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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ON THE 29TH DAY OF NOVEMBER, 2018
BEFORE THE HON'BLE MR. JUSTICE RAVI MALIMATH
AND
THE HON'BLE MR. JUSTICE K. NATARAJAN
INCOME TAX APPEAL NO.83 OF 2010
BETWEEN:
M/S. M.K. AGROTECH PRIVATE LTD.
REPESENTED BY ITS MANAGING DIRECTOR, MR. SUBHAN KHAN, M.B. ROAD,
SRIRANGAPATTANA,
MANDYA DISTRICT. ... APPELLANT
(BY SRI A. SHANKAR, SENIOR ADVOCATE, ALONG WITH SRI M. LAVA, ADVOCATE) AND:
THE ADDL. COMMISSIONER OF INCOME-TAX RANGE-2, 55/1, SHILPASHREE BUILDING, OPP. STERLING TALKIES, VISHWESHWARANAGAR, MYSORE.
... RESPONDENT
(BY SRI E.I. SANMATHI, ADVOCATE)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW AS STATED THEREIN AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT AND TO ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE TRIBUNAL IN I.T.A. NO.401/BANG/2009 DATED 30-9-2009.
THIS INCOME TAX APPEAL COMING ON FOR HEARING THIS DAY, RAVI MALIMATH, J., DELIVERED THE FOLLOWING:
J U D G M E N T
The assessee is a Company engaged in the manufacturing of refined oils, solvent oils and de-mealed meals. On 29-10-2005, the assessee filed its return of income for the Assessment Year 2005-06 declaring a total income of Rs.6,68,16,400/-. The return was processed determining a refund payable of Rs.20,60,121/-. The case was selected for scrutiny and a notice under Section 143(2) of the Income Tax Act, 1961, (for short, ‘the Act’) was issued. The Assessing Officer disallowed Rs.5,31,09,701/- on the ground that the assessee contravened the provisions of
Section 40A(3) of the Act with regard to payments made to the Challakere parties, wherein 20% of the payments made, was disallowed and was added back to the total income. Aggrieved by the same, an appeal was filed before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) held that there is no case for holding that the purchases are bogus. However, it upheld the payments made to Challakere parties, wherein the total purchases for all three parties amounted to Rs.1,36,57,416/-. Questioning the same, an appeal was filed before the Tribunal, which was dismissed. Hence, this appeal.
By the order dated 12-4-2010, the appeal was admitted to consider the following substantial question of law:
Whether the Tribunal was justified in law in confirming the disallowance of
Rs.27,31,483/- under section 40A(3) of the Act, on the facts and circumstances of the case?
Sri A. Shankar, the learned senior counsel appearing for the appellants counsel, contends that the Authorities have committed an error in misapplying Section 40A of the Act. The only ground for disallowance was with regard to three parties, where the drafts have not been crossed, i.e. Vaishnavi Oil Traders for Rs.1,04,51,051/-, Laxmi Trading Co. for Rs.7,15,294/- and Ratna Traders for Rs.24,91,071/-. He contends that even though the drafts were not crossed, the end sources have been furnished by him. He has also furnished the Bank report, which clearly indicates that drafts have been received by the purchasers. In respect whereto, he relies on the judgment of the Hon'ble Supreme Court in the case of ATTAR SINGH GURMUKH SINGH v. INCOME TAX
OFFICER, LUDHIANA reported in (1991) 191 ITR 667 (SC), wherein it was held that when the bank drafts were not crossed, it is open for the assessee to furnish to the satisfaction of the Assessing Officer, the circumstances under which the payment, in the manner, as prescribed under Section 40A(3) of the Act was not practicable or would have caused genuine difficulty to the payee. It is open for the assessee to identify the person, who has received the said payment. That the object of the Act and Rule is to check the proliferation of black money, which is under circulation. That any restraints intended to curb the chances and to give opportunities to use or create black money should not be recorded as curtailing the freedom of trade or business. Hence, he pleads that the appeal be allowed by setting aside the order passed by the Tribunal.
On the other hand, Mr. E.I. Sanmathi, the learned counsel for the respondent, has disputed the same. He contends that there is no satisfactory explanation offered by the assessee as to why the drafts were not crossed. That having considered the material produced by the assessee, the same would clearly indicate that so far as the three accounts are concerned, drafts have not been crossed and there is gross violation of Section 40A(3) read with Section 6 DD of the Income Tax Rules. There is no error committed by the Authorities. Therefore, the order does not call for interference.
