DCIT CORP CIRCLE 1, COIMBATORE vs. M/S KPG COTTSPIN INDIA PVT LTD, COIMBATORE

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

“1. The order of the ld. CIT(A), Coimbatore is against the facts and circumstances of the case and is erroneous by law.

3. The learned CIT(A) failed to consider that the assessee has failed to substantiate that the trade names of weavers as appearing in the ledger and the proprietor name as appearing in the Form 16A are one and the same. 4. For these and other grounds that may be adduced at the time of hearing, the order of the ld. CIT(A), may be cancelled and that of the Assessing Officer be restored.”

The Ld DR invited our attention to the following portion of the 2. order of the CIT(A) :

“5. The appellant manufactures cotton cloth by giving yarn to weaving factories situated outside factory on contract basis. They have 69 weaving contractors. Payments were made to them in cash. Out of the total weaving charges of Rs.4,65,08,554/- to 6 weavers, the Assessing Officer disallowed an amount of Rs.3,20,53,900/- u/s 40A(3) of the Act. The appellant submitted TDS Return to evidence that the payments were in fact paid after deducting tax. The appellant had debited the entire amount in one particular account by name ‘W.S.R.T’, which made the Assessing Officer believe that it is payment to one person. Since, the payments were made to 69 persons, it was found appropriate to call for a Remand Report from the Assessing Officer vide this office letter dated 24.03.2017. The Remand Report of the Assessing Officer dated 23. 10.2017 along with the comments of the Range Head was received in this office on 30.10.2017. In Para 4.1 of the Remand Report, the Assessing Officer stated “As could be seen from the above, the assessee’s cash payments exceeding Rs.20,000/- on a single day amounted to Rs.41,38,000/- out of which an amount of Rs.10,04,000/- was paid on 27.10.2012 being a Bank Holiday on the occasion of Bakrid. As per Rule 6DD of the Income Tax Rules, 1962, where payment was required to be made on a day on which the Banks were closed either on account of holiday or strike, then disallowance u/s 40A(3) of the Act is not called for.

In view of the above, disallowance u/s 40A(3) of the Act amounting to Rs. 31,34,000/- is requested to be upheld.” 5.1 On going through the Remand Report and the written submissions made, I find that there is no dispute regarding the genuineness of the payment. It is a practice in the manufacture of cotton cloth that cash payments are made to small weavers. The appellant has effected tax deduction from contract payments. Considering all these facts, I am of the view that the payments except Rs.31,34,000/- as identified by the Assessing Officer are genuine cash payments which will not come within the ambit of Section 40A(3) of the Act. Hence the disallowance of Rs.2,89,19,900/- (Rs.3,20,53,900/- minus Rs.31,34,000/-) is deleted.

and reiterated the grounds of appeal extracted , supra, and pleaded that the order of the ld. CIT(A) is against the facts and circumstances of the case and is erroneous in law.

“1. The Respondent is engaged in the business of manufacturing of textiles, handloom and powerloom. Assessment was completed by disallowing a sum of Rs. 3,20,53,900/- u/s 40A(3) for alleged cash payments exceeding Rs.20,000/- on a single day.

2. In the course of the appeal proceedings before the CIT(A), the respondent furnished the books of accounts, the details of cash payments, ledger extracts, cash book etc and also the details of the tax deducted in respect of the weaving charges paid during the year. The Ld. CIT(A) was pleased to call for a remand report from the AC. before the Assessing Officer, the Respondent submitted the details of payments made, the details of the payees, ledger accounts of all the payees in its books, day book, Form 16A and proved the fact that the payment of Rs. 2,89,19,900/- was paid to 69 different weavers on various days, withoutexceeding cash payment of Rs. 20,000/- on a single day. After verifying the same, the AC submitted a remand report dated 23.10.2017, accepting that disallowance u/s 40A(3) was warranted only in respect of Rs.31,34,000I-. Para 4.1 of the Remand Report is extracted below: “4.1. As could be seen from the above, the assessee’s cash payments exceeding Rs.20,000/- on a single day amounted to Rs.41,38,000/- out of which, an amount of Rs. 10,04,000/- was paid on 27.10.2012 being a bank holiday on the occasion of Bakrid. As per Rule 6DD(j) of the Income Tax Rules, 1962, where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike, then disallowance u/s.40A(3) is not called for. In view of the above, disallowance u/s.40A(3 amounting to Rs.31,34,000/- is requested to be upheld.”

