ACE BUILD TECH,NEW DELHI vs. ITO, GURGAON

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘SMC-3’, NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ACE Build Tech vs. ITO Flat no.257, Cycle Market Ward 1(1) Jhandewalan Extn. Udyog Vihar New Delhi 110 055 Gurgaon PAN: AAMFA 6561 C (Appellant) (Respondent) Appellant by : Shri Rajeev Saxena, Adv. Ms. Sumangla Saxena, Adv. Respondent by : Sh. Rajesh Kumar, Sr.D.R. O R D E R

This is an appeal filed by the assessee directed against the order of the Ld.CIT(A)-1, Gurgaon dated 27.2.2015 pertaining to the Assessment Year (A.Y.) 2010-11 on the following grounds . “1. The order of the AO is bad in law and against the facts of the case.

2. AO has wrongly made and CIT(A) has wrongly upheld the addition of Rs.35 lacs u/s 40A(3) of the Act as cash payment was made under exceptional circumstances which were beyond the control of A.

3. That appellant prays for leave to add, amend or vary any of the grounds either before or at the time of hearing of the appeal.”

2. After hearing rival contentions I find that the sole issue that arises for my consideration is whether the disallowance u/s 40A(3) of the Act, as confirmed by the Ld.CIT(A) could be ~ 1 ~ upheld, of cash payment of Rs.35 lakhs made by the assessee to M/s PSY Infrastructure P.Ltd.

These cheques bounced at Bank for insufficient funds and since they could not be cleared due to insufficient fund, the 'A' sought time for payment. All these cheques were asked for 'payment stop' under the fear that party will go to court if cheques are dishonoured. The action of 'payment stop' is justified as legal cases of 'dishonoured cheque' & 'stop payments' stand on different footing. Under the above circumstances the party was not ready to accept further cheques & insisted on cash payment. The 'A' was left with no alternative but to make cash payment. Copies of bank statement are attached evidencing the bouncing of cheques." Further to the aforesaid, appellant vide its reply dated 15.03.2013 submitted as under: "We submit in support of our submission that provision of section 40A(3) be not invoked, we are attaching herewith a certificate from M/s PSY ~ 2 ~

Infrastructure Pvt. Ltd. to whom payment of above-cash. was made to the effect that it was they who insisted cash and cash payment was made as to escape from legal proceedings. Legal proceedings in case of bounced cheques lands firm and its partner into trouble. They pressurised us so much that we couldn't even think of depositing cash and issuing DD etc. Pressure was mounted every minute and they threatened us to book us at Police Station & get us arrested. Cheque bouncing comes within the ambit of section 420 of IPC. It is important to mention here that thereafter 'A' stopped dealing with them (vice versa) & no purchases were made thereafter. Further 'A' left no stone unturned to pay the creditor by a/c payee cheque and even deposited Rs. 15.00 lac in bank on 15.12.2009 but said creditor will no way bent to accept any other mode of payment. Verbal threats were pouring in. also on cash payment at the time of final settlement a discount of Rs. 87,705/- was given as evidenced by statement of a/c duly confirmed by creditor ( attached). Further please note that cheques got bounced on 12.09.2009, 23.09.2009 and 05.10.2009, 26.10.2009 while letter to bank for stop payment was issued on 03.12.2009. Later on 17.12.2009 cash payment was made. After cheque bounced, a letter was delivered to bank for stop payment under the fear that if cheques are deposited again they will get bounced for the second time and hence court case/legal action/police action gets strengthened.”

3.1. The issue before me is whether the assessee had to make cash payments due to business expediency and if so whether S.40A(3) of the Act is attracted.

“Section 40A(3) of the Income Tax Act, 1961 – Business disallowance – cash payment exceeding prescribed limits (business expediency) – A.Y. 2008-09 – assessee was engaged in business of country liquor – During relevant year, assessee made purchases from two parties A and P – Payments were made in cash and amount was exceeding Rs.20,000 – A.O. thus disallowed said payments under s.40A(3) – It was noted that assessee had to make payments in cash in order to maintain sufficient stock of liquor as prescribed by Excise Department – It was also found that seller companies were not accepting account payee cheques as it would take couple of days time in clearance – However, there was no doubt about identity of parties and assessee had also produced their sales bills – Whether on facts, exception provided in assessee had also produced their sales bills – Whether on facts, exception provided

~ 4 ~ in provisions of s.40A(3) with regard to business expediency was applicable to assessee’s case – Held, yes – whether, therefore impugned disallowance was to be deleted – Held Yes (in favour of assessee). Section 254, r.w.s. 40A(3) of the Income Tax Act, 1961 – Appellate Tribunal – Power of (constitution of Special Bench) A.Y. 2008-09 – assessee made cash payments in excess of Rs.20,000/- for purchase of liquor – A.O. disallowed said payments u/s 40A(3) – In appellate proceedings, revenue sought reference of matter to Special Bench for disposal – Whether since payee was duly identified and confirmed transaction in question in compliance of notice issued u/s 133(6), assessee’s case did not require reference to Special Bench – Held, yes – Whether, therefore, revenue’s plea was to be rejected – Held, yes (paras 4 and 5 .) (In favour of assessee). Circulars and Notifications: Circular No.6P, dt. 6.7.1968.”

Order pronounced in the Open Court on 22nd September, 2016.