SUBRATA SARKAR,KOLKATA vs. ITO, WARD 51(3), KOLKATA, KOLKATA

This assessee’s appeal for A.Y.2013-14 emanates from the CIT(A)-15, Kolkata’s order dated 22.02.2017, passed in Appeal No. 380/CIT(A)-15/15-16/Wd- 51(3)/Kol, in proceedings u/s 143(3) of the Income Tax Act, 1961 (hereinafter the Act).

Learned counsel representing assessee takes us to relevant pleadings in the instant appeal. He states that the first and foremost grievance raised in assessee’s revised grounds is that of correctness of section 40A(3) disallowance of cash payment of business expenditure of Rs.76,74,788/- made in assessment as affirmed in lower appellate proceedings followed by enhancement in the CIT(A)’s order under the very provision amounting to Rs.23,90,907/-.

This assessee /individual runs a proprietary concern namely M/s Panhati FL Off Shop engaged in foreign liquor retail business. He made cash payments exceeding Rs.20,000/- in a single day to M/s. Galaxy Traders, M/s Castle Liquor Pvt. Ltd., M/s United Trading Company, Sen Law & Co, M/s Sona Kuthi and M/s Shree Riddhi Siddhi of Rs.46,67,384/-, Rs.13,07,889/-, Rs.6,43,767/-, Rs.9,35,748/-, Rs.80,000/- and Rs.40,000/- respectively. These cash payments represent its liquor supply expenditure. The Assessing Officer issued section 133(6) notice(s) to the concerned payees. All recipient parties came present with their respective ledger(s) indicating the assessee to have made the impugned cash payments. The Assessing Officer proposed to invoke the impugned statutory disallowance provision u/s 40A(3) of the Act. The assessee’s reply came on 11.03.2013 pleading therein that his foreign liquor sales are admittedly in cash. He stated that periodic shortfall of various liquor brands from time to time led him to make the impugned cash purchases of Rs.1,35,13,533/- as against the total purchases of Rs.3,98,06,566/- and corresponding sales of Rs.4,42,20,422; respectively. All this explanation failed to make the Assessing Officer agree. He observed in assessment order dated 21.03.2016 that the assessee had issued various cheques over and above his sanctioned credit limit of Rs.40,00,000/- and therefore, the above facts would not be covered under the specific circumstances allowing cash payments under Ruler 6DD of the Income Tax Rules 1962. The Assessing Officer thereafter granted the assessee benefit of Sundays and closed holidays to arrive at the impugned disallowance figure of Rs.76,74,788/- as affirmed in lower appellate proceedings. Coupled with this, the CIT(A) has made the corresponding enhancement as well as in case of bearer cheque payment of Rs.23,90,907/- made to M/s Galaxy Traders through one Shri Tapan Chakraborty acting as its salesman.

Learned Counsel first of all submits that there is no doubt about the genuineness of the assessee’s payments to have been made to his regular suppliers. He reiterates the facts that the bank credit limit of Rs.40,00,000/- had already been exhausted as per the relevant bank statement/cash credit journal forming part of case records. Learned Counsel cites hon’ble apex court decision Attar Gurmukh Singh vs ITO (1991) 191 ITR 667 (SC) holding that a tax payer can identify its cash recipients and the impugned disallowance provision is not made to restrict genuine business activities but aims to prevent use of unaccounted money thereby reducing flow of black money in business transactions. Another case law referred is (2002) 121 taxman.com 143 (Cal) Bagmari Tea Co.Ltd. vs CIT holding that such cash payments of business expenditure in absence of unavoidable circumstances involving business expediency would invite the impugned statutory provision’s application. Learned Counsel further relies on hon’ble Gujarat high court judgment in [2014] 366 ITR 122 (Guj) Anupam Tele Services vs ITO that cash payments of business expenditure involving unavoidable circumstances coupled with genuineness element is not to be disallowed u/s 40A(3) of the Act. He accordingly seeks to delete the impugned disallowance as well as the enhancement (supra) under challenge.

Learned Departmental Representative strongly supports both the lower authorities’ action invoking the disallowance along with the enhancement in the lower appellate proceedings of Rs.23,90,907/- in the case of M/s. Galaxy Traders (supra). He highlights the fact that the assessee had not fully exhausted his credit limit sanctioned by the bank authorities (supra) as per the relevant records. He emphasizes that the Assessing Officer as well as the CIT(A) have rightly disallowed the impugned business expenditure in absence of payment by way of a specified mode(s). He further asserts that the same is not liable to be interfered in the given facts and circumstances of the instant appeal.

We have heard rival submissions. Case file perused. It has become sufficiently clear by now that the assessee, engaged in foreign liquor retail busines, has made the relevant payments to his suppliers by bearer cheque/cash. His payees concerned have already appeared along with their respective ledgers acknowledging the very payments. There is no issue of genuineness therefore. The sole issue between the parties is qua mode of payment only. The Revenue’s case as per both the lower authorities respective orders is that the assessee’s action of making cash payments of expenditure to his suppliers rather than the specific modes u/s 40A(3) of the Act invites the impugned disallowance since not covered under Rule 6DD of the IT Rules. The relevant bank statement/cash journal reveals that the assessee had been having sanctioned credit limit of Rs.40,00,000 with his bank. The assessee’s case before us is that the entire cash payments’source is his cash sales of foreign liquor. He explains the sole reason of making cash payments to overdraft in excess of the sanctioned credit Subrata Sarkar A.Y.2013-14 limit of Rs.40 lakhs as increased to Rs.52 lakhs in succeeding assessment years. We notice that there is no material in the case file or in assessment order or in lower appellate order which could indicate such an overdraft in the said credit limit account on the respective days of the impugned cash payments. We thus deem it appropriate to remit the instant former component of original disallowance of Rs.76,74,788/- back to the Assessing Officer for factual verification. It is made clear that the impugned disallowance would stand deleted to the extent the assessee had negative balance in his sanctioned credit limit 2 days before or within each and every cash payment and not otherwise. We thus leave the issue open to the Assessing Officer for further necessary verification as per law.

Coming to enhancement component of Rs.23,90,907/- (supra), we find that one Mr. Tapan Chakraborty acting as payee’s sales man had collected a bearer cheque in order to withdraw payment since many cheques had bounced in the past. We are of the opinion that in these facts that the assessee had to pay the sum in quesiton by way of bearer cheque in order to expedite payment to payee’s authorised agent only. This enhancement component of Rs.23,90,907/- is deleted therefore.

In the result the appeal by the assessee is allowed for statistical purposes.