M/S CRONY ENTERPRISE,BURDWAN vs. I.T.O WD - 1(3),ASANSOL, ASANSOL

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), Asansol dated 15.05.2013 for the assessment year 2006-07 on the following grounds:-

1. For that the order passed by the ld. CIT(A), Asansol is arbitrary, excessive, hence bad in law.

2. For that on the facts of the case the CIT(A) was not justified in sustaining the addition of Rs.18,88,560/- u/s. 40A(3) of the Act,

61, when the said payment made in cash is covered by exception to Rule 6DD of the Income Tax Rules’62, and a such the addition may please be deleted. 3. For that on the facts of the case the ld. CIT(A) was not justified in sustaining the addition of Rs.13,050/- on A/c of tanker rent, and the same may please be deleted. 4. For that the appellant craves leave to add, alter, amend any further grounds of appeal before or at the time of hearing. “

3. Ground no.1 is general in nature and requires no adjudication. Hence, the same is dismissed.

6. The Assessee is a firm filed engaged in the business of acting as dealer in purchase and sale of kerosene oil. In the course of assessment proceedings, the Assessee filed list of persons/concerns from whom purchase of Kerosene Oil were made along with list of persons to whom the sales were made. The AO issued notice u/s.133(6) of the Income Tax Act, 1961 (Act) to verify the entries in the ledger account of the parties from whom the Assessee effected purchases and sales as per the books of accounts of the Assessee. The replies along copy of party ledger obtained from the parties from whom the purchase and sales were made by the assessee notices u/s. 133(6) of the Act were issued for checking and verification w.r.t books of account, bills, vouchers as produced by the ld.AR of the assesse. On perusal of the ledger account and copy of cash memo furnished w.r.t 133(6) by the distributors namely General Mercantile Corporation, M/s. Rupnarayan Supply Agency, Kanhailal Matadin Sharma, M/s. B.N Ojha, Phulchand Omprakash, Murarilal Jugalkishore regarding purchase of K.Oil by the assessee firm, the AO found that payments made by the assessee firm to its distributors in cash exceeded Rs.20,000/- in all occasions. On verification of cash book of the assessee firm as produced before the AO, it was observed that date wise entries of cash payment made to different distributors has been reflected at Rs.20,000/- and less in all occasions. Thus, there was a discrepancy detected in respect of quantum cash payments made by the assessee firm to its different parties/distributors towards purchase of K.Oil. The AO held that the assessee made the payment in contravention of Section 40A(3) of the Act. Accordingly, 20% of total cash payment of Rs.94,42,806/- i.e Rs.18,88,560/- was disallowed u/s. 40A(3) and added the same to the total income of the assessee firm.

7. Aggrieved by such order of the AO, the assessee preferred appeal before the ld. CIT(A). The ld. CIT(A) considering the submissions of the assessee has disposed of the appeal by stating as under:-

"The appellant partnership firm is a BIG DEALER of KEROSENE OIL in the chain of Public Distribution System , and functions under the provisions of the it Essential Commodities Act, .1955 ". It is appointed by the Government of West Bengal as a big dealer in the public distribution system for distribution of kerosene oil in the State of West Bengal. In the State of West Bengal there is a chain, i.e., AGENT - BIG DEALER - M.R. DEALER for efficient running of public distribution system (PDS) of kerosene oil. The appellant is a big dealer in such chain. The Department of food and supplies issues allotment memo to the appellant for purchase of kerosene oil of a specified quantity from a specified AGENT. Similarly, allotment memos are also issued, to the appellant for supply of kerosene oil to the specified M. R. The purchase price to be paid to the agent as also the sale price to be charged from M.R. dealer is periodically determined by the Department of food and supplies. As per the allotment memo issued to the appellant ( in this case Crony Enterprise), by the Department of food and supplies for the purchase of kerosene oil, the assessee is required to make the payment in cash. (sample copies of allotment letters issued by sub-divisional controller, food and supply, Asansol , is already on record has been duly verified by the AO and found correct) In the allotment letter, there is clear direction to the AGENT to deliver the specified quantity of kerosene oil to the APPELLANT ( BIG DEALER ) on CASH PAYMENT. Therefore, when the appellant is working as a licensee being a part of the public distribution system of the Government of West Bengal, it is bound to make the payment as directed by the Government of West Bengal.

He, therefore, submitted that in the case of the assessee neither the identity of the seller nor the genuineness of the purchase is doubtful. Moreover, the payment has been made as per the rate fixed by the Government of West Bengal. Against the above back drop, certain FACTS are admitted and uncontroverted: 1) The APPELLANT is a resident of CHAKDOLA village and he carries out his business of distribution of Kerosene Oil, from the said village, distributing the same to various M R shops in the region. 2) The said CHAKDOLA vii/age is located in a remote corner s of the District of Burdwan, nearest town being Jamuria s situated about 5 KM away , and the nearest 'bank located at Jamuria Town. 3) In the financial year 2005-06, there was no banking facility at Chakdola Village . Now in the year 2013, also there are no Banks at Chakdola Village. 4) Payments in CASH are made by the appellant for purchase of goods at Govt. fixed rates, at Chakdola village. 5) Kerosene Oil are transported in OIL TANKERS, to Chakdola Village, and stored in OIL DRUMS for further distribution, down the line, and tank are also paid by the appellant. 6) Even though the appellant has a bank Nc at Jamuria town , it is mostly inoperative, because it is practically not possible to pay by A/c payee cheques, because a single cheque will take 15 days time for clearance, and the entire chain of distribution will break down. 7) After considering all practical difficulty the SUB DIVISIONAL CONTROLLER food and supply, Govt. of West Bengal, has issued specific written instructions for payments to be made in CASH. 8) In this case neither the identity of the seller nor the genuineness of the purchase is doubtful and the payment has been made as per the rate fixed by the Government of West Bengal. 9) Under the circumstances the appellant cannot unilaterally decide the mode of payment to the Govt. AGENT. The above factual aspect are undisputed. Now our arguments are two fold: First, the CASH payments made by the appellant are covered by exception to Rule 6 DD (h) of the I. T. Rules, 62, which exempt cash payment at a place not served by a bank and in this case payments made at Chakdola village, is certainly covered. We are also relying in the case of Basudev Seth V CIT (Kol) 2006, where the Hon'ble ITAT, Kolkata Bench, has decided the issue in favour of the appellant, and subsequently the Honb'le Calcutta High Court in 386 of 2007 ( Cal) , has dismissed the revenues appeal. (Copies of the said judgment is enclosed)

Secondly, payments made in CASH by the appellant is also covered by exception to Rule 6 00 ( b ) of the I. T Rules'62, because payments made to the AGENT being representative of the Govt. of West Bengal, is payments made to the Govt. Itself. Further, on this issue we would like to draw your notice to the provisions of The Essential Commodities Act'55 . Sec 5 of the said Act '55 clearly specifies that “ power to make orders or issue notification under section 3 shall, ---------- ---------------------------------------- --------------------------- direction, be exercised also by (a) such officer or authority subordinate to the Central Government, or ( b ) such State Government or such officer or such authority subordinate to a State Government" , Sec 2 of the said Act'55, empowers the Sub Divisional Office , with delegated powers of Collector. Sec 6 of the said Act: has overriding effect over all enactments : u Any order made under Section 3 shall have effect notwithstanding anything inconsistent herewith contained in any enactment other than this Act or ---------------------------- ------------------------------------------------ this Act". The above provisions of the Act'55, read with sec 3 of the said Act, makes it clear that a direction issued u/s 3 of the EC Act'55, by the Sub- Divisional Officer, is binding on the appellant and provisions of Sec 6 of the said Act, provides the overriding effect. As considering all aspects of the matter J it is humbly prayed before your Honour, that the addition made u/s 40A(3) may please be deleted because the same is covered by exceptions under Rule 600, clause (h) and also clause (b) of the I. T.Rules '62." He also relied on the decision in K 06 A.Y. 2003-04 in case of Sri Basudeb Seth vs. ITO, Ward-2(3), Hooghly, which according to him is squarely applicable.