Heard the learned counsels.
Section 40A(3) of the Act reads as under:
“Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day,
otherwise that by an account payee cheque drawn on a bank or account payee bank draft, [exceeds twenty thousand rupees,] no deduction shall be allowed in respect of such expenditure.”
A reading of Section 40A(3) makes it clear that any payment in excess of Rs.20,000/- would have to be made by crossed cheque or crossed bank drafts. On failure to do so, the said payment would be disallowed. Admittedly, in the payments made to the aforesaid three accounts, the drafts were not crossed. Rule 6 DD of the Income Tax Rules provides the cases and circumstances, in which such a payment can be made, otherwise by crossed demand draft. Admittedly, the said conditions are not complied with by the assessee herein. However, what is relevant is that specific material is placed by the assessee before the Assessing Officer. All the purchases made by the assessee from the aforesaid three parties are
supported by the registered dealer invoice along with valid transit/receipt documents, freight charges paid, weightment slips, etc. of the supplier. The stock register is maintained to record purchase of Sunflower cake. None of these documents are disputed by the Assessing Officer. Letters have been issued by the Bankers which would indicate that the payments made to the suppliers are credited to their respective bank accounts. Therefore, all the purchases made are supported by valid dealer invoices. The Commissioner of Income Tax, having considered the said material, recorded a finding that the parties are existent. That their bank accounts are identified. Except one party, all other parties have filed sales tax returns, though the turnover disclosed is very small compared to the purchases claimed by the appellant. The fact remains, that since the transactions are made through the bank account of the assessee and considering the evidence let in, in respect of purchases made by it, there was no
material to hold that the purchases have not been made. However, the Commissioner of Income Tax (Appeals) applied the provisions of Section 40A(3) of the Act and disallowed the said claim of the assessee.
We are of the view that the judgment of the Hon’ble Supreme Court stated supra, while considering the provisions of Section 40A(3) of the Act read with Rule 6 DD of the Rules, stands squarely applicable to the facts of the present case. In the aforesaid judgment of the Hon'ble Supreme Court, the question for consideration was the validity of Section 40A(3) and its applicability to the payments made in stock-in- trade. In considering the same, the Hon'ble Supreme Court held as under:
“In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD. The Section must be read along with the Rule. If read together, it will be clear
that the provisions are not intended to restrict the 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 on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the Section. It 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. See: Mudiam Oil Company v. ITO, [(1973) 92 ITR 519 (AP)]. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black money which is under circulation in our 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.”
Therefore, we are of the view that following the said judgment of the Hon'ble Supreme Court, the appeal requires to be allowed.
The main purpose of crossing a demand draft is to ensure that the payment is cleared by means of an account, i.e., the payment is deposited in the Bank Account of the person in whose favour the demand draft has been drawn. It ensures the payee receives the payment and it is routed through bank channels. In the facts of this case, both have been proved. The Bank report would indicate that demand drafts were admittedly not crossed. However, the payments were credited into the accounts of the payees. Therefore, the object with which Section
40A(3) was promulgated stands satisfied with such material.
Further, the only objection was as to why payments have not been made through crossed demand drafts. In fact, in its order, a question was asked as to why the payments were not made in crossed demand drafts. The same is answered by the assessee, who stated that, generally, suppliers require demand drafts for quick realisation. For purchasing the demand drafts normally ‘yourself cheque’ will be issued to the bankers. The Bank may not have crossed the demand draft. It did not come to his notice.
We are of the view that expecting a answer for a specific question as to why the demand draft has not being crossed, would not be appropriate. In view of the fact that the Bank report would indicate that payees have received the said amounts with the
concerned drafts, the finding of the Tribunal on this issue with regard to unsatisfactory answer given by the assessee falls into insignificance.
For the aforesaid reasons, the substantial question of law is answered by holding that the Tribunal was not justified in confirming
the disallowance of Rs.27,31,483/- under Section 40A(3) of the Act in the facts and circumstances of the case. Consequently, the appeal is allowed. The orders of the Tribunal, the Commissioner of Income Tax (Appeals) and the Assessing Officer are set aside on the issue of disallowance under Section 40A(3) of the Act. Consequently, the Assessing Officer to grant relief in terms of this order.
SD/-
SD/- JUDGE
JUDGE kvk