TARA ART PRINTER PVT. LTD.,,NEW DELHI vs. ITO, NEW DELHI

This is an appeal filed by the Assessee directed against the order of Ld.CIT(A)-9, New Delhi dated 26.2.2016 pertaining to the Assessment year (Assessment Year) 2012-13 on the following grounds.

“1. The Ld.CIT(A)-9, New Delhi erred in law and on facts in sustaining addition/disallowance u/s 40A(3) amounting to Rs.4,89,065/- being wages paid to two employees during the year. 2. The Ld.CIT(A)-9, New Delhi erred in law and on facts in short allowing claim assessee in respect of P.F. & E.S.I. payments amounting to Rs.3,45,262/-. 3. The appellant craves leave of add, amend or delete any ground of appeal

.”

2. After hearing rival contentions I find that the employees in question, to whom salaries have been paid in cash, the sum of which exceeded Rs.20,000/- a month, have been long standing employees of the assessee. They were employed for more 12 years. The submission of the assessee is that, the company was having huge debt and that the cheques issued were likely to be bounced and hence the employees insisted on payment of their salaries in cash and under such circumstances salaries were disbursed to all the employees in cash. The Ld.D.R. relied on the order of the ld.CIT(A) and submitted that the explanation given by the assessee do not fall within the exemption provided under Rule 6 DD and hence no exemption can be granted. In my view the assessee has demonstrated that it had unavoidable compulsions for making the payment to these employees in cash. The genuineness of the payment is not doubted. Under these circumstances I apply the decision of the Calcutta ‘C’ Bench of the Kolkata Tribunal in ITA 1603/Kol/2007 A.Y. 2008-09 dated 01.6.2016 in the case of Prabir Kumar Mullick vs. ITO wherein it is held as follows.

“11. We have heard rival submissions and perused the materials available on record. After examining on the facts of the case and hearing the rival contentions of both the parties we find that the AO has disallowed the purchases where the payment was exceeding more than Rs. 20,000/- in accordance with the provision of section 40A(3). In our view this issue needs to be adjudicated from different dimensions as enumerated below :

1) What were the provisions of section 40A(3) then applicable for the assessment year 2008-09.

2) The purpose of introduction of the section 40A(3) in the Income Tax Act.

3) Case laws of various courts.

The provisions of the Section 40A(3) of the Act then applicable for the assessment year 2008-09 reads as under :

40A.(1)... (2).... (3)(a) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure; (3)(b)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 any 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 amount of payment 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 this sub-section where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft, 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."

After reading the provisions of Section 40A(3) we find that certain exceptions have been provided which were then applicable for the assessment year 2008- 09 and one of them is with regard to the business expediency of the assessee. From the submission of the assessee we find that the assessee was the only authorized dealer in Asansol for the supply of country liquor and authorized Excise Vendors. The assessee can take the delivery of the goods only after depositing the payment with the company. The assessee was to keep sufficient stock of country liquor as prescribed by the Excise Department and in case stock falls short of the prescribed limit otherwise the Department used to impose penalty. Therefore the assessee avoided the process of depositing the ITA No.1603.Kol/2011 A.Y. 2008-09 Prabir Kr. Mullick v. ITO Wd-3(1), ASL. Page 12 cash in his bank account and thereafter getting the demand draft in the name of the company in order to keep the stock within the prescribed limit at all the times. It is also important to note that the company was also not accepting the account payee cheque of the assessee as it will take couple of day time in clearance. So in our considered view the exception provided in the provisions of section 40A(3) with regard to the business expediency then applicable for the assessment year 2008-09 is met by the assessee.

11.1 The provision of Section 40A(3) was inserted by the Finance Act 1968. The purpose for bringing the section was mentioned in the explanatory note Para 73 which read as under :

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 06.07.1968 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 frustrating proper investigation by the department as to the identity of the payee and reasonableness of the payment."

11.2 In this regard, it is pertinent to get into the following decisions on the impugned subject:-

Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (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 ITA No.1603.Kol/2011 A.Y. 2008-09 Prabir Kr. Mullick v. ITO Wd-3(1), ASL. Page 13 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 business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions."

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. "

CIT vs 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 hearer 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 vs ITO in (2014) 43 taxmann.com 199 (Guj) "Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment ITA No.1603.Kol/2011 A.Y. 2008-09 Prabir Kr. Mullick v. ITO Wd-3(1), ASL. Page 14 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 vs CIT reported in (2014) 49 taxmann.com 363 (Andhra Pradesh High Court) "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 ground nut in cash exceeding prescribed limit - Assessee submitted that her 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 vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) 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.

11.3 It is pertinent to note that the primary object of enacting section 40A(3) were two folds, 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 be fallen on account of non-observation of Section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free ITA No.1603.Kol/2011 A.Y. 2008-09 Prabir Kr. Mullick v. ITO Wd-3(1), ASL. Page 15 from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has directly deposited the cash in the account of the companies and has produced the sales bills of the company. The AO has also verified the transactions from the companies by issuing notice under Section 133(6) of the Act. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash.

2.1. Hence, this ground of appeal of the assessee is allowed.

3. Ground no.2 is on the disallowance of PF and ESI payments on the ground that, the same has not been remitted to the authorities within time prescribed in the statute. The assessee submitted that he moved an application u/s 154 before the Ld.CIT(A), as there was a mistake apparent on record in the order of the Ld.CIT(A) on this issue.

4. In view of the above I set aside this issue to the file of the AO for computing the correct amount of disallowance keeping in view the decision of the Ld.Commissioner of Income Tax (Appeals) (paras 2 to 3 of his order) which I do not extract for the sake of brevity. This ground is allowed for statistical purposes.

Order pronounced in the Open Court on 23rd January,2017.