3. However, the AD proceeded to state in pare 5 of his Remand Report, the following: “5. However on perusal of the information called for it is noticed that the names of weavers as appearing in the ledger differs from the name as per Form 16A. In order to verify this the assessee was asked to furnish the following details vide this office letter dt.4.9.2017,: — Confirmation letters from all the weavers [as furnished before the CIT(A)] - Reconciliation of names of weavers appearing in the cash book/ledger vis-a-vis copies of Forms 16A filed. 5.1 In response thereto, the assessee company has enclosed a list of weavers containing trade name; proprietor name and PAN. A perusal of the same reveals that most of the trade names are not matching with that of the proprietor names. A copy of the assessee’s letter dated 19.9.2017 is enclosed for kind reference. 5.2 Thus it is seen that though the names of some weavers as appearing in the ledger differs from the name as per Form 16A, the Assessee has stated the former to be trade name and the letter to be proprietor name. However the Assessee has not substantiated the same by correlating both. 5.3 Regarding the confirmation letters from all the weavers, the assessee company instead of filing confirmation letters, merely filed copies of statement pertaining to the individual weavers signed by the weaver”

4. Based on the Remand Report of the AO, the CIT(A) upheld the disallowance of Rs. 31,34,000/- as requested by the AO and deleted Rs.

2,89,19,900. The following table simplifies the payments, disallowance and relief granted. Total payments made to weaving Rs. 4,65,08,554/- contractors TDS Deducted by Assessee Rs. 4,65,091/- Disallowance made by the Assessing Rs. 3,20,53,900/-* Officer for payments in cash above Rs.20,000/- per day As per Remand Report Payments made in cash above Rs.20,000/- Rs.4138,000/- per day Payments made on Bank holiday/s Rs. 10,04,000/- Balance (To be sustained as per Remand Rs.31,34,000/-** Report) CIT(A) Order Relief granted by Commissioner of Income Rs. 2,89,19,000/- Tax (Appeals) – (Rs.3,20,53,900* - Rs.31,34,000/-**)

5. The order of the CIT(A) is fair, just, and correct in law considering the facts and circumstances of the case. He rightly relied on the AO’s remand report and deleted the disallowance of Rs.2,89,19,900/- being the genuine payments made to various weavers which do not come within the ambit of Section 40A(3) of the IT Act.

6. The Department has failed to raise any valid ground in respect of the above appeal, insofar as paragraph 5 of the remand report has no relevance to the issue at hand and would play no role in determining whether or not the Assessee has violated the provisions of Section 40A(3) of the Act. 7. Whether or not the trade names of the weavers as in the ledger are the same as the proprietors’ names in Form-16A, has no bearing or relevance in determining whether the Assessee had violated the provisions of Section 40A(3) of the Act or not. 8. The AO once having found that payments in cash did not exceed Rs.20,000/- per weaver per day, rightly recommended deletion of the :- 6 -: disallowance made u/s. 40A(3) of the Act; which the CIT(Appeals) accepted. 9. The AO having accepted that the payments made to each PAN-holder did not exceed Rs.20,000I- per day, ought not to have preferred the appeal on frivolous grounds before this Hon’ble Tribunal subjecting the Assessee to further litigation and great hardship. 10. The appeal of the Department is an abuse of process of law, and is liable to be dismissed.”

Order pronounced on Wednesday, the 31st day of October, 2018 at Chennai.