NATESAN KRISHNAMURTHY ,CHENNAI vs. ITO NON CORPORATE WARD 9(2) , CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

Assessee in this appeal filed against an order dated 23.05.2017 of ld. Commissioner of Income Tax (Appeals)-10, Chennai,

is aggrieved on a disallowance of �34,68,15,452/- made u/s.40A(3) of

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the Income Tax Act, 1961 (in short ‘’the Act’’) which was confirmed by

the ld. Commissioner of Income Tax (Appeals).

Facts apropos are that assessee claiming to be a 2.

commission agent had filed his return for the impugned assessment

year declaring income of �9,23,600/-. Assessee was one of the bidders

who participated in auctions of unredeemed old gold ornaments,

conducted by one M/s. Manappuram Finance Limited. Though in his

original return, sales/gross receipts shown in the profit and loss

account was only �6,66,134/- in a revised return filed sales/gross

receipts of �34,74,81,586/- was shown. Corresponding purchases were

for �34,68,15,452/-. Assessee was required to explain how purchases

of such huge volume could be made when his capital in the business

was only �22,67,797/-. Thereupon assessee submitted that a group of

persons who wanted to participate in the auctions held by M/s.

Manappuram Finance Ltd formed a syndicate. As per the assessee, he

was participating in the auction for such syndicate. Contention of the

assessee was that if the bid made by him was successful, he collected

the money from prospective purchasers who were the members of the

syndicate, and remitted it to M/s. Manappuram Finance Ltd. As per the

assessee, M/s. Manappuram Finance Ltd collected 1% tax at source

from such payments made by him for the old gold ornaments. In

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other words, explanation of the assessee was that money collected

from prospective purchasers were used by him for effecting payments

in accordance with bid and old gold ornaments received from M/s.

Manappuram Finance Ltd was distributed among such syndicate

members.

Section 40A(3) of the Act should not be applied since the payments

made to M/s. Manappuram Finance Ltd exceeded �20,000/- in cash.

Reply of the assessee to the notice read as under:-

"" .. I am dealing in Gold jewellery and I had made successive bidding of Gold Auction Conducted by M/s Manappuram Finance Limited, a Non Banking Company recognised by Reserve Bank of India and dealing only in banking business of accepting deposit and lending of finance against security during FY 2012-13. The meaning of Banking Company as per Section 5( c) in BANKING regulation Act, 1949.

(c) "banking company" means any company which transacts the business of banking [in India}. Explanation - Any Company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause; During the process of auction the company's policy was to settle the deal with successive bidder in the evening otter negotiation of prices and accept cash from

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outside bidders like me or by Ch/RTGS if it was bid successfully by Manappuram Group. The usual procedure will be to form a syndicate bidders ranging from 10 to 25 persons to a void increase In the, cost of auction gold and' after successive bidding by me, I will collect cash from each of the members of the syndtcete and wiJ/distribute the gold according to the payments collected from them and will be taken as sales in my account as manappuram Finance had raised invoice in my name and accordingly TDS was deducted and. which was shown as purchase in my account. Since the Purchase was in auction from Mls Manappuram Finance Ltd and I was new customer to the company in buying auctioned gold from them, it was -insisted that only cash dealing was me permitted to This was one of points taken for consideration .ot business expediency. In the case of Mls Kanishk Gold Pvt Ltd Vs Dept of Income tax, ITAT Chennai has made the contention that the party had accepted old gold ornaments and in exchange sold the fresh gold jewellery in exchange and collected / refunded the differential amount which will not attract Sec 40(A)(3) and the purchasers was deleted from addition of income. In my case as mentioned above would like to clarify that 1.I had made cash payment as I was a new customer to M/s Manappuram Finance Limited.

2.The Company is a NDFC Company recognised by RBI and are into acceptance of deposit and lending finance on security and are not into any manufacturing or trading company.

3.Already I am over burdened with financial crises due to highly volatile market conditions and my prior commitments are huge and led to several cases of cheque bounce against me.

4.The business of gold is done on a minimum margins with huge financial dealing and the addition u/s 40(A)(3) for the purchasers will be a very big financial burden with

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such a little margin and 1 will not be able to meet the demand through out my life and will made my life miserable and lead tounwarranted action which will not only spoil me and put my entire family's future at stake. 5, Hence I pray not to invoke the section and matter be dropped’’.

Assessee also relied on Rule 6DD of the Income Tax Rules, 1962 (in

short ‘’the Rules’’) for justifying the payments made in cash.

above reply. According to him, assessee’s payments were not covered

by any of the clauses in Rule 6DD of the Rules. He held that Section

40A(3) of the Act was squarely applicable on the cash purchases

made by the assessee. A disallowance of �34,68,15,452/- was made

and assessment completed accordingly.

Commissioner of Income Tax (Appeals). Contention of the assessee

was that he had participated in the auction conducted by M/s.

Manappuram Finance Ltd for purchasing unredeemed old gold jewelers

on behalf of a number of purchasers. As per the assessee, terms of

the auction required the highest bidder to deposit part of the

auctioned amount with M/s. Manappuram Finance Ltd and there was

no way he could know what amount would be required for the said

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purpose. As per the assessee, auction amount would be known only

when auction was complete. According to the assessee, money was

received from the ultimate buyers of the gold jewellery forming the

syndicate. Contention of the assessee was that he was under the

compulsion to collect cash from syndicate members and make

payments for the bid. As per the assessee, identity of the person to

whom he had made the payments were established and genuineness

of the purchases were not doubted. Submission of the assessee was

that there were compelling circumstances to make cash payments and

unless payments were made immediately, the jewellery purchased

through auction would be lost. Relying on the judgment of Hon’ble

Calcutta High Court in the case of Giridharlal Goenka vs. CIT, 179 ITR

122, it was submitted by the assessee that a transaction once found to

be genuine, Section 40A(3) of the Act, enacted to check evasion of

taxes, had no application. Reliance was also placed on the judgment of

Hon’ble Jurisdictional High Court in the case of CIT vs. Chrome Leather

Co. Pvt. Ltd, 235 ITR 708, that of Hon’ble Rajasthan High Court in the

case of Smt. Harshila Chordia vs. CIT vs. 298 ITR 349, that of Hon’ble

Delhi High Court in the case of CIT vs. Rhydburg Pharmaceuticals Ltd,

269 ITR 561 and Ramaditya Investments vs. CIT, 262 ITR 491, that

of Hon’ble Calcutta High Court in the case of Goenka Agencies vs. CIT,

263 ITR 145, that of Hon’ble Punjab and Haryana High Court in the

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case of CIT vs. Nikko Auto Ltd, 256 ITR 476 and Aggarwal Steel

Traders vs. CIT, 250 ITR 738, that of Hon’ble Kerala High Court in the

case of CIT vs. Eastern Condiments Pvt Ltd, 261 ITR 76, that of

Hon’ble Gauhati High Court in the case of Shri.Mahabir Industries vs.

CIT, 220 ITR 459, that of Allahabad High Court in the case of CIT vs.

Suresh Kumar Agarwal, 249 ITR 113, that of Hon’ble Madhya Pradesh

High Court in the case of CIT vs. Rajendra Rice Mill, 232 ITR 217 and

CIT vs. Mahavir Stores, 232 ITR 300 and that of Hon’ble Apex Court in

the case of Attar Singh Gurmukh Singh vs. ITO, 191 ITR 667.

Ld. Commissioner of Income Tax (Appeals) was not 6.

impressed by any of the above arguments made by the assessee. Ld.

Commissioner of Income Tax (Appeals) noted that assessee could not

justify the expenditure in cash by demonstrating how he fell within any

of the limbs of Rule 6DD. According to him, Section 40A(3) of the Act

stood attracted even when the payments were genuine and this was

clear from the judgment of Hon’ble Apex Court in the case of Attar

Singh Gurmukh Singh (supra). As per the ld. Commissioner of Income

Tax (Appeals) genuineness of the payments was not a factor which

was to be considered for application of Section 40A(3) of the Act.

According to him, assessee having not established how he stood

exempt from the application of Section 40A(3) of the Act, the

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disallowance made by the ld. Assessing Officer was justified. He

confirmed the disallowance.

Now before us, the ld. AR strongly assailing the orders of 7.

the lower authorities submitted that the terms of the auction clearly

required the highest bidder to deposit a part of the bid amount

immediately on announcement of the successful bid. According to

him, assessee was therefore compelled to make the payment in cash.

Contention of the ld. Authorised Representative was that assessee

collected money from members of the syndicate and paid it to M/s.

Manappuram Finance Ltd and these were all duly accounted and never

doubted by the Revenue. As per the ld. Authorised Representative,

various contingencies mentioned in Rule 6DD were not exhaustive but

only illustrative. According to him, if assessee was able to establish

that there existed circumstances to show requirements of paying in

cash, Section 40A(3) of the Act could not be applied. Reliance was

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

M/s. A Daga Royal Arts vs. ITO (ITA No1065/JP/2016, dated

15.05.2018) that of Delhi Bench of this Tribunal in the case of Vivek

Gupta vs. ITO (ITA No.5727/Del/2011, dated 14.08.2013) and that of

Chennai Bench of the Tribunal in the case of Mayur Marketing vs. ITO

(376/Mds/2012, dated 11.09.2012).

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supporting the orders of the lower authorities submitted that no

exceptional circumstance was demonstrated by the assessee

warranting an exclusion from application of Section 40A(3) of the Act.

orders of the authorities below. It is not disputed that assessee had

made payments in cash for the bid amounts to M/s. Manappuram

Finance Ltd. As per the assessee, cash was collected from various

syndicate members who wanted old gold jewellery and assessee was

representing such syndicate. In other words, as per the assessee, he

was acting as conduit for the purchases of the old gold jewellery and

bidding on behalf of the syndicate members who wanted to purchase

old gold jewellery from M/s. Manappuram Finance Ltd.. However, ld.

Assessing Officer has clearly noted that assessee in his revised return

had admitted purchase of gold from M/s. Manappuram Finance Ltd for

�34,68,15,452/- and sale thereof for �34,74,81,586/-. It is not

disputed by the assessee that the amounts paid to M/s. Manappuram

Finance Ltd were in cash and exceeded threshold limit of �20,000/- in

each case. Contention of the assessee is that there were unavoidable

circumstance which required him to pay the bid amount in cash and

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this was a relevant factor which needed to be considered while

deciding whether Section 40A(3) of the Act was to be applied or not.

Section 40A(3) of the Act, which is apposite is reproduced

hereunder:-

‘’(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees : Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for

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the words “twenty thousand rupees”, the words “thirty- five thousand rupees” had been substituted’’.

Rule 6DD set out the circumstances where payments could exceed the

threshold limit mentioned in Section 40A(3) of the Act. Said rule 6DD

is reproduced hereunder:-

‘’No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub- section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely :- (a) where the payment is made to- (i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) ; (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) ; (iii) any co-operative bank or land mortgage bank ; (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949) ; (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956) ; (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender ; (c) where the payment is made by-

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(i) any letter of credit arrangements through a bank, (ii) a mail or telegraphic transfer through a bank ; (iii) a book adjustment from any account in a bank to any other account in that or any other bank ; (iv) a bill of exchange made payable only to a bank ; (v) the use of electronic clearing system through a bank account ; (vi) a credit card ; (vii) a debit card. Explanation.-- For the purposes of this clause and clause (g), the term "bank" means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)], whether incorporated or not, which is established outside India ; (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee ; (e) where the payment is made for the purchase of- (i) agricultural or forest produce ; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming ; or (iii) fish or fish products ; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products ; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products ;

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(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business/profession or vocation, in any such village or town ; (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees ; (i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act and when such employee- (i) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship ; and (ii) does not maintain any account in any bank at such place or ship ; (j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike ; (k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person ; (l) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. Explanation.-- For the purposes of this clause, the expressions "authorised dealer" or "money changer" means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.

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Payments made by the assessee to M/s. Manappuram Finance Ltd for

purchasing old gold ornaments did not fall within any limbs of Rule

6DD.

payments made by him in cash did not fall within any of the sub-

clauses of Rule 6DD, still Section 40A(3) of the Act could not be

applied, since business expediency and other relevant factors

necessitated such payments. To a specific question raised by the

Bench, it was stated by the ld. Counsel for the assessee that

advertisements placed by M/s. Manappuram Finance Ltd for selling its

old gold ornaments by auction, did not have any condition as to

payments to be in cash mode only. However, according to him,

assessee had to collect money from the syndicate members and

business expediency required him to collect such money then and

there, and pay it to M/s. Manappuram Finance Ltd. In our oponion,

assessee failed to demonstrate that conditions of the bid required it to

effect payments in cash, then and there, and payments could not have

been made by cheque or demand draft or any other mode. It may be

true that assessee had to collect money from the syndicate members

whom he was representing. However, there is no explanation as to

what stopped the assessee from effecting payments through banking

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channels. Agreement with syndicate members if any, was not

produced by the assessee before any of the lower authorities, or in

other words, assessee could not demonstrate that it was representing

any syndicate nor could it demonstrate that it was collecting cash from

such syndicate members for making payments to M/s. Manappuram

Finance Ltd. As to the decision of Co-ordinate Bench in the case of

Mayur Marketing (supra) there the payments were made in cash, since

supplier had insisted for cash payments after banking hours. In the

case of A. Daga Royal Arts (supra) decided by Jaipur Bench of the

Tribunal, there were both payments by cheque and cash on same days

and there was a clear finding that payments in cash were made when

it was so insisted by the seller. In the case of Vivek Gupta (supra)

decided by Delhi Bench of the Tribunal, transactions done by the

assessee were between two proprietorship concern and hence there

was no outside payments in cash. Facts in all these cases, as well as in

the cases cited by the assessee before the ld. Commissioner of

Income Tax (Appeals) were entirely different from what is available

before us in the case of the assessee. No doubt if an assessee is able

to demonstrate a situation which compelled it to make payments in

cash, then application of Section 40A(3) of the Act might be excused.

However as mentioned by us, assessee before us has been unable to

demonstrate any such situation, which could convince us to exempt

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him from application of rigours of Section 40A(3) of the Act. We therefore do not find any reason to interfere with the orders of the lower authorities.

Order pronounced on Wednesday, the 20th day of June, 2018, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated: 20th June, 2018 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