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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:-
This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-Asansol dated 09.12.2013. Assessment was 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 order dated 20.12.2012 for assessment year 2010-11. The grounds raised by the assessee per its appeal are as under:- “1. The Ld. AO had disallow Rs.7624680/- u/s 40A(3) for depositing cash into the Bank Account of Supplier Asansol Bottling and Packaging Co. Pvt. Ltd. (Warehouse) against issue / purchasers of Country Spirit as per Rule 6 of West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules 2005 sowing the reason that as had violated provision of Section 40A(3) of Income Tax Act 1961.
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 2 2. Smt. Shila Mondal is the proprietor of South Nimcha C.S. Shop. South Nimcha C.S. Shop is a retail vendor of Country spirit in West Bengal as per Rule 2(iii) of West Bengal Excise (Supply of Country sprit on payment of Duty) Rules, 2005.
The Supply of Country Spirit is fully controlled by State Government as per West Bengal Excise Act 1909 and West Bengal Excise (Supply of Country Sprit on Payment of Duty) Rules, 2005.
M/s Asansol Bottling and Packaging Co. Pvt. Ltd., located at Dhadka, Asansol was originally granted exclusive privilege by State Government as per Section 22 of West Bengal Excise Act, 1909 and exclusively incorporated for Manufacturer and Supply of Country Spirit in West Bengal as per the Information Received from Office of the Superintendent of Excise under Right to Information Act 2005. The copy of such information and copy of Section 22 of West Bengal Excise Act, 1909 is attached herewith.
The assessee has to purchase / take issue of country spirit bottles from the wholesale vendor (Warehouse) after payment of Excise Duty, VAT Tax, Cost Price, Bottling Charges as per Rule 6 of West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules, 2005. The Asansol Bottling and Packaging Co. Pvt. Ltd., had issue bottles of country sprit when Retail Vendor deposit Cash in the Bank account of the Asansol Bottling and Packaging Co. Pvt. Ltd. and deposit one copy of such Bank Receipt at the Dispatch Section of ABPCPL.
Rule 6DD. 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) Where the payment is made to- (i) The Reserve bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) The State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (b) Where the payment is made to Government and under the rules framed by it, such payment is required to be made in legal tender; (k) Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (l) Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;
As the assessee has made all the payments by depositing cash in the Bank Account of Asansol Bottling and packaging Co. Pvt. Ltd. (ABPCPL), which was originally granted exclusive privilege by Stat Government as per Section 22 of West Bengal Excise Act 1909 and exclusively incorporated for Manufacture and Supply of Company Sprit in West Bengal. ABPCPL is a warehouse of the West Bengal State Government as per Rule 2(vii) of West Bengal Excise (Supply of Country Sprit on Payment of Duty) Rules, 2005. So ABPCPL is the agent of Stat Government. As the ABPCPL is the agent of the State Government. So the All Payment made by Depositing Cash in the bank Account of ABPCPL are made to the government by
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 3 way of legal tender. The Trade of Country Spirit is fully controlled by State Government as per West Bengal Excise Act, 1909 and West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules, 2005 and there is no choice of purchase otherwise than from specified Warehouse of Government. Retail Vendors are allotted quota for purchase of the Bottles of country Spirit from the specified Vendor (ABPCPL) only by the State Government and if the Retail Vendor Fails to Maintain the minimum stipulated stock of Bottles of Country Spirit than there is a penalty of Rs.25000/- per Day as Misc Case by State Excise Department. The composite Payment may be divided comprising (a) Cost of Product, (b) Excise Duty (c) VT and (d) TCS (Income Tax). 8. The Honorable ITAT Bench, SMC, Kolkata in Case of M/s ARPITA TRADERS vs ITO-WD-2/Cooch Bihar (ITA No. 1524/Kol/2012) has deleted the disallowance u/s. 40A(3) that I find that the assessee has to lift quota of spirit allotted to the assessee by excise authorities by paying Cash. The spirit has to be lifted from such manufacturing companies notified by the state government as the agent of the state government for the purpose of this trade. The System is to Pay the Cash to the government agent, which is the bottling company and lifted liquor quota allotted to an assessee. Therefore, it is compulsory on the part of the assessee to pay the price in case for lifting of the quota liquor. This is a compulsion which cannot be avoided. It is in these circumstances, disallowance made u/s. 40A(3) was not justified. When the government makes it compulsory to make the Payment by Cash the assessee has no other option. The Payment made by the assessee to the agent of the government has to be treated as the Payment made to the government itself. Disallowance of as cash Payment cannot be made when such payments are made to government. In facts and circumstances of the case and following the order of the coordinate Bench of the Tribunal in the case of M/s Hamuktala Company Sprit Shop, Jalpaiguri, I hold that the revenue authorities have erred in disallowing u/s. 40A(3) of the Income Tax Act, 1961. 