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Facts
The assessee, operating a wine shop, conducts all transactions in cash and does not maintain a bank account. An addition of Rs. 55,82,423/- was made under section 40A(3) for cash payments exceeding Rs. 20,000/- made for purchases, after the matter was remanded by the ITAT in an earlier round. The CIT(A) confirmed this disallowance.
Held
The ITAT noted that the genuineness of the cash transactions was not disputed and the assessee habitually conducted business solely in cash. Citing precedent from the Punjab & Haryana High Court and the Supreme Court, the Tribunal held that Section 40A(3) is not absolute and should not restrict genuine business activities based on business expediency. Given the unique nature of the assessee's business, the disallowance was found to be inappropriate.
Key Issues
Whether cash payments made by an assessee, who conducts business entirely in cash without a bank account, should be disallowed under Section 40A(3) of the Income Tax Act despite the genuineness of transactions and business expediency, considering Rule 6DD.
Sections Cited
Section 143(3), Section 40A(3), Rule 6DD
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘A’: NEW DELHI
(Assessment Year: 2009-10) Burmah Devi, vs. ITO, Ward 1, W/o Gokul Chand, Rewari. Flat No.133, Shanti Lok Society, Sector 3, Bawal Road, Rewari (Haryana). (PAN : APZPD7437E) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Pranav Yadav, Advocate REVENUE BY : Shri Kanv Bali, Sr. DR Date of Hearing : 18.07.2024 Date of Order : 11.09.2024 ORDER
PER S.RIFAUR RAHMAN,AM:
This appeal has been filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals), Rohtak [“Ld. CIT(A)”, for short] dated 23.10.2019 for Assessment Year 2009-10.
Brief facts of the case are, original assessment was made under section 143 (3) of the Income-tax Act, 1961 (for short “the Act”) vide order dated 28.11.2011. While framing assessment, the AO observed that the assessee made cash payments of Rs.77,47,703/- against purchase of goods and also made 40A(3) of the Act. Assessee appealed against the assessment order and ld. CIT (A) vide order dated 04.12.2012 dismissed the appeal of the assessee. Against the ld. CIT (A) order dated 04.12.2012, assessee filed appeal before the ITAT and ITAT vide order dated 29.01.2016 restored the issue to the file of the Assessing Officer to make the assessment de novo and consider the applicability of Rule 6DD of the Income-tax Rules, 1962.
In the second round of litigation, after considering the observations/directions of the ITAT in the earlier round of litigation, Assessing Officer held that out of cash payments of Rs.77,00,816/-, an amount of Rs.21,18,393/- was found to be made on holidays and gave the relief of this amount. He further held that balance transactions of cash payments of Rs.55,82,423/- made on bank working days have been made in contravention to the provisions of section 40A(3) of the Act and liable to be added to the income of the assessee. Accordingly, he made the addition of Rs.55,82,423/- and assessed the income of the assessee at Rs.66,23,320/-.
Aggrieved with the above order, assessee preferred appeal before the ld. CIT (A) and before ld. CIT (A), assessee has made elaborate submissions. Ld. CIT (A) being not satisfied with the submissions of the assessee confirmed the addition and dismissed the appeal filed by the assessee.
7. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-
1. That the Learned Commissioner of Income Tax (Appeals) Rohtak has erred both in Law and facts upholding the additions of Rs.5382423/- the payments made to M/s Poonia Wine L-I, Rewari.
2. That the Learned Commissioner of Income Tax (Appeals) has failed to appreciate that Section 40A(3) of the Act is wholly in applicable to the facts of the appellant since payments were covered under Rule 6DD of the Income Tax Rules and as such disallowance sustained is contrary to law and facts and hence untenable.
3. That the Learned Commissioner of Income Tax (Appeals) has upheld the disallowance by disregarding the ledger account of M/s Poonia Wines in the books of the appellant and has erred in relying upon ledger account of the appellant in the books of M/s Poonia Wines without appreciating that such account did not represent the factual position and was contrary to the evidence on record. ”
8. At the time of hearing, ld. AR for the assessee submitted that assessee never operated bank account and all the transactions in the business are carried through cash only. Assessee having a wine shop purchases all the wines by cash and sells the same in cash. The assessee habitually pays for the purchases after closing of business every day or as the case may be. The Revenue authorities has already acknowledged that the assessee has operated business only by cash and not through bank. Since the assessee does not operate any bank and made the cash payment on the basis of collection which is below the limit of Rs.20,000/-, assessee has not violated section 40A(3) of the Act. He 31.03.2009. Further, he relied on the decision of Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT(A), Bathinda & Anr. 2015 (8) TMI 569 and he further relied on the decision of coordinate Bench in the case of Shakti Singh Gulia vs. ITO, Ward 4, Rohtak in ITAs No.6115/Del/2018 & 4618/Del/2019 dated 15.06.2023.
9. On the other hand, ld. DR for the Revenue brought to our notice page 7 of the ld. CIT (A) order and relied on the detailed findings of the lower authorities.
10. Considered the rival submissions and material placed on record. We observed that assessee is running a wine shop wherein purchasing wine/liquor by cash and selling the same by cash. We observed that it is a second round of litigation wherein the Assessing Officer has disallowed the total purchases made of cash over and above Rs.20,000/-. In the first round of litigation, however, coordinate Bench remitted the issue back to the file of Assessing Officer and Assessing Officer/CIT(A) has given certain relief on the basis of record that certain payments were made during holidays, however, sustained the cash payments mostly made to M/s. Poonia Wines, Rewari based on their books of account. After considering over all facts on record, we observed that it is absolute fact on record that assessee never operated any bank account for running the business and the Assessing Officer observed that assessee has made certain cash payments more than Rs.20,000/-. He sought to disallow the same.
“8. The respondent's case is also supported by the judgment of the Supreme Court in Attar Singh Gurmukh Singh vs. ITO, (1991) 4 SCC 385. After referring to Rule 6DD, the Supreme Court held:- "7. In our opinion, there is little merit in this contention. Section 40- A(3) must not be read in isolation or to the exclusion of Rule 6-DD. The section must be read along with 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 40-A (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 disclosed sources. The terms of Section 40-A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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 40-A(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 6-DD 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 40-A(3) and Rule 6-DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. [See: 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."
At the cost of repetition, the Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency.
In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act.”
Even in the present case, we observed that the assessee has habitually carried on the business by only cash by selling the wine and making the payment towards purchases by cash. It is a fact on record that Revenue authorities have not disputed the genuineness of the payments and they also acknowledged that the method of business carried on by the assessee is only through cash. Therefore, on the one hand, the Revenue authorities are acknowledging the fact that payments are genuine and then only, they are invoking the provisions of section 40A(3) of the Act to disallow the same. As held by Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT (A) (supra) by relying on the decision of Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra) that by reading section 40A(3) and Rule 6DD, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in their 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 through crossed cheque or crossed bank draft. It insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of section 40A(3) of the Act are not absolute considering of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the section.
Therefore, from the above decision, it is clear that the business expediency cannot be overlooked and also in the given case, it is fact on record that assessee has carried on the business only on the basis of cash. Therefore, by now insisting upon the provisions of section 40A(3) overlooking the business expediency and also impossibility of performance at this stage is not just and proper. Even looking at the financial transactions, the assessee has merely earned net income of Rs.5,45,900/- and considering the impossibility of performance and by imposing the provisions of section 40A(3), the assessee is in big challenge, in our considered view, the intention of the legislature is not to do so. Therefore, we are inclined to extend the benefit to the assessee considering the peculiar nature of the business of the assessee.
In the result, the grounds and appeal filed by the assessee are allowed.