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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM]
ORDER Per M.Balaganesh, AM
This appeal by the assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-13, Kolkata [in short the ld CIT(A)] in Appeal No.222/CIT(A)- 13/Kol/Cir-45/2014-15 dated 23.02.2016 against the order passed by the DCIT, Circle- 44, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 29.12.2010 for the Assessment Year 2008-09.
The Ground Nos. 1 & 4 of the Revised Grounds of Appeal filed by the assessee is general in nature and does not require any specific adjudication.
M/s Karu Kanchan A.Yr. 2008-09 3. The Ground No. 2 of the Revised Grounds of Appeal was stated to be not pressed by the ld AR at the time of hearing before us for which necessary endorsement has been made by him in our file. Accordingly, the Ground No. 2 is dismissed as not pressed.
4. The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance made u/s 40A(3) of the Act in the sum of Rs 16,12,738/- in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a partnership firm engaged in the business of jewellery. The primary business activities include buying of raw gold, making ornaments from the raw gold with the help of various job workers, selling the ornaments to the customers. In the course of conducting these activities, it also repairs the ornaments received from its customers. The return of income for the Asst Year 2008-09 was filed by the assessee firm on 30.1.2009 declaring total income of Rs 49,30,630/-. A survey u/s 133A of the Act was carried out in the premises of the assessee firm on 14.9.2007 and accordingly as per the Central Action Plan of the Central Board of Direct Taxes, this case was selected for scrutiny and accordingly notice u/s 143(2) of the Act was issued and served on the assessee in time. The ld AO observed that the assessee had reported Gross Turnover of Rs 4,77,68,165/- and Net Profit of Rs 78,30,630.77 at the rate of 16.39%. The ld AO observed that assessee firm had made cash payments above Rs 20,000/- to the following parties :- a) M/s Oriental Gems Pvt Ltd - Rs 2,45,073/- b) G.K.Gems and Jewellery - Rs 2,88,554/- c) Behari Lal Shah & Co. - Rs 8,12,686/- d) Rajiv Malpani - Rs 2,00,329/- e) Shree Pawan Ornaments Pvt Ltd - Rs 66,096/- ---------------------- 16,12,738/-
M/s Karu Kanchan A.Yr. 2008-09 The ld AO showcaused the assessee as to why the aforesaid payment of Rs 16,12,738/- which were made in violation of provisions of section 40A(3) of the Act should not be disallowed in the assessment. In response , the assessee produced all the purchase bills, cash memos and the money receipts obtained from the aforesaid parties to prove the genuineness of the transactions carried out by the assessee. The assessee replied that the terms of section 40A(3) of the Act are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bonafide transactions are taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the ld AO 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. The ld AO however observed that the assessee had not proved the pressing circumstances which warranted it to pay the aforesaid parties otherwise than by account payee cheque or account payee draft. Moroever, the transactions of the assessee does not fall under any of the exceptions provided in Rule 6DD of the Rules. Accordingly, he proceeded to make disallowance of Rs 16,12,738/- u/s 40A(3) of the Act in the assessment.
The assessee pleaded before the ld CITA that the terms of section 40A(3) of the Act are not absolute and consideration of business expediency and other relevant factors are not excluded. Genuine and bonafide transactions are not taken out of the sweep of section. It was argued that the genuineness of the transactions and accounting by the payee in the instant case had not been disputed. The identity of the recipients stand very clearly established. The copy of money receipts were also produced from the payees in this regard. It was pleaded that the cash purchases against cash memos attached with the statement amounting to Rs 2,56,030/- ought to have been excluded directly as the insistence of the suppliers is evident from the fact that he had issued cash memos to the assessee. Similarly the ld AO erred in disallowing the payment made by cheque in the sum of Rs 10,371/- to one party which was also included in the 3
M/s Karu Kanchan A.Yr. 2008-09 disallowance figure of Rs 16,12,738/-. The ld CITA observed that the serial numbers of the cash memos numbering 314, 315 , 312, 317 , 324, 325 , 326 & 327 wherein each memo contains amount less than Rs 20,000/- goes to prove that the purchases are made at one go but the assessee had tried to split the same. The ld CITA deleted the payment of Rs 10,371/- made by cheque and sustained the other disallowance made u/s 40A(3) of the Act for the very same reasoning given in the assessment order. Aggrieved, the assessee is in appeal before us on the following ground:-
3. For that the Assessing Officer erred in ‘Adding back’ Rs. 16,12,738/- u/s 40A(3) of the Income Tax Act, 1961 inasmuch as the Appellant produced all supporting in this regard i.e. Bills, Cash Memos, Money receipts, etc. and also narrated the circumstanced under which these payments had to be made. In fact since all these transactions are genuine and free from vice of any device of evasion of Tax, the said addition is liable to be deleted.