5. The applicability of the case decision cited by appellant is first considered. The ITAT special Bench Kolkata has in I.T.O., Ward-1, Murshidabad vs. Mls Kenaram Saha and Subhash Sa ha in ITA No. 1545 (Kol) of 2007 for A. Y. 2004-05 considered the same matter. The case decision referred by appellant was also considered while giving the decision. The extract from order is reproduced below. “15. While referring to the second proviso to Sec. 40A (3), it has been claimed by the, learned counsel that this proviso provides certain exceptions where Sec. 40A (3) is not applicable. The exemption from applicability of Sec.40A (3) is to be allowed having regard to the (i) nature and extent of banking facilities available, (ii) consideration of business expediency, and (iii) other relevant factors. He stated that the second to Sec. 40A (3) is a provision of the law, full effect of which should be given. Therefore, even if the facts of the case of an assessee are not squarely covered by any of the clauses of Rule 6DD, still the exemption from the rigor of Sec. 40A(3) can be allowed in view of the provisions of second proviso to See 40A(3). We are unable to agree with the contention on of the learned counsel. At the cost repetition we reproduce the second to "Provided further that no disallowance under this sub-section shall be made 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. 11 [Emphasis supplied] From the above, it is evident that no disallowance under this sub-section shall be made where any payment in a sum exceeding Rs.20,000/- is made otherwise than by a crossed cheque/crossed bank draft in such cases and under such circumstances as may be prescribed. Thus, the mandate of the proviso is to exempt the payment in violation of provisions of Sec. 40A (3) in such cases and under such circumstances as may be prescribed. The last sentence of the proviso, i. e. "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors", is the guideline for the authority who has to prescribe the cases and circumstances under which the disallowance u/s. 40A (3) will not be made despite the payment exceeding Rs.20,000/- other than by cross cheque/bank draft. In pursuance to this proviso, Rule 6DD has been brought into the Statute vide I. T. (Amendment) Rules, 1969 w. e.f 1.4. 1969. Rule 6DD prescribes the cases and the circumstances in which payment in a sum exceeding Rs. 20, 000/- may be made otherwise than by crossed, cheque drawn on a bank or a crossed bank draft. Thereafter this rule has been amended from time to time. Rule 6DD, as applicable to the assessment years involved in the appeal before us, reads as under:- "Cases and circumstances in which payment in a sum exceeding [twenty thousand] rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. // Not reproduced// In view .of the above, in our opinion, the assessee will get the exemption from the rigors of Sec. 40A(3) if he is able to establish that his case falls within any .of the clauses .of (a) to (m) .of Rule 6oD. Burden would be upon the assessee to establish under which particular clause his case falls.

16. Now we revert back to the facts of each case, First we will take up I T.A. No. 1545 (Kal)/2007, i.e. ITO vs. Kenaram Saha & Subhash Saha. 16.1. The assessee is an AOP which is a big dealer in the chain of agents involved in the public distribution system far supply . of kerosene ail within the State of West Bengal. During! the year under consideration the assessee made the payment of Rs. 1, 34,58, 430/- far purchase of kerosene oil in cash exceeding Rs. 20,000/-,. As per A. 0., the payment was in violation of the previsions of Sec.40A (3). He, therefore, disallowed 20% . of the payment made by the assessee. Accordingly, the disallowance was worked out at Rs. 26,91,680/-. On appeal, the C.I. T (A) deleted the disallowance holding that the assessee's case is covered under Rule 6DD (k) as well as Rule 6DD(1) of I. T Rules. Before us the assessee's learned counsel further claimed that the case of the assessee is also covered by Rule 6DD (b). However on perusal of the orders of the authorities below we find that before the A. O. the assessee did not make a specific claim under which clause of Rule 600 case calls, The claim was that the purchase was made from the Government. The assessee s explanation before the A. O. was of general nature explaining the manner in which the business is being carried on by it. The C.I. T(A) has mentioned that the assessee's case falls within Rule 6DD(k) and also alternatively under Rule 6DD(1). We find that Rule 6DD(k) would be applicable where the payment was required to be made on a date on which the banks were closed either on account of holiday or strike. Therefore it would be a matter of factual verification with reference to each payment whether the payment was made on bank holiday or not. The date-wise details of the payments and whether on those dates it was bank holiday or not has not been placed before us. Therefore, we are unable to give any finding whether Rule 6DD(k) is applicable in the case or the assessee. 16.2. Rule 6DD(1) would be applicable where the payment is made by any person to his agent, who is required to make the payment in cash for goods or services on behalf of such person. Whereas Rule 600 (b) would be applicable "where the payment is made to Govt. and, under the rules framed by it, such payment is required to be made in legal tender." It was claimed by the assessee that as per the public distribution system in the state of West Bengal there is a chain of persons as follows - "Agent - Big dealer - M. R. dealers." The assessee purchases kerosene oil from the agent appointed by the Govt. of West Bengal and the assessee supplies kerosene oil to the M. R. dealers. However, whether the "agent" to whom the payment is made by the assessee can be said to be agent of the assessee within the meaning of clause (1) of Rule 6DD is an important question, because Rule 6DD(i) would be applicable only where the payment is made by the assessee to his agent. While claiming exemption under Rule 6oo(b), it was claimed by the assessee that the agent is the representative Govt. of west Bengal and, therefore, payment made to the agent being representative of Govt. of West Bengal is a payment to the Govt. of West Bengal. However, as we have noted, no such claim was made by the assessee before the A.O. It was also stated by the Ld. Departmental Representative that the necessary facts are not available on record to examine the contention of the assessee that its case falls in clauses (k), (1) or (b) of Rule 6DD. We agree with the Ld. Departmental Representative. The claim of the assessee would require examination of the facts with reference to the books of account so as to ascertain on which particular date payment was made and whether such date was bank holiday or not so as to ascertain the applicability of Rule 6Do(k). With regard to applicability' of Rule 600 (/) and Rule 6oo(b) also further facts are required to be examined. The learned counsel for the assessee has given the copy of the supply order issued by Sub-Divisional Controller, Food & Supplies, Jangipur giving direction to the assessee to make the payment in cash. However, it was pointed out by the Ld. Departmental Representative that these supply orders are dated 2007 and, therefore, will not be applicable to the year under consideration. What was the exact direction of the supply order in the accounting year relevant to assessment year under consideration would require to be examined. In view of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the A.O. with the direction that he will ex amine the facts of the case afresh and will adjudicate upon the assessee’s contention that its case falls under clauses (b), (k) and (I) of Rule 600. Needless to mention that he will allow adequate opportunity of being heard to the assessee.

8. Aggrieved by such order of the ld.CIT(A), now the assessee is in appeal before us by raising the above mentioned grounds of appeal.

9. At the time of hearing before us the ld. Counsel for the assessee submitted that the ld.CIT(A) was not justified in sustaining the addition, when the said payment made in cash is covered by exception to Rule 6DD of the I.T Rules 1962 and such addition may please be deleted. On the other hand, the ld.DR has relied on the orders of the authorities below.

Sec.40A(3) of the Act as applicable for AY 2006-07 reads thus: “Where the assessee incurs any expenditure** in respect of which payment is made, after such date (not being later than 31st day of March, 1969), as may be specified in this behalf by the Central Government by notification in the Official Gazette in a sum exceeding ***[twenty thousand] rupees otherwise than by $[an account payee cheque drawn on a bank or account payee bank draft] $$[twenty per cent of such expenditure shall not be allowed as a deduction]: Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding ***[twenty thousand] rupees otherwise than by $[an account payee cheque drawn on a bank or account payee bank draft] the allowance originally made shall be deemed to have been wrongly made and the $$$[Assessing Officer] may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made 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."

Rule 6DD is the rule prescribed under the second proviso to Sec.40A(3) of the Act and the relevant rule, in so far as this case is concerned viz., Rule 6DD(h) reads thus: “Rule 6DD. Cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by crossed cheque drawn on a bank or by a crossed bank draft.-No disallowance under Sub-section (3) of Section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely: (a) To (g)….. (h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;”

We have heard learned Counsel for the appellant. Perused the order passed by the Tribunal. We find, that no substantial question of law is involved in this matter. Hence this appeal being I. T. A. No. 386 of 2007 is dismissed.

“Heard both the parties, perused the record and find force in the contention of the assessee that he has to make this cash payment to M/s. B.S.K.F3.S Ltd. out of business expediency in view of the fact that there was no branch of United Bank of India at the place where the business of the assessee is located. The assessee's case also finds support from the above mentioned decision in the case of ITO v. Shri Binod Kr. Aganuala decided by the hon'ble Income-tax Appellate Tribunal, Kolkata. We are therefore, of the opinion that the addition made by the Assessing Officer underSection 40A(3) of the Income-tax Act 1961 was not justified in the instant case.”

(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;