ARUN KUMAR MONDAL,BURDWAN vs ITO, WD-2(2), ASANSOL, ASANSOL

Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA

Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

Both appeals filed by the assessee are against the different orders of Commissioner of Income Tax (Appeals), Asansol of even date 09.12.2013. Assessments were framed by ITO Ward-2(2), Asansol u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his orders dated 17.11.2011, 17.12.2012 & 13.12.2012 for assessment years 2009-10 & 2010-11 respectively.

Shri Ravi Tulsiyan, Ld. Authorized Representative appeared on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representative appeared on behalf of Revenue.

Since common grounds are involved in both the appeal of assessee except figures, therefore they were heard together and are being disposed of by way of this A.Ys 2009-10 & 2010-11 Arun Kr. Mondal vs. ITO Wd-2(2), Asl Page 2 consolidate order for the sake of convenience. We, therefore, are taking the facts of the case for the AY 2009-10 as a lead case for the sake of convenience. The grounds raised

by the assessee per its appeal are as under:- “1. That, the appellate order passed by Ld. CIT(A), is arbitrary, erroneous, and hence bad in law.

2. That, on the facts and circumstances of the relevant case, Ld. CIT(A) has erred in confirming the disallowance of Rs.62,48,722/- [U/s 40A(3) of I.T. Act, 1961 being made by Ld. AO in his order u/s. 143(3)]

That, the Ld. CIT(A) has confirmed the disallowance of Rs.62,48,722/- U/s 40A(3) of I.T Act, 1961 I the said case without appreciating that--- i) That Ld. AO had made the disallowance of Rs.62,48,722/- in the said without considering the reply of the appellant submitted in response to his show cause letter. ii) The Ld. AO has failed to consider that the payment to excise had been made by the approved bottler here through its Current Account maintained with the State Bank of India, Asansol. iii) The Ld. AO had also failed to consider the circulars of Excise Deptt. Govt. of West Bengal issued with respect to the matter of payment of excise duty, VAT etc. AND; iv) The Ld. AO had failed to appreciate that the Circulars of Excise department, Govt. of West Bengal clearly says that Excise duty, VAT etc., to be paid through the wholesaler, being the excise approved bottler known as, ASANSOL BOTTLING & PACKAGING CO.(P) LTD. AND; 4. That, the Appellant craves leave to amend, alter, modify and substitute all of the above grounds.”

3. Common inter-connected issue in all the grounds is that Ld. CIT(A) erred in confirming the action of Assessing Officer by sustaining the disallowance of ₹62,48,722/- u/s 40A(3) of the Act.

Facts in brief are that assessee in the instant case is an individual and running a shop as retail vendor of country spirit. The assessee for the year under consideration has filed his return showing business income of ₹1,76,520/- on 19.01.2010. Thereafter case was selected for scrutiny and accordingly notice u/s 143(2) r.w.s. 142(1) of the Act issued upon assessee on 15.09.2010. In compliance thereto, the assessee A.Ys 2009-10 & 2010-11 Arun Kr. Mondal vs. ITO Wd-2(2), Asl Page 3 produced, books of account which were test checked with regard to balance-sheet and profit and loss account.

The assessee, during the year has made cash payment of ₹62,48,722/- for the 4.1 purchase of country spirit from Asansol Bottling Packaging Co. Ltd. (ABPCL for short) by way of depositing cash in the account of said supplier. The AO observed that there is a clear violation of the provisions of Sec. 40A(3) of the Act read with Rule 6DD of the IT Rules, 1962 (‘the Rule’ for short). Accordingly, AO disallowed the sum of ₹62,48,722/- and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A), who confirmed the action of AO by observing as under:- “5. In response, after adjournments, the case was posted for 03.12.2013. The Authorized Representative submitted objections to my proposal in writing. I had gone through the same. The gist of submission is that in view of provisions of West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules, 2005, exemption under rule 6DD(b) and rule 6DD(k) are available. Reasons as to why rule 6DD(b) and rule 6DD(k) are not applicable has already been communicated in the notice issued by me but specific points raised have not been addressed. It was also claimed that the bottling plant has never accepted cash. Section 40A(3) mandates that payment other than by way of account payee cheque or Demand Draft entails disallowance.

6. Rules 4 and 5 of West Bengal Excise (Supply of Country Spirit on payment of Duty) Rules, 2005 prescribe the manner of payment to West Bengal Govt. it states that bottling plant has to make advance payment to Govt. and sums paid by individual dealers are debited to the advance. There is no remittance of case by case remittance of sums paid by dealers to bottling plant for subsequent remittance by bottling plant to Govt. the rules n where prescribe mandatory cash payment.

The appellant also relies on observations in paragraph 4 of the order of Hon'ble. Income Tax Appellate Tribunal in M/s Arpita Traders vs. ITO Ward-2 Cooch Behar in ITA No.1542/Kol/2012. Paragraph 4 is not a decision. It narrates a compulsive situation. A part of very same order is being relied upon by me. In paragraph 5 it is stated that “when the Government makes is compulsory to pay in cash.” Whether a compulsion exists or not in matter of fact and compulsion is a pr-requisite to be proved. The appellant is duty bound to explain the compulsion. In other words, on facts and circumstances of case M/s Arpita Traders may have established compulsion, but what is need is that -306/Kol/2014 A.Ys 2009-10 & 2010-11 Arun Kr. Mondal vs. ITO Wd-2(2), Asl Page 4 compulsion is established by the appellant on the fact and circumstances of his case. If so established then naturally benefits (subject to meeting any other specified conditions, but what is needed is that compulsion is established by the appellant on the facts and circumstances of his case. If so established then naturally benefits (subject to meting any other specified conditions) of rule 6DD will follow. Here the appellant has failed to prove that there is a rule by which he has to pay the bottling plant by cash. No rule exists (even West Bengal Excise (Supply of Country Spirit on payment of Duty) Rules, 2005 does not make compulsion to pay by cash to the company from where spirit is purchased) and here payment is made to a company having distinct identify and PAN and not Government.

Considering all aspects discussed in paragraph 5 to 7, I hold that the Assessing Officer has rightly made the disallowance under section40A(3). The ground against disallowance of Rs.62,48,722 is dismissed.”

Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

At the outset, we find that in the identical facts & circumstances this Co-ordinate Bench has decided the issue in favour of assessee in the case of Prabir Kumar Mullick Vs. CIT, Kolkata in ITANo.1603/Kol/2011dated 01.06.2016. The relevant extract of the order is reproduced below : “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 -306/Kol/2014 A.Ys 2009-10 & 2010-11 Arun Kr. Mondal vs. ITO Wd-2(2), Asl Page 5 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, 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 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.”

-306/Kol/2014 A.Ys 2009-10 & 2010-11 Arun Kr. Mondal vs. ITO Wd-2(2), Asl Page 6 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 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.

6.1 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 the object to evade the liability of 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 A.Ys 2009-10 & 2010-11 Arun Kr. Mondal vs. ITO Wd-2(2), Asl Page 7 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. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash.

ARUN KUMAR MONDAL,BURDWAN vs. ITO, WD-2(2), ASANSOL, ASANSOL