We have heard the rival submissions. The ld AR before us narrated the entire facts of the case for disallowance made on merits and thereafter referred to plethora of decisions in support of the assessee. He stated that the disallowance was made by the lower authorities only for the reason that the assessee was not able to establish the pressing circumstances which warranted the assessee to make payments in cash. There was no evidence that the payees had insisted the assessee to make payments in cash. In this regard, it was only a verbal request of the payees which enabled assessee to make payments in cash. In support of this verbal request, the ld AR filed an affidavit duly sworn before the Notary Public dated 3.3.2018 from the partner of the assessee firm wherein at point 4, it was mentioned that the cash payments had to be made on the insistence of the suppliers and their refusal to accept cheques. He also drew our attention to the CBDT Circular No. 6-P dated 6.7.1968 explaining the purpose behind introduction of section 40A(3) of the Act which reads as under:-
M/s Karu Kanchan A.Yr. 2008-09 Expenditure incurred in businesses and professions for which payment is made in an amount exceeding Rs 2,500/- , otherwise than by a crossed cheque drawn on a bank or a crossed bank draft
Sub-section (3) of new section 40A makes a provision for the disallowance of expenditure incurred in businesses and professions for which payment is made in an amount exceeding Rs 2,500/- , otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. This provision will apply in respect of payments made after a date to be notified by Government, being a date not later than 31-3- 1969. This provision is designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and the reasonableness of the payment.
He argued that on genuineness of the transactions and for accounting of the subject mentioned payments in the hands of the payees, there is absolutely no dispute. He further argued that the assessee had declared gross profit of 21.20% and net profit rate of 16.39% in the return. The net profit in the earlier year was only 2% and the assessee had reported a very decent net profit of 16.39% during the year under appeal and disallowance u/s 40A(3) of the Act would result in abnormal net profits which is not practicable to earn in the business operated by the assessee. He further argued that the GP rate and NP rate disclosed by the assessee are accepted by the ld AO . He also argued that during the year under appeal, a survey u/s 133A of the Act was conducted in the business premises of the assessee and the ld AO had even cross verified the transactions of the assessee with the concerned suppliers and had not found any adverse remarks on the same. All the suppliers are registered with sales tax authorities and are assessed to income tax. In response to this, the ld DR vehemently argued that assessee had not proved the commercial expediency in the instant case for making payments for purchases in cash . There is no reason adduced by the assessee to pay the suppliers in cash in violation of provisions of section 40A(3) of the Act. The affidavit given by the 5
M/s Karu Kanchan A.Yr. 2008-09 assessee cannot be believed and raised an allegation that the assessee might have paid payments to these suppliers in cheque in earlier years as well as in subsequent years and while that is so, why the assessee decided to pay these concerned suppliers in cash during the year. The ld AR in rejoinder argued that the test of commercial expediency should be judged from the view point of the businessman and not from the view point of the revenue. We find in the instant case , the genuinity of the purchase transactions in cash are not disputed by the revenue. We find that in the case laws relied upon by the ld AR , in those cases, the pressing circumstances under which the payments were sought to be made in cash were proved. But in the instant case, the same is not proved by the assessee. We find that the assessee had produced all the bills, cash memos and money receipts of the payees before the lower authorities. Though the assessee had not established the circumstances which warranted it to pay the suppliers in cash by any cogent evidence, it had filed an affidavit duly notarized and signed by the partner of the assessee firm clearly deposing that the cash payments had to be made on the insistence of the suppliers and their refusal to accept the cheques. It was also pleaded that all the suppliers are duly registered with sales tax authorities and having PAN. This affidavit has been filed by the assessee only before us for the first time. The contents of the affidavit requires examination by the lower authorities and hence in the interest of justice and fairplay, we deem it fit and appropriate, to remand this issue to the file of the ld AO , to decide the same in the light of the following direction that the suppliers had to be examined by the ld AO to ascertain whether they had insisted on the cash payments to be made and that they had refused to accept payments through cheques as mentioned in the affidavit. If on examination, it is found , that the suppliers indeed had done so, then no disallowance u/s 40A(3) of the Act is to be made in the hands of the assessee taking into account the spirit of the section and the various judicial precedents relied upon by the ld AR before us. The examination of the suppliers in this regard is to be carried out by the ld AO in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard, if found necessary to rebut the 6
M/s Karu Kanchan A.Yr. 2008-09 findings of the examination as stated supra. Accordingly, the Revised Ground No. 3 raised by the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Court on 21.03.2018