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Income Tax Appellate Tribunal, [ DELHI BENCHES : “C” NEW DELHI ]
Before: SHRI I. C. SUDHIR & SHRI O. P. KANT
Assessee by : Shri Ashwani Taneja, Adv.; & Shri Somil Agarwal, C. A.; Department by : Shri A. K. Saroha, CIT [DR]; Date of Hearing : 22.06.2017 Date of Pronouncement : 15.09.2017 O R D E R. PER I. C. SUDHIR, J. M. :
These are two appeals of different assessment years of same assessee. First, we shall take appeal for AY 2006-07 in :
2 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
This appeal has been preferred by the assessee against the order dated 28.06.2013 passed by the learned CIT (Appeals) against the assessment order under section 153A dated 22.01.2013 for assessment year 2006-07 by the DCIT Central Circle–4, New Delhi on the following grounds :-
1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in framing the impugned assessment order u/s 153A/143(3) without assuming jurisdiction as per law and without obtaining requisite approval as per law and without complying with the other mandatory condition envisaged under the Act, more so when no incriminating material have been found as a result of search.
2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of Rs.23,62,700/- u/s 40A(3) and that too without considering the submissions/evidences of the assessee, more so when such disallowance could not have been made in the proceedings u/s 153A of the Act.
3. That in any case and in any view of the matter, impugned disallowance and impugned assessment order are bad in law, illegal, unjustified, barred by limitation, contrary to facts & law and based upon recording of incorrect facts and finding, without giving adequate opportunity of hearing, in violation of principles of natural justice and the same deserves to be quashed.
4. That in any case and in any view of the matte action of Ld. CIT(A) in confirming the action of Ld. AO in framing the 3 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
impugned assessment order is contrary to law and facts, void ab initio, beyond jurisdiction and the same is not sustainable on various legal and factual grounds.
5. Without prejudice to the above grounds, no disallowance could have been made in the present appeal because no incriminating material has been found as a result of search.
6. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest 234B of the Income Tax Act, 1961.
That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other. ”
During the course of hearing, detailed arguments were advanced by Shri Ashwani Taneja, learned Advocate on behalf of the appellant- assessee and by Shri Ashok Siroha, learned CIT-DR. on behalf of Revenue.
Ld. Counsel of the assessee vehemently challenged the disallowance made by the Assessing Officer for Rs.23,26,700/- under section 40A(3) of the Act, mainly on the following two grounds. His first argument is that no incriminating material was found during the course of search, therefore impugned disallowance was beyond the jurisdiction of Assessing Officer. In support of his argument, he
4 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08. drew our attention on the original assessment order passed u/s 143(3) dated 16.09.2008 for assessment year 2006-07, wherein full facts about purchase of land and details of payments were furnished and books of account were also produced. He also relied upon following judgments in support of this proposition :-
-PCIT vs. Meeta Gutgutiya in 82 taxmann.com 287 (Delhi) - CIT vs. Kabul Chawla in 380 ITR 573 (Delhi) - M/s Lotus Buildtech Ltd. vs. DCIT in ITA 5836 & 5837/Del/2013
His second argument was that, in this case genuineness of payment made in cash is not doubted and payees are duly identified. Under these circumstances, disallowance u/s 40A(3) should not have been made in view of the following judgments :-
- Smt. Harshila Chordia vs. ITO in 298 ITR 0349 (Raj) - Gurdas Garg vs. CIT in 63 taxmann.com 289 (P&H) - Sri ManoranjanRaha vs. ITO in - Mr. Nirmal Kumar Das vs. ACIT in ITA No. 391/Kol/2014
The learned AR also relied upon the Circular of the CBDT No. 6-P (LXXVI-66) of 1968 dated 06.07.1968 in support of his proposition. Per-contra, Ld. CIT-DR. vehemently opposed the arguments of the Ld.
5 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
Counsel of the assessee. It was submitted by him that addition can be made even in absence of incriminating material and he drew our attention to the paper book filed by the department on 22.11.216 wherein it was shown that various documents such as purchase deeds were seized during the time of search and he relied upon the following judgments of Hon’ble Delhi High Court for the proposition that addition can be made in absence of incriminating material :-
-CIT vs. Smt. Dayawanti in 75 taxmann.com 308 (Delhi) -CIT vs. Sh. Anil Bhatia in 352 ITR 493 (Delhi) -CIT vs. Chetan Das Lachman Das in 25 taxmann.com 227 (Delhi).
7. Further, with regard to the other arguments of the learned Counsel for the assessee, it was submitted by the learned CIT-DR that disallowance under section 40A(3) can be made even when genuineness of payment is not doubted. Finally, he relied upon detailed findings of learned CIT (Appeals) and requested for upholding the same.
We have gone through the orders of the authorities below as well as the submissions made by both the sides before us.
The brief facts as culled out from the order of the authorities below are that search and seizure operation u/s 132 of the Act was 6 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
carried out on 21.01.2011 in Dharampal Satyapal group of cases and in pursuance to the same, assessment proceedings were carried out under section 153A of the Act upon the assessee company. It is noted that original assessment order u/s 143(3) was passed for assessment year 2006-07 in the case of assessee-company on 16.09.2008 wherein books of accounts were also produced by the assessee and details of land purchased by the assessee were given. Thus, when search took place, assessment of the assessee for assessment year 2006-07 already stood concluded and did not abate and therefore no addition could have been made in the impugned assessment year in absence of any incriminating material. It is brought to our notice that legal position in this regard is well settled in view of recent judgment of Hon’ble Delhi High Court in the case of PCIT vs. Meeta Gutgutiya 82 taxmann.com 287 (Delhi), wherein it was observed, inter-alia, as under :-
“ 38. It appears that the seized cash was added to the income during the year of search and not in relation to any of the other AYs i.e., AYs 2000-01 to 2004-05. The documents as stated by the Revenue in its Memorandum of Appeal in viz., Annexures A1, A3 to A5 stated to pertain to AY 2003-04, 2005-06, 2004-05, and 2006-07 respectively have neither been described as such or in any detail by the Revenue either in these appeals. They have not been referred to or discussed in any of the orders of the AO or the CIT (A). Although it was repeatedly urged by Mr. Manchanda that there were "hundreds of seized documents", what is necessary to examine is whether they were in fact 'incriminating documents'. Any and every document cannot be and is in fact not an incriminating document. The legal position, as will be 7 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08. discussed shortly, is that there can be no addition made for a particular assessment year without there being an incriminating material qua that assessment year which would justify such an addition. Therefore, the mere fact there may have been documents pertaining to the above assessment years does not satisfy the requirement of law that there must be incriminating material. In any event, the aforementioned documents i.e., A1, A3, A4 and A5 pertain to only some of the AYs with which we are concerned i.e., assessment years 2003-04, and 2004-05. The Court is unable to accept the submissions of Mr. Manchanda that there was incriminating material other than what has been discussed in the orders of the Assessing Officer, CIT (Appeals) and the ITAT for the assessment years in question. ”
In the above said judgment, Hon’ble Delhi High Court has given these observations after considering law in detail in this regard and judgments relied upon by the learned CIT-DR have also been considered.
No contrary judgment has been placed before us by the revenue. Thus, we are bound by the decision of the Hon’ble jurisdictional High Court. Thus, the law that emerges before us is that no disallowance could have been made u/s 40A(3) in absence of any incriminating material discovered during the course of search. In the facts of the case before us, as is also clear from the perusal of the order passed by Assessing Officer as well as the learned CIT (Appeals), the impugned disallowance has been made only on the basis of inquires made during the course of assessment proceedings.
8 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
It has also been contended by the Revenue that some purchase deeds were also seized during the course of search indicating purchase of land by the assessee. We have considered this argument also. The perusal of above said order of Hon’ble Delhi High Court would make it clear that the registered purchase deeds would not by themselves become incriminating material. Thus, taking into account all the facts of this case and position of law as has been settled by Hon’ble Delhi High Court, it is clear that disallowance made u/s 40A(3) by Assessing Officer is without jurisdiction in as much as the same is made in absence of any incriminating material and therefore the same deserves to be deleted on this ground itself.
Further, it is noted that the impugned transaction has been duly recorded in the books of accounts maintained by the assessee. It was also shown that the particulars of payment made in cash on account of purchase of land have been picked up from the purchase deeds which are duly registered and all the payees are duly identified. In fact, no doubt has been expressed with regard to genuineness of the payment in the orders passed by the lower authorities. In this regard, learned Counsel placed reliance on various judgments in support of the proposition that no disallowance should be made under section 40A(3) when payees are identified and genuineness of payment is not doubted.
9 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
We noticed in this regard that Kolkata bench of Tribunal in the case of Sri Manoranjan Raha vs. ITO (supra) has decided this issue in favour of assessee by observing as under :-
“ 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 AmitDutta 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 CIT(A). 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 :-
10 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
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. 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 ShriManorajanRaha 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. "
11 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
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 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 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 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 ld. 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. "
12 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
Anupam 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 assesse] "
Sri LaxmiSatyanarayana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhrapradesh High 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] "
13 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
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 payee4.5. 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 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.
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 whileupholding the constitutional validity negated the existence of a mensrea 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 the goods and the failure of C & F agent to furnish information required by the Commissioner is implicit in section 57(2) and 14 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08. 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) 298 ITR 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.”
The above judgment has been followed by Kolkata bench in the case of Mr. Nirmal Kumar Das vs. ACIT (supra). Similar view is 15 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
taken by Hon’ble Rajasthan High Court in the case of Smt. Harshila Chordia vs. ITO (supra). Similarly, Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT (supra), has held that where genuineness of transactions made in cash in excess of Rs.20,000 was not disbelieved by authorities, same cannot be disallowed under Section 40A(3).
Thus, on this ground also, we find that disallowance made by Assessing Officer under section 40A(3) is not sustainable.
Therefore, keeping in view both the aspects as discussed above, the disallowance made by the Assessing Officer is not sustainable and wrongly confirmed by the learned CIT (Appeals) and, therefore, we direct the Assessing Officer to delete the same.
As a result, appeal of the assessee is allowed.
Now we shall take up appeal for assessment year 2007-08 17. in :
17.1 It has been unanimously stated before us by both the parties that facts and issues involved in this year are identical to assessment year 2006-07. Therefore, following our order of assessment year
16 I.T. Appeal No. 5293/Del/2013 AND I.T. Appeal No.3029/Del/2014 Assessment Years : 2006–2007 & 2007-08.
2006-07, the disallowance made in this year also under section 40A(3) is directed to be deleted.
As a result, both the appeals filed by the assessee, are allowed.
The order is pronounced in the Open Court on : 15th September, 2017.