ACIT vs. SRI. SOUTHADY PREMANATH,

Brief facts of the case are that the assessee, an individual, who is engaged in the business of executing civil construction contract work, filed his return of income on 12/10/2010 for the assessment year 2010-11 declaring a total income of Rs.53,62,690/-. During the assessment proceedings u/s 143(3), the AO perused the books of account of the assessee and noticed that the assessee has made purchases from many suppliers and the payments were in the range of Rs.18,000/- to Rs.19,000/- every day. Therefore, the AO issued a notice u/s 133(6) of the Act to various suppliers of materials to verify the claims of the assessee. The suppliers complied with the notices and furnished the ledger extracts of the assessee in their books on different dates. On verification of the books of account of the assessee as well as of the suppliers, the AO observed that the assessee had paid amounts of Rs.17,000/- to Rs.19,500/- on almost all the days during the financial year 2009-10. Therefore, he issued summons u/s 131 of the Act to the proprietor of M/s.Rachana Service Centre,[RSC] Melkar, Bantwal Tq. The proprietor appeared and during the course of recording of her statement, she also filed a copy of the ledger extract of the assessee as appearing in her books of account. As per the said statement, it was explained that the transactions with the assessee during the financial year were done in cash and are SP No.118 & Smt. Santosh Devi. Page 3 of 7 reflected in the ledger extracts and the cheque payments and transfer through NEFT and RTGS are not recorded in the ledger. The AO, therefore, came to the conclusion that all the payments made by the assessee are cash payments. The assessee was also examined u/s 131 of the Act and during the course of recording of the statement; the assessee filed a copy of the ledger extract of M/s.RSC as appearing in his books of account. It was confirmed that all the payments made were indeed cash payments and the AO found that the payments were in split in books to avoid applicability of sec.40A(3) of the Act. He further observed that the purchases are all done by different truck or lorry drivers and though cumulatively the amounts paid to M/s.RSC exceeded Rs.20,000/- per day, but since the purchases are for different vehicles belonging to the assessee, split of bills was made to see that no single bill exceeded Rs.20,000/-. On a query from the AO, the assessee stated that he was not aware of the amendment to sec.40A(3) and he voluntarily agreed for disallowance during the scrutiny proceedings. Taking the same into consideration, the AO has made the addition u/s 40A(3) of the Act.

Subsequently, the assessee filed an appeal before the CIT(A) stating that as per the provisions of sec.40A(3), the provisions are applicable to each expenditure and since each expenditure did not exceed Rs.20,000/- in the case of the assessee, the provisions of sec.40A(3) are not applicable. He

The learned Departmental Representative placed reliance on the order of the AO and stated that the assessee has SP No.118 & Smt. Santosh Devi. Page 5 of 7 himself admitted during the course of recording of statement u/s 131 that the payments were split up to avoid the rigor of the provisions of sec.40A(3) of the Act. He further submitted that the CIT(A) has granted relief by holding that the transaction falls within clause (k) of rule 6DD whereas drivers of the assessee cannot be called as the agents of the assessee. In support of this contention, he placed reliance upon the decision of the Tribunal at Pune in the case of DCIT vs. Vijaykumar Rameshchand & Co. (2007) 108 ITD 626(Pune) wherein it was held that drivers are not the agents of the owners.

Having regard to the rival contentions and the material on record, we find that the provisions of sec.40A(3) are attracted where an assessee incurs expenditure in respect of which a payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds Rs.20,000/- such a claim is SP No.118 & Smt. Santosh Devi. Page 6 of 7 not allowable i.e. in such circumstances, no deduction shall be allowed in respect of such expenditure. Rule 6DD of the IT Rules prescribes the cases and circumstances in which a payment or aggregate of payments exceeding Rs.20,000/- may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft. Thus rule 6DD applies only to payment or aggregate of payment made to any person on a single day by the assessee. It is not in dispute that the aggregate of payments made to RSC by the assessee on a single day has exceeded Rs.20,000/-. But it is to be kept in mind that each of the payments to RSC or other service centre is on account of a different truck and a driver. It is also to be noted that the general practice in the petrol pump is to supply fuel only for cash payments and as a general practice the service centre would not accept cheque or would not make credit sales of fuel. In such circumstances, the assessee would have to make payment by cash only. Further, as held by the ITAT at Bangalore in the case of Shree Mahaveer Corporation (cited supra), when each of the payments did not exceed Rs.10,000/- [as per the prescribed limit for the assessment year 1993-94] the provisions of sec.40A(3) were not applicable. As regards the decision of the Tribunal at Pune in the case of Vijaykumar Rameshchand & Co. (cited supra), a driver is different from the agent and cannot be held as an agent of the assessee. Therefore, applying this principle, we hold that the finding of the CIT(A) on this issue is SP No.118 & Smt. Santosh Devi. Page 7 of 7 not correct. However, as seen from the evidence placed before us, though the recipient of the payment is one and the same, each of the payments, is on a different truck and driver and therefore each payment has to be considered separately and cannot be aggregated to apply the provisions of sec.40A(3). In view of the same, we are of the opinion that the provisions of sec.40A(3) are not applicable and we uphold the finding of the CIT(A) though on a different reasoning.