BHAGYA LAKHI ROY (PROP), BIJOY NARAYAN ROY (DECD),BURDWAN vs. ITO, WARD - 3(1), ASANSOL, ASANSOL

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

.Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 2 2. For that the Ld. CIT(A) erred in law & on facts in not properly considering provisions of Sec. 144/145 of the IT Act.”

Being aggrieved by this order of Ld CIT(A) the assessee is in second appeal before us. Shri K.K.Khemka, Ld. Authorized Representative appearing on behalf of assessee and Shri Sital Chandra Das, Ld. Departmental Representative appearing on behalf of Revenue. .Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 3 5. Before us Ld. AR filed a paper book which is running pages from 1 to 196 and submitted that assessee is Authorised Retailer Agent (franchise) of country sprit of West Bengal Government under Bengal Excise Act & Rules. The payments were made by way of deposit of cash directly in the bank a/c of Wholesaler Agent of West Bengal Government in terms of Calcutta Gazette notification No, 188-EX/0/R-4/2000 dt. 23/02/2000, THE ENTIRE PAYMENT IS THEREFORE TO WEST BENGAL GOVERNMENT (through Authorised 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 Authorised wholesaler Agent of WB. Government, IFB Agro Industries Ltd City Centre, Durgapur - 713216 and Asansol Bottling & Packaging Pvt Ltd. P.O. KALLACH - 713340, Burdwan. The wholesaler Agent of WB Govt. supplied printed paying slips of his Bank, wherein name and Bank A/c no. was printed in some paying slip even quantities supplies with rate has been mentioned on the back of the paying slip. In the invoice issued the supplier has specifically mentioned the amount of Bank deposit and cash received column was remained BLANK (see copies Paper Book Page 14 to 196. The ITO has verified the entire purchase from the wholesaler Agent and the supplier has confirmed the total sales made by them to the Assessee, IFB Agro Industries Ltd. Having PAN. AAACI6487L Bank A/e. No. 10306876975, SBI, City Centre Durgapur and Axis Bank, Durgapur A/e. No. 21301020001645 Excise No. 19200052155, CST No. 19200052252, Vat No. 19200052058, TAN No. CALl01584C. and Asansol Bottling & Packaging Pvt. Ltd having PAN. AAECA2535R Bank A/e. - SBI, Asansol CST No. 6940 (B.A)C, VAT No. BA/13650, TAN no. CALA05758E. The entire material purchased and sold 18 as an Agent & franchise of WB. Government subject to strict checking by the State Excise Authority, who put their stamp and seal on Stock Register maintained (see copies at page No: 14. to 196 paper book). Even TCS u/s. 206C of the I. T. Act has been collected by the wholesale Agent and paid to Central Govt. which has been filed before the ITO for claiming Tax Credit. (TAN No: of the party CALl0l584G / 59(2)) and CALA05758E/59(2) the WHOLESALER AGENT OF W.B. GOVT. is clear from TCS Certificate issued. The .Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 4 provision of Section 40A(3) was introduced in the act by Finance Act, 1968. As per the explanatory note para-73 “the provision is 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.” Earlier also rule 6DD was enacted which read as under :- " 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, 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". The law amended and following provisions was 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 20000.00 rupees is made otherwise then by an a/c payee cheque drawn on a bank or a/c 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". INTEREPRETATI~N OF LAW" ....................... The comma” - websters New World Dictionary - Oxford (see paper Book page No 251 (1) The use of "Comma"

(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 .Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 6 therefore, otherwise covered under Rule 6DD(b) of the I. T. Rules to which provisions of Sec. 40A(3) are inapplicable.

5B Rule 6DD(b) OF I. T. Rules Where the payment is made to the Government and under the Rules famed 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.

(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.”

From the plain reading of the provisions of section 40A(3) we find that certain exceptions have been provided 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 to the authorized Excise ITA No.1602.Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 8 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 then 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 days time in clearance. So in our considered view the exception provided in the provisions of section 40A(3) with regard of the business expediency then applicable for the assessment year 2008- 09 is met by the assessee.

7.1 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.” 7.2 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 .Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 9 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.” .Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 10 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.

7.3 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. .Kol/2011 A.Y. 2008-09 Bijoy N Roy (dead) v. ITO Wd-3(1), ASL. Page 11 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.