whether the services are actually rendered by the commission agents or not. Therefore, we are unable to sustain the order of the learned CIT(A) and hold that the commission payments in question are not allowable keeping in view the ratio laid down in the cases cited supra. The assessee company had miserably failed to demonstrate the actual services rendered by the agents to whom the commission payments were made, despite ample opportunity granted by this Tribunal to furnish evidence in support of service rendered by commission agent’’.

Even before us, no material is shown establishing rendition of actual

services by Balakrishnan Minor (HUF) and therefore commission

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payment cannot be allowed as deduction. Ground No.3 filed by the assessee is also stands dismissed.

Order pronounced on 21st day of October, 2019, at Chennai.

Sd/- Sd/- (इंटूर� रामा राव) (धु�वु� आर.एल रे�डी) (DUVVURU RL REDDY) (INTURI RAMA RAO) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated:21st October, 2019. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF