DCIT, CIRCLE - 2, MINAPORE, PASCHIM MEDINIPUR vs. SHRI JUGAL KISHORE DAS, PASCHIM MEDINIPUR

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IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘C’ KOLKATA [Before Hon’ble Shri J.Sudhakar Reddy, AM & Shri S.S.Viswanethra Ravi, JM ] ITA No.1707/Kol/2014 Assessment Year : 2010-11 D.C.I.T., Circle-2, -versus- Shri Jugal Kishore Das Midnapore Paschim Medinipur (PAN: ADXPD 2305 B) (Appellant) (Respondent) For the Appellant: Shri David Z.Chawngthu, Addl. CIT(Sr.DR) For the Respondent: Shri Somnath Ghosh, Advocate Date of Hearing : 10.08.2017. Date of Pronouncement : 13.09.2017. ORDER PER J.SUDHAKAR REDDY, AM: This is an appeal by the Revenue directed against the order of the Commissioner of Income Tax-(A)-XXXVI, Kolkata relating to A.Y. 2010-11 on the following grounds : “1. That on the facts and in the circumstances of the case, the Ld.Commissioner of Income-Tax (Appeals)-XXXVI, Kolkata was not justified in deleting addition aggregating to Rs 86,55,000/-, made u/s 40A(3) on account of cash payments of Rs 45,80,000/- to M/S United Spirits and Rs 40,75,000/- to M/s VTR Marketing, ; 2. That on the facts and in the circumstances of the case, the Ld.Commissioner of Income-Tax (Appeals) - XXXVI, Kolkata was not justified in deleting addition of Rs 86,55,000/- u/s 40A(3), ignoring assessee's own statement recorded on oath u/s 131 on 15/03/2013, that payments exceeding Rs 20,000/- were made in violation of the provisions of section 40A(3) read with Rule-6DD ; 3. That on the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals) -XXXVI, Kolkata was not justified in deleting addition of Rs 86,55,000/- u/s 40A(3), ignoring the fact that the assessee failed to substantiate his claim that payments were made in violation of the provisions of section 40A(3) read with Rule-6DD due to commercial expediency ;”

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"When this judgment of the Hon‟ble Jurisdictional Calcutta high Court is read along with the decision of the Hon‟ble Gujarat High Court in the case of Anupam Tele Services (refer to supra) as also the decision of the Hon‟ble Rajasthan High Court in the case of Smt. Harishila Chordia (refer to supra), if becomes clear {hat the exception contained in Rule 6DD are not exhaustive and the said rule must be interpreted liberally. Further, a perusal of the decision of the Hon‟ble Apex Court in the case of Attar Singh Gurmukh Singh (refer to supra) clearly shows that if the genuineness and bonafide nature of the transactions of the assessee are not disputed and the assessee is able to show that there was business exigency as also business expediency for the requirements of paying cash for the purchase of goods necessary for the business, then the assessee would be entitled to get relief from the applicability of the provisions of section 40A (3) of the 1. T. Act, 1961. In the present case, clearly the revenue has not disputed the genuineness or bonafide of the transactions in respect of purchase of cement in cash. The person from whom the cement has been purchased and also

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the person through whom the cement has been purchased have been identified and genuineness also proved. The agreement with the procurer of the cement on behalf of the assessee also proved the business expediency in so far as the saving of an amount of Rs. 1.50/- per bag of cement as also business exigency in so far as the procurement of cement, when there is shortage of cement. All the conditions required for showing the business expediency, exigency and bonafide and the transactions having been proved. We are of the view that cash payment made by the assessee for the procurement of the cement would not be hit by the provisions of section 40A(3) of the 1. T. Act, 1961. The addition/disallowance as made by the AO and as confirmed the Ld. CJT(A) on this issue stands declared " Similar view has been taken by the Hori'ble Delhi High Court in the case of R. C. Goel vs CIT (2013) 29 Taxmann.com 406 (Delhi) the relevant portion of which is as under: “HELD “The assessee engages itself in executing catering contracts for Railways in respect of two trains. In those trains, its personnel are deployed for sale of small articles of daily necessity and use to the passengers. Perforce, the payments received by them are necessarily in cash. These amounts are collected and in turn handed over to the assessee. The assessee in terms of its contract is bound to maintain constant supplies in the trains and ensure that at no. point in time can the passengers be deprived of these articles (which are food articles, sofi drinks and other items necessary for travel]. In the course of such transactions, it sources these articles from 'S'. Apparently, that concern is also a small time one and insists on cash payments for ensuring continuity and Timely supplies. Whilst the Court is conscious and does not in any manner wish to comment adversely on the larger public interest element embedded in section 40A and the underlying principle, at the same time, the Court also notes that the proviso seeks to relieve to a certain extent, the measure of hardship which might be imposed upon small businesses and professionals who are engaged in activities and are dependent entirely on timely cash flow. It is in such cases that rule 6DD - which was formulated as a proviso to section 40A(3) - steps Into aid such assessees and concerns. In this context, the statutory mandate in rule 6DD(k), at least in the circumstances of the case, has to be construed as to mean that but for the cash payment, the assessee would have been deprived of the benefit of supplies itself. The High Court clarifies that the interpretation of the expression who is required to make payment in cash‟ having regard to the circumstances of the case is fact dependent, at least in the present case. The consequence of instances of payment through account payee cheques in small business which are dependent on such supplies would be to completely stifle, if not stop, the business activities. It is in that sense that the expression required would have to be construed. [Pard. 9]

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In view of the above discussion, the High Court is of the opinion that having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of rule 6DD(k), the benefit of which the assessee clearly was entitled to. The question of law is accordingly answered in favour of the assessee and against the revenue. Para 10].” As has been held by the Hon 'ble ITAT ,'C'. Bench. Kolkata vide ITA No.1724/Ko1/20 12 in the case of Smt. Sarbani Chakraborty vs. lTO .. where genuineness and bonafide nature of transaction has not been doubted. if cash payment has been made due to business exigency as also for business expediency, the disallowance u/s 40A(3) cannot be made. In the present case due to the facts discussed earlier the assessee does not benefit in anyway by making cash payment other than the compulsion for doing so, to ensure timely purchase of goods for his business. In case of payments made to VTR Marketing, Kharagpur the seller insisted on cash payment. In case of M/s. United Spirits. M/s. Pegasus Marketing (sister concern of VTR Marketing). as the agent is effectively under the same management, the same conditions apply. Even though the facts in the case of Contai F.L. Trade are same, and the genuineness of payment has not been doubted, the business exigency and expediency for doing so has not been established. Therefore, as far as the cash payment made to VTR Marketing and M/s. United Spirits for making purchases is concerned the rigours of Section 40A(3) will nor apply. The 'balance addition made under section 40A(3) is confirmed. In the result appeal is partly allowed under this head.”

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Admittedly the payments were made to the aforesaid parties in cash by the assessee. It is not in dispute before us that the said suppliers had also duly acknowledged the receipt of monies from the assessee which is also quite evident from the subsequent supplies made by them to the assessee at different sites during the year and also in subsequent year. The ledger accounts also support the contention that the cash payments made have been duly reflected in their accounts. The assessee submitted that the payments were forced to be made in cash for procuring the materials at different sites situated in remote villages as the project is to be executed and completed within 3 to 4 weeks of allotment and that the said suppliers were not willing to supply the materials if the payments were made by cheques and they insisted for payments in cash. It is not in dispute that the supply of materials had happened through out the year at different sites but at each site, the job allotted to the assessee was supposed to be executed within a short duration of 3 to 4 weeks. These facts have not been controverted by the revenue before us. Accordingly the payments were made to the parties in cash by the assessee through his employees who were site in charge / supervisors at various sites and it is not in dispute that the bulk payments were transferred to the employees by the assessee and those employees inturn make payment for purchase of materials as and when needed by making cash payments. It is not in dispute that the individual purchase bill for which payment was made was much below Rs 20,000/- for which expenditure was incurred. All the purchase bills were also produced by the ld AR in his paper book filed. 4.6.1. We find that the Hon‟ble Supreme Court had held in the case of Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC) had held as below:- 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. In interpreting a taxing statute the court cannot be oblivious of the proliferation of black money which is under circulation in the 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. It is not in dispute before us that the said suppliers of materials had disclosed these sums in their accounts and assessee had not induced those parties for generation of any black money or unaccounted money. In the instant case, the ld AR argued that the suppliers insisted for payments in cash and not by cheques for supply of materials at distant village destinations where projects were executed by the assessee. It is not in dispute that the employees of the assessee who were site in charge / supervisors situated at different site locations had approached these suppliers who do not know each other and hence the suppliers insisting on cash payments thereon has to be accepted and cannot be doubted / faulted with. It has already been stated that the site in charge / supervisors do not know the fact as to whether the materials were purchased from the same suppliers by

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different / other site in charge. We also find that the provisions of section 40A(3) of the Act contains a proviso which says as under :-

“Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub- section where a payment or aggregate of payments made to a person in a day, otherwise, than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, 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.” It could be seen that the consideration of business expediency factors have not been dispensed with in the amended provisions of section 40A(3) of the Act w.e.f. 1.4.09.

4.6.2. We draw support from the following case laws in support of the aforesaid contentions :- 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 bonafide 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 ITA No. 202 of 2008 dated 30.7.2008 – Calcutta High Court

“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 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 78,45,580/- and disallowed @20% thereon 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 Id. 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."

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Anupam Teleservices vs ITO reported in (2014) 43 taxmann.com 199 (Guj)

“"Section 40A(3) of the Income-tax Act, 1961, read with rule 600 of the Income-tax Rules, 1962-Business disallowance - Cash payment 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 415 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 23J [ in favour of the assessee." Sri Laxmi Satyanarayana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (AP) "Section 40A(3) of the Income-tax Act, 1961, read with Rule 600 of the Income-tax Rules, 1962- Business disallowance - Cash payment exceeding prescribed limit (Rule 600) - 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 23J [In favour of the assessee]" ) 4.6.3. Another argument advanced by the ld AR was that section 40A(3) of the Act uses the word „any expenditure‟ which only pertains to single invoice and if the single invoice is less than Rs 20,000/-, then the provisions of section 40A(3) of the Act should not be invoked. In support of this proposition, he placed reliance on the co-ordinate bench of Cochin Tribunal in the case of Raja & Co vs DCIT in ITA No. 534/Coch/2011 dated 22.3.2013 , wherein the amended provisions of section 40A(3) of the Act w.e.f. 1.4.2009 together with the purpose of the said amendment as explained by CBDT was duly considered as under:-

“The purpose of amendment was explained by the CBDT as under:-

"13.1 Clause Ca) of sub-section (3) of section 40A of the Income tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction. Clause (b) of sub- section (3) of section 40A also provides for deeming a payment as profits and gains of

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business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque or by an account payee bank draft. However, the provisions of this section are subject to exceptions as provided in rule 600 of the Income tax Rules, 1962. 13.2 Sub-section (3) of section 40A is an anti tax evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction. Thereby the risk of evasion is substantially mitigated. Field formations have reported that assessees tend to circumvent the provisions of sub-section (3) of section 40A by splitting a particular high value payment to one person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day. The courts have approved such splitting by interpreting the words "in a sum" used in the section to mean a single sum thereby applying the limit to each transaction. This interpretation is against the legislative intent and has, consequently, adversely affected the efficacy of this anti- abuse provision.

13.3 Therefore, the provisions of sub-section (3) of section 40A have been amended providing that the provisions of sub-section (3) shall also be attracted where the aggregate of payments made to a single party otherwise than by an account payee cheque drawn on a bank or account payee draft exceeds twenty thousand rupees in a day. 13.4 Applicability:- This amendment has been made applicable with effect from 1st April 2009 and shall accordingly apply for the assessment year 2009-2010 and subsequent years" 16. It is pertinent to note here that the rate of disallowance was 20% for the year under consideration, i.e., assessment year 2007-08. The Finance Act, 2007 enhanced the disallowance to 100% w.e.f. 1.4.2008. Again the amendment cited above was brought by Finance Act 2008 w.e.f. 1.4.2009. The Ld CIT(A) has taken the view that the amendment made by Finance Act, 2008 w.e.f.1.4.2009 shall apply to the year under consideration also, as the said amendment is clarificatory in nature. In our view, there are two major differences between the provisions as applicable to the year under consideration and the provisions amended by Finance Act, 2008. (a) As per the provisions of sec. 40A(3) as applicable to the year under consideration, the payments of less than Rs.20,000/- made during the course of a day to a single person is not hit by the said provisions. However, as per the amended provisions, the said provisions shall apply only if the aggregate amount of payments made to single party in a day exceeds Rs.20,000/-. For example, if the value of a bill is Rs.1,00,000/-

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and an assessee makes five payments of Rs.20,000/- each during the course of a day, then the said payments shall not be hit by the provisions of sec. 40A(3) as applicable to the year under consideration. However, under the amended provisions, they would be hit. However, if an assessee makes payment of Rs.20,000/- in a day and he so makes payments in five days, then such splitting up of payments would not be hit even by amended provisions. (b) The rate of disallowance was 20% as per the provisions applicable to the year under consideration and the rate of disallowance is 100% as per the amended provisions. The question that arises is whether the amendment brought out by Finance Act, 2008 w.e.f. 1.4.2009 can be considered as clarificatory in nature so that it shall have retrospective operation? As discussed earlier, the amendment only debars making several payments of less than or equal to Rs.20,000/- in a day to a single person, but does not debar making several payments of less than or equal to Rs.20,000/- on different dates to a single person, meaning thereby, the splitting up of payments during the course of a day to a single person is only debarred. Further, as stated earlier, there is significant variance in the quantum of disallowance to be made for violation of sec. 40A(3) of the Act. We notice that the Ld CIT(A) , though held that the amendment is retrospective in operation, however, has restricted to disallowance only to 20% of the expenditure as per the old provisions., i.e., the Ld CIT(A) has applied the amended provisions only in part. In our view, an amendment cannot have retrospective operation in part. Since the amendment only debars splitting up of payments made to a person during the course of a day and did not debar splitting up in toto and since there is significant variance in the rate of disallowance, in our view, the amendment brought out by Finance Act, 2008 can only be considered as substantive in nature and shall have prospective operation only. 17. The CBDT circular (referred supra) refers to "a particular high value payment". The necessity to make payment to a party would arise only after conclusion of a transaction, say a "purchase" and the said deal would culminate into rising of a bill/invoice. Hence the term "high value payment" apparently refers to the concerned bill/invoice in respect of which the payment is required to be made, meaning thereby, the concerned bill/invoice should also be of a higher value. However, if the value of bill/invoice itself is less than Rs.20,000/-, it cannot be considered as a high value transaction in the context of sec. 40A(3) and hence the payment effected in respect of that kind of bill/invoice cannot be considered as high value payment. Accordingly, in our view, if the purchase is effected from a single person by way of several bills/invoices and if the value of each bill/invoice is less than Rs.20,000/-, then payments made to settle each bill/invoice would not be hit by the provisions of sec. 40A(3), as each bill/invoice has to be considered as a separate contract. The question of splitting up of the payment also does not arise in respect of such type of bills/invoices, as the value of each bill is less than Rs.20,000/-. In view of the above, we are unable to agree with the decision of Ld CIT(A) in holding that the purchases

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effected through several bills/invoices from a person shall also be hit by the provisions of sec. 40A(3) and accordingly set aside the said view of the tax authorities.” 4.6.4. Hence considering the totality of the facts and circumstances and going by the intention of introduction of section 40A(3) of the Act together with its amendments and decided judicial precedents relied upon hereinabove, we hold that no disallowance u/s 40A(3) of the Act is warranted in the facts and circumstances of the case. Accordingly, the Ground No. 3 raised by the assessee is allowed.

Order pronounced in the Court on 13.09.2017. Sd/- Sd/- [S.S.Viswanethra Ravi] [ J.Sudhakar Reddy ] Judicial Member Accountant Member Dated : 13.09.2017. [RG PS] Copy of the order forwarded to: 1.Shri Jugal Kishore Das, Prop of M/s. BELDA F.L.(OFF)SHOP, BELDA-721424. Dist. Purba Medinipur. 2. D.C.I.T., Circle-2, Midnapore. 3. C.I.T.(A)-XXXVI, Kolkata 4.C.I.T-XIX, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order, Senior Private Secretary Head of Office/D.D.O, ITAT Kolkata Benches