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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Shri J.Sudhakar Reddy, AM & Hon’ble Shri S.S.Godara, JM]
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : KOLKATA [Before Hon’ble Shri J.Sudhakar Reddy, AM & Hon’ble Shri S.S.Godara, JM] I.T.A No. 1117/Kol/2017 Assessment Year : 2011-12 S.N. Construction -vs- ACIT, Circle-2, Durgapur [PAN: ABAFS 9119 B] (Appellant) (Respondent) I.T.A No. 1205/Kol/2017 Assessment Year : 2011-12 ACIT, Circle-2, Durgapur -vs- S.N. Construction [PAN: ABAFS 9119 B] (Appellant) (Respondent)
For the Appellant : Shri Saikat Maulik, FCA For the Revenue : Gautam Kumar Mondal, Addl. CIT(DR) Date of Hearing : 06.06.2018 Date of Pronouncement : 04.07.2018
ORDER Per J.Sudhakar Reddy, AM
These cross appeals by the Assessee as well as Revenue directed against the common orders of the learned Commissioner of Income Tax (Appeals)-Durgapur [in short the ‘Ld. CIT(A)’] dated 27.02.2017 passed u/s 250 of the Income Tax Act, 1961 (in short the ‘Act’) for the assessment year 2011-12.
The assessee is a partnership firm and carries out business as civil contractor. It filed its return of income on 12.03.2013, declaring total income at Rs. 36,51,703/-. The Assessing officer passed an order u/s 143(3) computing total income of the assessee at Rs. 1,04,758.80 paisa inter alia, disallowing an amount of Rs. 16,26,104/- u/s 40A(3) of
2 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 the Act and also disallowing the claim of bad and doubtful debts of Rs. 15,62,369/- and also sadding an amount of Rs. 31,23,870.88 as prior period adjustment among other additions. Aggrieved the assessee carried the matter an appeal. The ld. First appellate authority granted part relief. On the issue on which the Ld. CIT(A) has granted relief, the revenue has filed this appeal and on the issues on which the Ld. CIT(A) upheld the order of the assessing officer, the assessee has filed this appeal.
After hearing rival submissions and on a careful consideration of the facts and circumstances of the case, a perusal of papers on record and orders of the lower authorities below as well as case law cited, we hold as follows.
First we take up in I.T.A. No. 1117/Kol/2017 Ground nos. 1 to 3 in the assessee’s appeal are on the disallowance made on the ground that there is violation of provision of section 40A(3) of the Act. Ground no. 4 is against the disallowance of Puja expenses, ground no. 5 is against the disallowance of telephone charges and general expenses and ground no. 6 is on the addition of interest earned on TDS.
Regarding the disallowance u/s 40A(3) of the Act, the assessee submits that it was, under exceptional circumstances, that payments had to be made by way of cash. The assessee pleaded that it had taken up civil works on contract from U.K.Ispat and that the location of the site was at a village by name “Shri Chandanpur”, where the “Jadab community” sold land to the company and were given jobs of supplying various materials to the site of the company and that the assessee was not in position to deny the supply work for them. It was submitted that these people complete the job and come to the office of the assessee and demand for payment in cash. When the assessee wanted to issue account payee cheques it was told that, they had no bank account and would accept only cash. The assessee claimed that it was forced to make cash payments to 2
3 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 these three persons without whose co-operation to work whatsoever can take place in that area.
The assessing officer records that the assessee had also received cash and had paid cash for this expenditure. The issue that is to be adjudicated is whether the payments in question, the genuineness of which is not in doubt and which were made in cash, were made under exceptional circumstances or not.
The undisputed fact is that due to local unrest the construction of the factory by U.K. Ispat had to come to an end and ultimately this construction of the factory to prove had to be abandoned. These events and exceptional circumstances, the assessee had produced statements given by the parties to whom these payments were made. From these details filed it can be seen that the payments were made for either purchase of sand, purchase of mooram, purchase of bricks, stone chips or for exclusion of a contract. The genuineness of the expenditure is not in doubt. In our view even the exceptional circumstances under which the assessee made cash payments are proved.
