SRI MALAY MONDAL,BURDWAN vs. I.T.O WD - 2(2),ASANSOL, ASANSOL

IN THE INCOME TAX APPELLATE TRIBUNAL,‘B’ BENCH KOLKATA

Before Shri Waseem Ahmed, Accountant Member and Shri S.S.Viswanethra Ravi, Judicial Member

I.T.A. No. 903/KOL/2013 A.Y: 2008-09

Sri Malay Mondal Vs. Income Tax Officer PAN: ALLEM 2361A Ward 2(2), Asansol (Appellant) (Respondent)

Appearances by: Shri K.K. Khemka, Advocate, AR Shri P.K. Chakraborty, JCIT, Sr.DR

Date of hearing : 28-07- 2016

Date of pronouncement : 28-09-2016

O R D E R Shri S.S. Viswanethra Ravi, JM

This appeal by the assessee is directed against the order dated 22-02-2013 passed by the Commissioner of Income Tax(Appeals), Durgapur for the assessment year 2008-09.

The assessee has raised the following grounds:- 2.

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I am carrying on the business of trading of Country Liquor, Beer, Rum, and Whiskey etc… In this regards I am to state that I purchased country liquor from Asansol Bottling & Packaging Co. Pvt. Ltd., the only authorized bottler in Asansol by the Excise Department. The bottling plant will supply the goods only after the encashment of the cheque or demand draft as such they have instructed to deposit the total price of the required bottles of country liquor including TCS (Tax Collected at Source) in their bank account and furnish the deposit slip to them and to lift the bottles of country liquor from their plant. In this regard 1 am to state that I have deposited the amount in SBI, Asansol in the account of Asansol Bottling & Packaging Co. Pvt. Ltd. The pay in slip is produced before the bottling plant for lifting the goods from them. As they are the only authorized bottler in Asansol for bottling and supply of Country Liquor to authorized Excise Vendors and for business exigency, as laid down in the Act., I have deposited the amount in their bank account and furnished the deposit slip to the bottling plant and lifted the goods from ITA No. 903/Kol/13 Sri Malay Mondal 2

them. It will not be out of place to mention that periodical stock is checked by the Excise Department and I have to keep sufficient stock of country liquour as prescribed by them and in case my stocks falls short of the prescribed limit then the department imposes penalty upon me for the fault.

More over in trading of country liquor my net earning ranges from 1 % to 1.25% and my major portion of the profit is locked in the form of deduction of T.C.S leaving with me minimum cash for purchase of goods and meeting of day to day expenses which forces me to deposit the cash in the bank account of the bottling plant instead of depositing the cash in my bank account and obtaining demand draft for purchasing of goods. The bottling plant will supply me goods after encashment of cheque or demand draft as such we are forced to deposit the cash in the bank account of the bottling plant and lifting goods as quick as possible to avoid blockage of capital and penalty by Excise Department. The main component of purchase price deposited by me in the bank account of Asansol Bottling & Packaging Co. Pvt. Ltd is 70% in the form of Excise Duty, Vat and T.C.S and the balance 30% is cost of liquor.

Sec 40A(3) was originally inserted by the Finance Act 1968 with effect from 1s t April 1969 and amendment in 1996 and 2007. The objective of Sec 40A(3) requiring such payment to be made by crossed cheque or draft as repeatedly stressed by the courts, as for example, in Walford Transport (Eastern India) Vs. C.I.T., 240 ITR, page 902 (Gouhati) as under:- "From a perusal of the decision of different High Courts referred to above, it clearly emerges that the purpose of Sec 40A(3) of the Act., is not to penalize the assessee for making cash payment of an amount of Rs.2500/- or above. The purpose is only preventive and to check evasion of tax and flow of unaccounted money or to check transaction which are not genuine and may be put as camouflage to evade tax by showing the fictitious or false transaction. The assesse relied on the decision of the Tribunal in Sri Renukeswara Rice Mills Vs. ITO reported in 93 TTJ (Bang) 912

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amount of Rs.24,30,692/- and added the same to the total income of the assessee u/s. 40A(3) of the Act.

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does not come into specific criteria as contemplated in Rule 6DD of the I.T Rules 1962. In support of his arguments/contentions he also placed his reliance on the decision of Hon’ble High Court of Calcutta in the case of Crescent Export Syndicate.

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Authorized wholesaler agent) who is 'PRINCIPAL' in this case. The Assessee was required and forced to pay the cost of material (wine) only by way of deposit of money in cash to the Banker of Authorized wholesaler Agent of WB. Government, IFB Agro Industries Ltd City Centre, Durgapur - 713216 and Asansol Bottling & Packaging Pvt Ltd. P.O. KALLACH - 713340, Burdwan. Therefore, it is clear the facts and circumstances of the case and the decision thereon is applicable and covered by the decision of Tribunal supra. The relevant portion of which reproduced herein below:

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"in any other case where the assessee satisfied the income tax officer that the payment could not be made by a cross cheque drawn on a bank or by a cross cheque bank draft- a) Due to exceptional or unavoidable circumstances, for b) Because payment in the manner in aforesaid was not practicable, would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof and also furnishes evidence to the satisfaction of the income tax officer as to the genuineness of the payment and the identity of the payee" 2. The law amended and following provisions were introduced by the Finance Act 2007 w.e.f. 1.4.2008 and explanatory NOTES there under provides "provided that no disallowances 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 20000- rupees is made otherwise than by an account payee cheque drawn on a bank or 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". INTEREPRETATIN OF LAW" ....................... The comma” - websters New World Dictionary - Oxford (see paper Book page No 251 (1) The use of "Comma" 1. Use a comma to separate and introductory clause or phase from a main clause. 9. Use a comma to separate, words, phrases and clauses in the series. 10. Used a comma to set off absolute and parenthetical elements in the sentence. 12. Use a comma or commas to set off non-restrictive pharases or clauses from the rest of sentence. 16. Use a comma after terms that introduce a series or an example. FIRSTLY 3. After reading the original enactment and subsequent amendment and after reading the finance Minister's explanatory note the followings should be requirement to allow - Cash payment within meaning of section 40A(3). (a) Identity of the payee (b) Reasonableness of the payment (c) Considerations of business expediency and other relevant factors

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(d) The act as introduced in 1968 read with rules 6DD requires to exempt the provision of section 40A(3) if cash payment is due to genuine difficulty and the evidence thereof is produced at the time of assessment. This rule 6DDj was incorporated in act itself by Finance Act 2007 by using the word “considerations of business expendiency and other relevant factors”. (a) Circumstances as prescribed in the rule. (b) Extent of banking facility available. (c) Consideration of business expediency and other relevant factors. The intention of the Act is very clear by the fact that the Act has not used the word" AND" which denotes that cumulative conditions are Not required to be full filled. The absence of the word "AND" implies that the Act has GIVEN" ALTERNATIVE INDEPENDENT CONDITIONS (i.e. anyone of the condition given in the Act NEEDS to be fulfilled to claim exemption from operation of See. 40A(3) of the Act AND NOT THE CUMULATIVE CONDITION. IN THIS CASE the condition" Consideration of Business expediency & other relevant factors" has been fully satisfied which entitle the assessee to claim exemption of operation of See. 40A(3) of the I. T. Act. SECONDLY 4A. In this case the assessee has been able to proof (A) identity of the payee wholesaler AGENT of WB. Govt. having IFB Agro Industries Ltd having PAN No: AAACI6487L Bank A/e. No: 10306876975 with SBI, City Centre, Durgapur, Excise Regn. No: 19200052155, VAT No: 19200052058, CST No: 19200052252, TAN No: CALl01584C and Asansol Bottling & Packaging Pvt Ltd. PAN No. AAECA2535R Bank A/c. with SBI, Asansol, VAT No. BA/13650, CST No. 6940 (BA)C, TAN no. CALA0578E and also reasonableness of the payment. (B) As price is determined by the West Bengal Govt. and is subject to check by the Excise Authorities. (C) Payment has been made by the assessee directly to the suppliers Bank A/e. on the printed stationery supplied by the wholesaler Agent of W.B. Govt. IFB Agro Industries Ltd. and Asansol Bottling & Packaging Pvt. Ltd., which is the proof the consideration of the business expediency. 4B. The ITO has verified the total transaction from the suppliers by issue of notice u/s. 133(6) of the Act and got reply thereto, confirming the entire transaction and also the fact of bank deposit through its bill. THIRDLY 5A. The payments by way of deposit of cash directly in the Bank A/c of the wholesaler Agent of West Bengal Government in terms of Calcutta Gazette notification No. 188-EX/0/R-4/2000 dt. 23/02/2000. The payments made is therefore, otherwise covered under Rule 6DD(b) of the I. T. Rules to which provisions of Sec. 40A(3) are inapplicable. 5. In this connection, attention is drawn to Calcutta Gazette as under:

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"5(1) - The retail vender or shall submit to the Wholesale Licensee through excise officer in charge of the warehouse a demand for issue of county sprit ", 5(2) No retail vender of Country Sprit shall deposit duty direct into the local treasury for issue of Country Spirit r Duty cost price, bottling charge shall be paid by the retail vender to the Credit of the wholesale Licensee concerned. 5(3) The Wholesale licensee shall realise the necessary amount to duty, cost price and bottling charge And shall debit the amount of duty for the issue from the personal Ledger Account ………. The authorized representative shall then submit requisition …… To the excise Officer in charge of a warehouse………….” 5B Rule 6DD(b) OF I. T. Rules Where the payment is made to the Government and under the Rules framed by it" such payment is required to be made in legal tender. 5D. The ENTIRE PAYMENT, is therefore, to PRINCIPAL, WEST BENGAL GOVERNMENT through its wholesale Agent. The relationship, between the assessee (franchise Authorised Retailer) and W.B. GOVERNMENT (the supplier) acting under Bengal Excise Rules through its Authorised wholesaler Licensee (agent), both de facto and de jure, is one of "Principal" and "agent". The retailer at all times acting only for and all behalf of the supplier (WB. Government) as link only in the supply chain and, thus, the payments by it to the principal - supplier are only in terms of and in pursuance of Gazette Notification. The question of no separate payment being made by the payee - principal (WB, Government) to the payer - Retailers i.e. towards remuneration or commission, etc, arises. Provisions of Sec. 40A(3), therefore, are not applicable to this case under rule 6DD(b) also. 10. On the other hand the ld. DR vehemently supported the order of the lower authorities. 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 :

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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 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.

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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 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, ITA No. 903/Kol/13 Sri Malay Mondal 11

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 ITA No. 202 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 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 ITA No. 903/Kol/13 Sri Malay Mondal 12

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 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.

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Order Pronounced in the Open Court on 28 September,2016

Sd/- Sd/- WASEEM AHMED S.S.VISWANETHRA RAVI ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated:28/09/2016

Copy of the order forwarded to:- 1. The Appellant/Assessee: Sri Malay Mondal Vill: Parira P.O Majira, Dist:Burdwan 713330. 2. The Respondent/Department; The Income Tax Officer, Ward2(2), Asansol-713301. 3. CIT 4. CIT(A) 5. The Departmental Representative 6. Guard File True Copy

** PRADIP SPS By order Assistant Registrar Income Tax Appellate Tribunal Kolkata benches, Kolkata

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