SMT IRA PANJA,BURDWAN vs. ITO, WD-2(3), ASANSOL, ASANSOL

This appeal by assessee is arising out of order of CIT(A), Asansol vide Appeal No. 116/CIT(A)/Asl/W-2(3)/Asl/11-12 dated 17.12.2013. Assessment was framed by ITO, Ward-2(3), Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2009-10 vide his order dated 27.10.2011.

Brief facts of the case are that the Assessee is a retail vendor of Country Spirit, which is an excisable commodity. The purchase and sale are strictly controlled by the State Government. Earlier the retail dealers like the assessee were depositing the cost price, excise duty, bottling charges, etc. in the Treasury for getting supplies from the wholesale licensee. However, the Excise Department by a Notification dated 29.08.2005 changed such procedure, whereby prescribing that for lifting Country Spirit, the retail vendors have to make payment consisting of cost of the stock-in-trade, excise duty and bottling charges, etc. only to the wholesale licensee appointed by the State Government. Pursuant to the said procedure, the assessee made payments in the Bank account of M/s. Asansol Bottling and Packaging Pvt. Limited, but during the assessment year proceeding, the Assessing Officer disallowed the cash deposits which were in excess of Rs.20,000/- on each occasion, made into the Bank account of M/s. Asansol Bottling and Packaging Pvt. Limited, under section 40A(3) of the Income Tax Act. The assessee carried the matter in appeal before the ld. CIT(Appeals), who by way of the impugned order dated 17.12.2013 dismissed the same and confirmed the order of the Assessing Officer. Challenging the same, the assessee carried the matter in appeal before this Tribunal on the following grounds:-

It is the argument of the ld. A.R. that pursuant to the Rules framed by the State Government, the assessee deposited cash in the account of the wholesale licensee, as such the provisions under section 40A(3) are not attracted in view of the exemption allowed under section 6DD(a)(ii) of the Income Tax Rules. He further submitted that the wholesale licensee, namely M/s. Asansol Bottling and Packaging Pvt. Limited was appointed by the State Government by way of a Notification for collection of cost price, bottling charges, etc., as such the payments made to the bank account of such wholesale licensee shall be treated as payments made to the Government and consequently disallowance is not sustainable in view of the payments under Rule 6DD(b) of the Income Tax Rules, which provided for exemption, where the payment is made to Government. Further he contended that because of appointment by way of notification, the wholesale licensee shall be treated as an agent of the State Government because it is only through him, the Government receives the amount from the retail vendors, as such the payments made by the assessee fall under the exception provided in Rule 6DD(k) of the Income Tax Rules. He, therefore, prayed to the Tribunal to delete the addition made on account of application of section 40A(3) of the Act.

On the other hand, the ld. D.R. contended that Rule 6DD(b) also requires the payments to be made in legal tender as framed by the Government and the Rules framed by the State Government in this regard do not compel the assessee to make cash payments only. He further argued that the payments made in the Government account are saved, but not the payments, which were made into the customer account.

Basing on the above contention, the point that arises for our consideration is whether the ld. CIT(Appeals) is justified in upholding the disallowance under section 40A(3) of the Act in the facts and circumstances of the case.

In this context, it is useful to refer to Rule 6(2) of the Income Tax Rules framed by the State Government in exercise of the power conferred by section 85 and section 86 of the Bengal Excise Act, 1909 regulating the issue and removal of country spirit on payment of duty in labelled and capsule bottles from country spirit bottling plants and in bulk from warehouses by licensed wholesale vendors of the same for the purpose of selling country spirit by wholesale. This Rule 6(2) stipulates that no retail vendor of country spirit shall deposit duty direct into the local treasury for issue of country spirit to be taken by him from the warehouse concerned, duty, cost price, bottling charges, if there be any, at the prescribed rate and other imposition, as may be prescribed by law, shall be paid by the retail vendor to the credit of the wholesale licensee concerned.

Now coming to the application of section 40A(3) is concerned, we find from the CBDT Circular No. 6P dated 06.07.1968 that this provision under section 40A(3) was 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 reasonableness of the payment. When this is the primary object of enacting section 40A(3), we will have to see whether the payments made by the assessee into the account of M/s. Asansol Bottling and Packaging Pvt. Limited, would frustrate the purpose of enactment of section 40A(3). By virtue of payment through cash dated 04.09.2006, the wholesale licensee with exclusive privilege for bottling and/or sale by wholesale country spirit in sealed or capsule bottles and for manufacture and wholesale supply of country spirit in bulk litter enjoyed now by the holders of license in terms of section 22 of the Bengal Excise Act, 1909 and M/s. Asansol Bottling and Packaging Pvt. Limited, has become an arm of State Government. On this aspect, for all practical purposes, the relationship between the Government and wholesale licensee in so far as dealing with 4 Smt. Ira Panja, AY 2009-10 the country made liquor is concerned, i.e. the principal and agent, subject to the territorial limitation prescribed in such Notification. We, therefore, can safely conclude that the payments made to M/s. Asansol Bottling and Packaging Pvt. Limited, for all practical purposes are the payments to be reached to the State Government and once this is so, the said wholesale licensee shall be construed as an agent of the State Government. We, therefore, can safely conclude that once such payments are made to the credit of M/s. Asansol Bottling and Packaging Pvt. Limited, the source and destination of such funds cannot be doubted. Therefore, the provision of section 40A(3) is not frustrated by the assessee making payments into the account of M/s. Asansol Bottling and Packaging Pvt. Limited, .

Commercial expediency in relation to the application of section 40A(3) is well recognized by the various Courts vide in the cases as under:- (i) Attar Singh Gurmukh Singh –vs.- ITO reported in (1991) 191 ITR 667 (SC) (ii) CIT –vs.- CPL Tannery reported in (2009) 318 ITR 179 (Cal.); (iii) CIT –vs.- Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.07.2008 (Calcutta High Court); (iv) Anupam Tele Services –vs.- ITO reported in (2014) 43 taxman.com 199 (Guj.); (v) Ashok Mondal –vs.- ITO in ITA No. 873/KOL/2012 (Kolkata Tribunal’s order dated 06.02.2014); 10. In the case of Ashok Mondal (supra), the Coordinate Bench of this Tribunal by way of an order dated 06.02.2014 considered the issue, which is identical to the facts of this case and after elaborating discussion reached a conclusion that the payments made by the assessee for the purchase of country liquor and country spirit from the territorial licensee bottling plant, M/s. Asansol Bottling and Packaging Pvt. Limited, is protected by the exemption in terms of Rule 6DD(b) of the Income Tax Rules, 1962.

In view of the above, we find that the assessee has a commercial expediency under Rule 6(2) of the West Bengal Rules referred to above to make payments to the credit of M/s. Asansol Bottling and Packaging Pvt. Limited, and M/s. Asansol Bottling and Packaging Pvt. Limited, who is deemed to be an agent of the State Government, as such in terms of Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules, they are exempted and the disallowance made under section 40A(3) of the Act cannot be sustained. We, therefore,