8.The Jaipur Bench of the Tribunal in I.T.A. No. 1065/JP/2016 for assessment year 2013-14 order dated 15.05.2018 wherein it was held as follows: “20. In case of Attar Singh Gurmukh Singh v. ITO (supra), the matter which came up for consideration before the Hon'ble Supreme Court, the facts of the case were that assessee had made payment in cash exceeding a sum of Rs. 2,500/- for purchase of certain stock-in-trade. Payments were not allowed as deductions in the computation of income under the head "profits and gains of business or professions" as the same were held to be in contravention of section 40A(3) read with that 6DD of the Income rules. In that factual background, the question regarding validity of section 40A(3) and applicability of the said provisions to payment made for acquiring stock-in- trade came up for consideration before the Hon'ble Supreme Court. 21. The Hon'ble Supreme Court referring to the provisions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant point in time, has held as under:-
4 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 "6. As to the validity of section 40A(3) it was urged that if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft then the income- tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary. 7. In our opinion there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. 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 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 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(J) 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 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 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black- money for business transactions. - Mudiam Oil Co. v. ITO [1973]92 ITR 519 (AP). If the payment is made by a crossed cheque 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.”
Further, the Hon'ble Supreme Court upheld the applicability of section 40A(3) to payment made for acquiring stock-in-trade and raw materials and also affirmed the decision of Hon'ble Rajasthan High Court in case of Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj) to the effect that the payments made for purchasing stock-in-trade or raw material should also be regarded as expenditure for the purposes of section 40A(3) of the Act.
The Hon'ble Supreme Court has therefore upheld the constitutional validity of section 40A(3) of the Act and has held that the provisions are not intended to restrict the business activities and restraint so provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. The Hon'ble Supreme Court has thus laid great emphasis on the intention behind introduction of these provisions and it would 4
5 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 therefore be relevant to examine whether in the present case, there is any violation of such intention and if ultimately, it is determined that such intention has been violated, then certainly, the assessee deserves the disallowance of the expenditure so claimed.
The Hon'ble Supreme Court referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee has held that:
"The terms of section 40A(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 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 crossed cheque or crossed bank draft in the circumstances specified under the rule.”
Here, it is relevant to note that there has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors are concerned, as existed at relevant point in time and as considered by the Hon'ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impugned assessment year i.e. AY 2013-14. However, Rule 6DD(j) has been amended and by notification dated 10.10.2008, it now provides for an exception only in a scenario where the payment was required to be made on a day on which banks were closed either on account of holiday or strike. A question which arises for consideration is whether the legal proposition so laid down by the Hon'ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to which such delegated legislation is subservient has been retained in its entirety. Alternatively, can it be said that what has been prescribed as exceptional circumstances in Rule 6DD as amended are exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations.
If we look at the legislative history of section 40A(3) and Rule 6DD, we find that initially, section 40A(3) provides for disallowance of 100% of the expenditure unless the matter falls under exception as provided in Rule 6DD(j) Later on, section 40A(3) has been amended to provide for disallowance of 20% of the expenditure incurred in cash and Rule 6DD(j) was omitted. Thereafter, by virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to 5
6 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 employees and thereafter, by virtue of lastest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike.
We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance.
Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions.
We refer to the decision of the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (supra), where the facts of case were that the assessee had made certain cash payments towards purchase of scooter/mopeds which exceeded Rs. 10,000/- in each case to the principal agent instead of making payment through the cross cheques or bank draft. The Assessing Officer invoked the provisions of section 40A(3) and held that they were no exceptional circumstances falling under rule 6DD which could avoid consequences of the provisions of section 40A(3) of the Act. The Id. CIT(A) held that such exceptional circumstances did exist. However, the findings of the Id. CIT(A) were reversed by the Tribunal and the matter came up for consideration before the Hon'ble High Court.
The Hon'ble High Court observed that the principal reason which weighed with the Tribunal in discarding the explanation furnished by the assessee was that the case of the assessee did not fall in any of the clauses enumerated in the circular issued by the CBDT about the explanatory note appended to clause (j) was to operate as it was existing at the relevant time and enumerated circumstances in the circular was 6
7 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 exhaustive of exceptional circumstances. The Hon'ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the provisions of clause (j) under rule 600 would operate to be exhaustive of such circumstances and had not been properly understood its implication. It was further observed by the Hon'ble High Court that primary object of enacting section 40A(3) in its original incarnation was two-fold, firstly, putting a check on trading transactions with 'a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community. The consequence which was provided was to disallow of deduction of such payments/expenses which were not through bank either by crossed cheques or by demand draft or by pay order. It was further held by the Hon'ble High Court that:
"Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore/ the consequences/ which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration which has been overlooked by the Tribunal”.
It was accordingly held by the Hon'ble High Court that it is the relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in light of Rule 600 as clarified by 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. This is particularly so, because the consequence provided u/s 40A(3) for failure to make payments through bank is not absolute in terms nor automatic but exceptions have been provided and leverage has been left for little flexing by making a general provision in the form of clause (j) in rule 6DD. Thereafter, the Hon'ble High Court refers to the clause 6DD(j) and the circular dated 31st May, 1977 issued by the Board in the context of what shall constitute exceptional and unavoidable circumstances within the meaning of section Clause (j). The Hon'ble High Court observed that the circular in paragraph 5 gives a clear indication that rule 6DD(j) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and the identity of the receiver is established, the requirement of rule 6DD(j) must be deemed to have been satisfied. The Hon'ble High Court observed that apparently section 40A(3) was intended to penalize the tax evader and not the honest transactions and that is why after framing of rule 6DD(j), the Board stepped in by issuing the aforesaid circular and this clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO vs. Swastik Roadways reported in [2004] 2 RC 539; [2004] 3 SCC 640.
The legal proposition that arises from the above decision of the Hon'ble Rajasthan High Court is that the consequences, which were to befall on account of non- observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any
8 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 device of evasion of tax is relevant consideration and which should be examined before invoking the rigours of section 40A(3) of the Act.
In case of Anupam Tele Services v. Income Tax Officer, the matter which came up for consideration before the Hon'ble Gujarat High Court, the facts of the case were that the assessee who is involved in the business of distribution mobile and recharge vouchers of Tata Tele Services Ltd had made payment of Rs. 33,10,194/- to Tata Tele Services Ltd., by cash on different dates. The assessee had made such payment through account payee cheques till 22nd Aug, 2005, when a circular was issued by Tata Tele Services Ltd., requiring the appellant to deposit cash at the company's office at Surat. In that factual background, the Hon'ble High Court held as under:-
“17. Rule 6DD of the IT Rules, 1962 provides for situations under which disallowance under s. 40A(3) shall not be made and no payment shall be deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, cl. (j) which is relevant, read as under: 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;
It could be appreciated that s. 40A and in particular sub-cl. (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of account payee cheque drawn on a bank or account payee bank draft.
As held by the Apex Court in case of Attar Singh Gurmukh Singh (supra): “….In our opinion, there is little merit in this contention. Sec. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. 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. Sec. 40A(3) only empowers the AO. 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 undisclosed sources, The terms of s. 40A(3) are not absolute. Considerations 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 AO, the circumstances under which the payment in the manner prescribed in s. 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 crossed cheque or crossed bank draft in the circumstances specified under the rule, It will be clear from the provisions of s. 40A(3) and Rule 6DD that they are intended to regulate business transactions
9 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions”
It was because of these considerations that this Court in case of Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the payment and the identify of the payee are the first and foremost requirements to invoke the exceptions carved out in r. 6DD(j) of the IT Rules, 1962,
In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted, These were the conclusions on facts drawn by the CIT(A), The Tribunal also did not disturb such facts but relied solely on r. 6DD(j) of the rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of r. 6DD, consequences envisaged in s. 40A(3) of the Act must follow.
In our opinion, the Tribunal committed an error in coming to such a conclusion, We would base our conclusions on the following reasons: (a) The paramount consideration of section 40A(3) is to curb and reduce the possibilities of black money transactions, As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of the Act does not eliminate considerations of business expediencies.
(b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow-
(i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time;
(ii) the assessee was, therefore, required to make cash payments only;
(iii) Tata Tele Services Ltd. assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee;
(iv) It is not disputed that the Tata Tele Services Ltd. did not act on such promise;
(v) if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations.
We would find that the payments between the assessee and the Tata Tele Services Ltd. were genuine. The Tata Tele Services Ltd. had insisted that 9
10 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 such payments be made in cash, which Tata Tele Services Ltd. in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of s. 40A(3) of the Act must be lifted.
We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007) 208 CTR (Raj) had observed 'that the exceptions contained in r. 6DD are not exhaustive and that the said rule must be interpreted liberally.”
In case of M/s Ajmer Food Products Pvt. Ltd., Ajmer vs. JCIT (supra), a similar issue has come up before the Co-ordinate Bench and speaking through one of us, it was held as under:
"4.5 The genuineness of the transaction as well as the identity of the payee are not disputed. Further, the appellant has explained the business expediency of making the cash payments to both the parties which has not been controverted by the Revenue. Following the decision of Gujarat High Court in case of Anupam Tele Services (supra) and Rajasthan High Court in case of Harshila Chordia (supra), the addition of Rs. 45,738/- under section 40A(3) is deleted. "
In case of Gurdas Garg vs. CIT(A), Bathinda (supra), the matter which came up for consideration before the Hon'ble Punjab & Haryana High Court, the facts of the case are pari materia to the instant case and the ratio of the said decision clearly applies in the instant case. In that case, the facts of the case were that the assessee was engaged in trading in properties and during the course of assessment proceedings, the AO observed that there are transactions where the payments have been made in excess of Rs. 20,000/- in cash which were disallowed u/s 40A(3) of the Act. The Hon'ble High Court held that rule 6DD(j) is not exhaustive of the circumstances in which the proviso to section 40A(3) is applicable and it only illustrative. The Hon'ble High Court refers to the decision of the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia v. ITO (Supra) and the decision of Hon'ble Supreme Court in case of Attar Singh Gurmukh Singh v. ITO (Supra). The High Court further observed that the Id. CIT(A) has given a finding that the identity of the payee i.e. vendors in respect of land purchase by the appellant was established, the sale deeds were produced, the genuineness thereof was accepted' and the amount paid in respect of each of these agreement was satisfied before the Stamp Registration Authority and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not attracted, The Hon'ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions and it is also important to note that the correctness of the transactions and it is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market and therefore it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to settle the deals. The Tribunal did not doubt this case. The Tribunal, however, held that the claim for deduction was not 10
11 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 sustainable. In view of Section 40A(3) as the payments which were over Rs. 20,000/- were made in cash. The Hon'ble High Court accordingly observed that "the Tribunal has not disbelieved the transactions or the genuineness thereof nor has it disbelieved the fact that payments having been made. More importantly, 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."
The Co-ordinate Bench in case of M/s Dhuri Wine vs DCIT (ITA No. 1155/chd/2013 & others dated 09.10.2015) has held that the proposition so laid down by the Hon'ble High Court in case of Gurdas Garg (supra) is quite unambiguous to the effect that even if the case of the assessee does not fall in any of the clauses of Rule 6DD of the Income Tax Rules, invoking the provisions of section 40A(3) of the Act can be dispensed with if the assessee is able to prove the business expediency because of which it has to make the cash payments, the genuineness of the transactions have also to be verified.
The Co-ordinate Bench in case of Rakesh Kumar vs. ACIT (ITA No. 102(Asr)/2014 dated 09.03.2016) relying on the decision of Hon'ble Punjab and Haryana High Court in case of Gurdas Garg (supra) has held that the genuineness of the payment has not been doubted as the Assessing Officer himself has held that sale deeds of properties were registered with the Revenue department of the Government. Therefore, following the decision of Hon'ble Punjab and Haryana High Court, the payment for purchase of land was allowed.
We further note that in case of M/s ACE India Abodes limited (DB Appeal No. 45/2012 dated 11.09.2017), a similar issue has come up before the Hon'ble Rajasthan High Court regarding payment for purchase of land from various agriculturist for which the assessee has paid consideration in cash and shown the land as its stock-in- trade. The Hon'ble Rajasthan High Court referring to the intent behind introduction of section 40A(3) and catena of decisions right from Attar Singh Gurmukh Singh, Smt. Harshila Chordia, Gurdas Garg, Anupam Tele Services referred supra has decided the issue in favour of the assessee and against the department.
We find force in the contentions so raised by the ld AR. The transactions have been executed by the assessee within a span of one and half month and there are transactions where the payment has been made through cheque and there are transactions where the payment has been made through cash. The said contentions are supported by the fact that on the same day, there are cash and cheque payments as evidenced from the details of the transactions appearing at page 7 and 8 of the assessment order. It is therefore clear that the assessee was having sufficient bank balance and only at the insistence of the specific sellers, the assessee has withdrawn cash and made payment to them and wherever, the seller has insisted on cheque payments, the payment has been made by cheque. This makes out a case that the assessee has business expediency under which it has to make payment in cash and in absence of which, the transactions could not be completed. The second proviso to section 40A(3) refers to "the nature and extent of banking facility, consideration of business expediency and other relevant factors" which 11
12 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 means that the object of the legislature is not to make disallowance of cash payments which have to be compulsory made by the assessee on account of business expediency. Further, the source of cash payments is clearly identifiable in form of the withdrawals from the assessee's bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income, of the assessee has been utilized in making the cash payments. 43. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that the identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee's bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by the Hon'ble Rajasthan High Court in case of Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act”.
The “ C” Bench of the Kolkata Tribunal in I.T.A. No. 482/Kol/2014 wherein it was held as follows:
We find that in the instant case also, it is not in dispute that the payments were made by the assessee to the brokers from whom the trucks were hired on payment, and in turn was required to make the payment in cash to the truck- drivers in each. As per Oxford Dictionary & Thesaurus-II Page no.15, an agent is:
i) person acting for another in business etc.
ii) person or thing producing effect
iii) broker, delegate, envoy, executor, functionary, go-between, intermediary, mediator, middleman, negotiator, proxy, representative, surrogate, trustee.
Therefore, a broker is akin to an agent. Thus, the facts of the case are identical to the facts, which were in the case of Vijay kumar P. Desai (supra), and therefore, the decision in that case is squarely applicable to the facts of the assessee‟s case. Hence, respectfully following the above-cited decision of the Tribunal, we set aside the orders 12
13 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 of the lower authorities, and delete the disallowance under section 40A(3) of the Act, and this ground of the appeal of the assessee is allowed. 9.2. We find that the Hon‟ble Jurisdictional High Court in the case of Goenka Agencies vs CIT reported in (2003) 263 ITR 145 (Cal) wherein the head notes are reproduced as below:- "Business expenditure-Disallowance under s. 40A(3)-Exceptional and unavoidable circumstances-Assessee has to establish only one of the requirements as provided in r. 6DD(j)(1) and (2), namely, that the payment was made in exceptional and unavoidable circumstances or the payment by cheque or bank draft was not practicable or would have caused genuine difficulty-Assessee made cash payments to its supplier on the insistence of the latter-Genuineness of the transaction was not doubted by the AO or by the Tribunal-Identity of the payee was also not questioned-CIT(A) found that the payments were made to keep harmonious relationship with the principal-Same clearly satisfies the requirement of the provisions of r. 6DD(j)(1)- Disallowance under s. 40A(3) not justified." 9.3. We find that the Hon‟ble Gujarat High Court in the case of Anupam Tele Services vs ITO reported in (2014) 366 ITR 122 (Guj) wherein the head notes are reproduced as below:-
Business Expenditure-Disallowance-Validity of-Cash payment exceeding prescribed limit-Assessee acted as agent of Tata for distributing mobile cards and recharge vouchers-Assessee made payments by account payee cheques till August 2005- Subsequently TATA issued circular and assessee was required to make payment by cash, since it had bank account with cooperative bank-Assessee made payment in cash on different dates and such payment exceeded Rs. 20,000 each-AO disallowed payment made in cash invoking provisions of s 40A(3)-CIT(A) deleted disallowance made by AO holding that genuineness of transaction was not disputed and assessee took a very practical step in making payment in cash to stay in business in a competitive environment-Tribunal allowed revenue‟s appeal relying on clause (j) of r 6DD-Held, s 40A (3) aims to curb and reduce possibilities of back money transactions-It does not eliminate considerations of business expediencies-Assessee was compelled to make cash payments under peculiar circumstances as principal company, to which assessee was a distributor, insisted that cheque payment from a cooperative bank would not do, since the realization takes a longer time-If assessee had not made cash payment, it would have received the recharge vouchers delayed by 4/5 days and thereby would severely affect its business operations- Rigors of s 40A(3) to be lifted-Further the exceptions contained in r 6DDD are not exhaustive and that rule must be interpreted liberally- Impugned order set aside-Assessee‟s appeal allowed. 9.4. We also find that the Hon‟ble Gauhati High Court in the case of Walford Transport (Eastern India) Ltd vs CIT reported in (1999) 240 ITR 902 (Gau) wherein the head notes are reproduced as below:-
14 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 Business expenditure-Disallowances under s. 40A(3)-Exceptional and unavoidable circumstances-Assessee explained that its financial positions was very bad at the relevant time and it had to resort to cash transaction in order to avoid the risk of bouncing of cheques- Explanation accepted by AO in majority of transaction-Same however not accepted in some transactions only on the basis that the names of payees were not indicated in the vouchers-On appeal, CIT(A)- Where the transaction is found to be genuine and the identity of payee is established a liberal view of compelling and mitigation circumstances should be taken-The Tribunal, erred in drawing the inference that in no circumstances deferred payment would be covered by r. 6DD(j)-CIT(A) was justified in allowing deduction of cash payments.
In the said judgement it was also held as under:-
"13. Learned Counsel appearing for the Revenue has submitted that the payments have not been genuine, on the basis of the finding of the assessing authority where it was has observed that on some of the vouchers the names of the payees were not indicated. As indicated earlier, this finding of fact has been upset by the CIT(A) on checking each voucher and it was observed that the names of the payees were indicate. From a perusal of the decisions of different High Courts referred to above, it clearly emerges that the purpose of s. 40A(3) of the Act is not to penalize the assessee for making cash payment of an amount of Rs.2,500 or above. The purpose 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." 9.5. We also find that the Hon‟ble Rajasthan High court in the case of Smt Harshila Chordia vs ITOreported in (2008) 298 ITR 349 (Guj) had held that the exceptions contained in Rule 6DD of the Rules are not exhaustive and that the said rule must be interpreted liberally.
9.6. In view of our aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the subject mentioned cash payments would fall under the ambit of exception provided in Rule 6DD(k) of the Rules in the facts and circumstances of the case and accordingly the provisions of section 40A(3) of the Act could not be made applicable in the instant case. Hence we do not find any infirmity in the order of the ld CIT(A) in this regard. Accordingly, the grounds raised by the revenue are dismissed.
The Jurisdictional High Court in the case of CIT Vs. Crescent Export Syndicate in I.T.A. No. 202 of 2008 judgment dated 30.07.2008 held as follows: “It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(A) 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 14
15 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 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. “ (iii) 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 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.”