9. Rule 6(2) of West Bengal Excise (Supply of Country Sprit on Payment of Duty) Rules, 2005 defines that No retail vendor of country spirit shall deposit duty direct into the local treasury for issue of country sprit 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. 10. Section 40A(3) was introduced by the Finance Act 1968 as a provision 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 the reasonableness of the payment. However in this case genuinity of purchase cannot be denied or questionable because it can be verified because TCS has been deducted by the (ABPCPL) who is the agent of the Government as per Section 206CA of Income Tax Act, 1961 which can be viewed and shown in From 26AS of Income Tax Department. The Copy is attached herewith. 11. The Payments are Made to the (ABPCPL) agent and warehouse of government by way of legal tender as per West Bengal Excise Act, 1909 and West Bengal Excise (Supply of Country Sprit on payment of Duty) Rules, 2005 which fall under the
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 4 purview of Rule 6DD(a), (b), (k) & (l) of the Income Tax Rules, so the Disallowance of Rs.76,24,680/- u/s 40A(A) should be deleted.”
Shri U. Dasgupta, Ld. Authorized Representative appeared on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representative appeared on behalf of Revenue.
At the time of hearing Ld. AR for the assessee has stated that he has instructed by assessee not to press grounds No. 2 to 11. Hence, same are dismissed as not pressed.
Solitary inter-connection issue in Ground No. 1 raised in this appeal of assessee is that Ld. CIT(A) erred in confirming the action of AO by sustaining the disallowance of ₹76,24,680/- u/s 40A(3) of the Act.
Brief facts are that assessee in the present case is an individual and engaged in the business of C.S. shop. The assessee for the year under consideration has filed her return of income on 30.09.2010 declaring total income of ₹3,36,120/-. Thereafter case was selected for scrutiny and accordingly notices u/s 143(2)/142(1) of the Act with questionnaires were issued to assessee. The assessee, in the instant case, has made cash payment of ₹76,24,680/- for the purchase of country liquor and violated the provision of Sec. 40A(3) read with Rule 6DD of the IT Rules, 1962. Accordingly, AO has disallowed the payment of ₹76,24,680/- 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:- “7. Upon going through the submission, I find that no case is made out to prove that any of sub-rules of rule 6DD applies. For applying rule 6DD(b) mandate that cash payment is compulsory is to be proved. For applying rule 6DD(k), not only the mandate that cash payment is compulsory it to be proved but also that the bottling plant, which as I had already stated is a private company with distinct status and PAN, is gent of Government. Just because tax is collected and remitted to Government the Private Company does not become Government for any purpose. 8. Having considered the submission of the appellant and may analysis as above, I uphold the decision of the Assessing Officer to make the disallowance under section
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 5 40A(3) of Income Tax Act 19661. No case is made to prove that payment is made to Government as per rules framed where payment by legal tender is mandatory. Rule 6DD(b) and 6DD(k) does not apply to the case of assessee. Accordingly grounds 2 and 3 are 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 the Co-ordinate Bench has decided the issue in favour of assessee in the case of Prabir Kumar Mullick Vs. ITO, in ITA No.1603/Kol/2011 dated 01.06.2016 and 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 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
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 6 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 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
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 7 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.
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) of the Act 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. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash.
In view of above facts and circumstances of the case and relied on the various case laws cited above, we are inclined to reverse the order of lower authorities. Hence this ground of appeal of the assessee is allowed. In the result, assessee’s appeal stands allowed. 8. Order pronounced in open court on 12/08/2016
Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp �दनांकः- 12/08/2016 कोलकाता / Kolkata
ITA No.336/Kol/2014 A.Y.2010-11 Smt. Shila Mondal vs. CIT (A), Asl Page 8 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-Shila Mondal Prop – South Nimcha C.S. Shop, Akanta Apan, Hill View Park (South) P.O. Asansol, Dist. Burdwan,Pin713347 2. ��यथ�/Respondent-CIT (Appeals) Asansol, ITO Wd-2(2), Room No.2/3, 2nd Fl. “Parmar Building” 54 G.T. Road, (West), Asansol, 713304 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file.
By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता