BINOD KUMAR BURNWAL,BURDWAN vs. ITO, WARD - 1(3), DURGAPUR, DURGAPUR

Appearances by: Shri Soumitra Choudhury, Advocate, appeared on behalf of the assessee. Shri Robin Choundury, Addl. CIT Sr. D/R, appearing on behalf of the Revenue. Date of concluding the hearing : November 14th, 2018 Date of pronouncing the order : December 12th, 2018 ORDER Per J. Sudhakar Reddy, AM :-

This appeal filed by the revenue is directed against the order of the Learned Commissioner of Income Tax (Appeals)- Durgapur, (hereinafter the “ld.CIT(A)”), passed u/s. 250 of the Income Tax Act, 1961 (the ‘Act’), dt. 01/02/2012, for the Assessment Year 2008-09.

Assessment Year: 2008-09 Binod Kumar Burnwal “1. For that on the facts of the case, the order of the Ld. C.I.T.(A) is completely arbitrary, unjustified and illegal.

2. For that on the facts of the case the Ld. CIT(A) was wrong in dittoing the order of the A.O. and confirming the estimated addition amounting to Rs.7,87,193/- @20%, out of total commission paid to retailers at Rs.39,35,967/- which is completely arbitrary unjustified and illegal.

3. For that on the facts of the case the Ld. CIT(A) was wrong in not considering the fact that all entries in books of accounts & their respective ledger produced are supported by confirmation of retailers and their identities, therefore, the estimated addition of Rs.7,87,193/- on based on surmise, presumption and conjecture and should be deleted.

4. For that on the facts of the case the Ld. CIT(A) was wrong in dittoing the order of the A.O. and confirming the addition amounting to Rs. 1,74,429/- on suppression of purchase which is completely arbitrary unjustified and illegal.

7. For that the interest u/s 234B charged mechanically is wrong & illegal.

8. For that the appellant reserves the right to adduce any further ground or grounds, if necessary, at or before the hearing of the appeal.”

Assessment Year: 2008-09 Binod Kumar Burnwal The assessee submits that the retailers are all petty traders and may have shifted their shops and hence they could not receive the notice or reply to the notice received. He also opposes 20% disallowance on an adhoc basis. 4.1. In our view, disallowance of 20% of the commission claimed on an adhoc basis is not justified. As only 26 parties did not respond to the notices, the Assessing Officer should have made further enquiries and directed the assessee to produce further evidence. It is well known that in this line of business as the sales made through these retailers are maintained by the assessee in its books of accounts and as these books have not been doubted, we are of the opinion that the adhoc disallowance is exercise and unreasonable. Hence, we delete the same and allow this ground of the assessee.

5. Ground No. 4 is against the addition of Rs.1,74,426/-, on the ground that there is suppression of turnover. 5.1. The ld. CIT(A) records that the assessee was not able to reconcile the purchase figures and the Assessing Officer was reasonable in adopting the gross profit. On turnover ratio as profit on undisclosed purchases. The assessee submitted that the figures have been reconciled. As no reconciliation has been furnished before us, we see no reason to interfere in this fatual finding of the ld. CIT(A). Hence Ground No. 4, is dismissed.

6. Ground Nos. 5 & 6, are on the issue of disallowance u/s 40A(3) of the Act. 6.1. In this case, the undisputed facts is that the assessee deposited the amounts in question directly into the bank account of the principal seller of the goods. In fact, ASL, the principal company had issue a letter to the assessee dt. 01/05/2006, informing him that for smooth transactions, cash deposit facility is provided at the home location. The Assessing Officer 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 (Rules), and hence the provisions of Section 40A(3) of the Act, apply. ASL has confirmed the receipt of Assessment Year: 2008-09 Binod Kumar Burnwal all the payments in question. The genuineness of the payments are not doubted. Thus the disallowance is an hyper technical ground. No disallowance can be made u/s 40A(3) of the Act on these facts as per the propositions of law laid down by the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Smt. Shelly Passi; 2013 350 ITR 227. Similar view was taken by the Jurisdictional Tribunal in the case of Rampada Panda v. ITO; 65 Taxmann.com 213, wherein it was been held as follows:-

“3.3.3 We hold that since the genuinity of the payments made to the party 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 is observed that the assessee had taken enough precautions from his side to ensure that the payee also don't escape from the ambit of taxation on these receipts by directly depositing the cash in the bank account of the payee. This fact is also not disputed by the revenue. 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 frustrate proper investigation by the department as to the identity of the payee and reasonableness of the payment." 3.3.4 In this regard, it is pertinent to get into the following decisions on the impugned subject:— Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11 (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 Assessment Year: 2008-09 Binod Kumar Burnwal 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 v. CPL Tannery [2009] 318 ITR 179/[2008] 175 Taxman 316 (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 bona fide 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 v. 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 bearer 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." Anupam Tele Services v. ITO [2014] 43 taxmann.com 199/222 Taxman 318 (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 Satyanarayana Oil Mill v. CIT [2014] 49 taxmann.com 363/226 Taxman 139 (AP)

Assessment Year: 2008-09 Binod Kumar Burnwal "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 groundnut in cash exceeding prescribed limit - Assessee submitted that he 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 v. Smt. Shelly Passi [2013] 350 ITR 227/213 Taxman 213/31 taxmann.com 173 (Punj. & Har.) 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. 3.3.5 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. In the instant case, the cash has been deposited directly in the bank account of the supplier i.e M/s Pickme Feeds by the assessee. 3.3.6 The Hon'ble Apex Court in the case of CTO v. Swastik Roadways [2004] 3 SCC 640 had held that the consequences of non-compliance of Madhya Pradesh 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 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 Assessment Year: 2008-09 Binod Kumar Burnwal 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 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 the Hon'ble Rajasthan High Court in the case of Smt. Harshila Chordia v. ITO [2008] 298 ITR 349 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. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the addition made in the sum of Rs. 62,06,269/- u/s 40A(3) of the Act. Accordingly, the ground No. 1 of the assessee is allowed.”

6.2. Though the ld. D/R, relied on the judgment of the Hon’ble Madras High Court in the case of Additional Commissioner of Income-tax v. Shree Shanmughar Gunny Stores [1984] 146 ITR 600 (Madras) and the judgment of the Hon’ble Patna High Court Sri Narayan Bijoy Kumar v. Commissioner of Income-tax [1987] 163 ITR 695 (Patna), in view of the judgment of the Hon’ble Jurisdictional High Court in the case of CIT v. Crescent Export Syndicate in of 2008, dated 30.7.2008, which is binding upon us, we adjudicate this issue in favour of the assessee.