Applying the proposition of law laid down in these case law, the facts of this case and keeping in view the exceptional circumstances such as public interest which led to abandonment of the project of construction of work, on facts, we delete the disallowance u/s 40A(3) of the Act. Hence , grounds no. 1 to 3 are allowed.
Ground no. 4 is on the disallowance of puja expenses of Rs. 36,542/-. The assessee submits that the expenditure relates to Viswakarma Puja. It was submitted that these expenses were incidental to business and customary in nature. We find no reason for the AO to disallow the expenses, hence we allow the same. Accordingly, ground no. 4 is allowed.
Ground no. 5 is dismissed as it relates to ad hoc disallowance of telephone charges and general expenses and as the assessee could not dispute the factual findings of the Ld. CIT(A), we dismiss this ground.
16 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12
Ground no. 6 is also dismissed as interest of TDS his income.
Ground no. 7 is general in nature and does not require any specific adjudication.
Now we take up revenue appeal in I.T.A. No. 1205/Kol/2017 Ground no. 1 is against the deletion an amount of Rs. 1,73,600/- disallowed u/s 40A(ia) of the Act.
The Ld. CIT(A) has deleted the disallowance by holding that at para 4.6.5 as held that the payments made to Shri Santana Das, Prasanta Ghosh, S. Banerjee was not for expenses and also not towards credit us as the expenditures were claimed to debit in the profit and loss account and hold that no disallowance can be made. The balance disallowance was upheld on the ground that, the existence of circumstances warranting payments in cash was not proved by the assessee. We find no infirmity in this order of the Ld. CIT(A). Hence, ground no.1 is dismissed.
Coming to ground no. 2 we find that the Ld. CIT(A) has at para 6.7.3 held as follows: “6.7.3. I have perused the remand report and the submission of the appellant. In this case perusal of facts shows that the A.O. has found that “the assessee had raised bills amounting to Rs.33,48,887/- during the financial year 2004-05 to 2006-07. He also submitted letter of Nilkanth Ferro Limited dated 24.03.2014 wherein the same details were found. The· A/R of the assessee was asked regarding the reason of difference between amount shown by him with supporting documents (Rs. 33,48,887/-) and addition made by the then A.O (Rs. 31,23,870.88/- )." The appellant has argued on this issue that prior period expenses have been confirmed by the concern M/s Nilkanth Ferro Limited. The only issue remains for difference of Rs. 2,25,016/- the claim of the appellant against prior period adjustment is of Rs. 31,23,870/- which is lower than the claim made and confirmed by the third party it is also the fact that amount of Rs. 33,48,887/- has been treated as income by the appellant date wise and hence it has been reversed by the appellant, keeping in view of the aforesaid facts the eligible 16
17 ITA Nos.1117&1205/Kol/2017 S.N. Construction A.Yrs.2011-12 disallowance which has been claimed by the appellant to the tune of Rs.31,23,870/- is hereby allowed and the ground of the appeal of the appellant is allowed. The addition made by the A.O is hereby deleted.”
The ld. DR could not controvert these factual findings of this case. Hence we uphold this order and dismiss ground no. 2.
Ground no. 3 is general in nature and does not require any specific adjudication.
In the result, the appeal of the assessee is allowed in part and the appeal of the revenue is dismissed.
Order pronounced in the Court on 04.07.2018
Sd/- Sd/- [S.S. Godara] [ J.Sudhakar Reddy] Judicial Member Accountant Member
Dated : 04.07.2018 SB, Sr. PS Copy of the order forwarded to: 1. S.N. Construction, Srichandanpur, Nityanandapur, Bankura, Pin-722142. 2. A.C./D.C., Circle-2, Durgapur, Aayakar Bhawan Annexe, 3rd Floor, Aaykar Bithi City Centre, Durgapur, Burdwan, W.B.-713216. 3..C.I.T.(A)- , Kolkata 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.