M/S SUPER ENTERPRISE,BURDWAN vs. ITO, WD-2(3), DURGAPUR, DURGAPUR

SHRI M.BALAGANESH, AM

This appeal of the assessee arises out of the order of the Learned CIT(A), Durgapur in Appeal No. 134/CIT(A)-DGP/2011-12 dated 01-08-2012 against the order of assessment framed for the Asst Year 2009-10 u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’).

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the assessee . M/s IFB Agro Industries Limited vide its compliance dated 19.8.2011, categorically confirmed that the payment has been received by them in cash from the assessee and also stated that the assessee had directly deposited cash into their bank account towards their sale to M/s Super Enterprise (assessee herein). Accordingly, the Learned AO invoked the provisions of section 40A(3) of the Act and disallowed the entire purchase of country spirit to the tune of Rs. 64,36,222/-, which was also upheld by the Learned CITA . Aggrieved, the assessee is in appeal before us on the following grounds:- 1. For that both AO and Ld Appellate authority erred on fact and Law while confirming addition u/s 40A(3), that payments made by Appellant to the supplier were within the prescribed limit but such misnomer arouse due to showing of such payments in consolidated manner by the supplier. Hence such non consideration of vital material fact by Ld CIT(A) is bad in Law and such Appellate order is liable to be quashed.

2 For that Appellant's Purchase figure on cash in a day was inclusive of excise duty, VAT etcwhich are statutory revenues paid to government If such taxes are deducted from purchase figures then the amount of cash purchase will be below the prescribed limit U/s 40A(3) and such statutory payments are exempted from rigour of 40A(3), U/R 6DD (b) of Income Tax. Hence non consideration of such vital question of law by both assessing as well as Appellate authority is illegal and perverse.

3 For that Appellant made all payments though in cash but deposited and paid through banking channels. Any payments made through banking system is exempted from U/s 40A(3), U/R 6DD( C ) of Income Tax, so Ld Appellate authority should have considered such question of Law.

4 For that Appellant was required to make all those cash payments through the bank, which was acting as an agent of Appellant on Payments for purchases. No payments were made directly by Appellant to its supplies so Appellant's transaction falls under rule 6DD(K) of Income Tax. Both AO. and Ld. CIT(A) should have considered such rule.

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3.1. The assessee has also raised the following additional ground before us :-

For that apart from statutory deduction & taxes from purchase prices, there are also deduction on account of bottling charges which are mere service charges not purchase prices. Hence after such deduction actual purchase price will be far below Rs. 20,000 limit. Hence 40A(3) is not applicable.

3.2. The Learned AR prayed for admission of additional ground as it goes to the root of the matter and does not require any fresh investigation on facts in that regard. He also argued that the genuineness of cash payments made to M/s IFB Agro Industries Ltd is proved beyond doubt as the assessee has only deposited cash into the bank account of M/s IFB Agro Industries Ltd towards purchase of country spirit. He referred to the relevant pages of the paper book filed by him containing bank deposit challans wherein it is clearly evident that the assessee had frequently deposited cash to the bank account of M/s IFB Agro Industries Ltd. He stated that the payment has been made by the assessee in legal tender and hence the case falls under exception provided in Rule 6DD(b) of the IT Rules. He placed reliance on the following decisions :-

(a) Decision of the Co-ordinate Bench of this Tribunal in the case of Rampada Panda vs ITO reported in (2016) 65 taxmann.com 213 (Kolkata-Trib.) dated 7.10.2015.

(b) Decision of the Co-ordinate Bench of this Tribunal in the case of Ashok Mondal vs ITO in ITA No. 873/Kol/2012 for Asst Year 2009-10 dated 6.2.2014.

3.3. In response to this, the Learned DR argued that the assessee’s case does not fall under the exception provided in Rule 6DD(b) of IT Rules as the payment is not made by the assessee to Government in legal tender. Payment is made herein by the assessee to a private party.

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(a) The transactions made by the assessee is genuine. (b) The identity of the receiver is established beyond doubt. (c) The payment is made on the bank account of the seller.

4.1. We hold that since the genuinity of the payments made to the party is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case. It is observed that the assessee had taken enough precautions from his side to ensure that the payee also don’t escape from the ambit of taxation on these receipts by directly depositing the cash in the bank account of the payee. This fact is also not disputed by the revenue. Moreover , this aspect has also been established beyond doubt in the assessment order itself by the Learned AO by cross verification from

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M/s IFB Agro Industries Limited. It will be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture.

4.2. 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 6.7.1968 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.”

4.3. 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) " 3.3.4 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 theIncome-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

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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 contention of the assessee that he purchased goods from suppliers who are producers of hides and skins, has not been refuted either by the AO or by the CITA. 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 bonafide of the assessee that payments are made to M/s IFB Agro Industries Ltd for purchase of country spirit 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 bearer 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 Id. 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."

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• 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 v. CIT [2014] 49 taxmann.com 363/226 Taxman 139 (AP)

"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 groundnut in cash exceeding prescribed limit - Assessee submitted that he 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.

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4.4. It is pertinent to note that the primary object of enacting section 40A(3) was two fold, 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 befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration. In the instant case, the cash has been deposited directly in the bank account of the supplier i.e M/s IFB Agro Industries Limited by the assessee.

4.5. The Hon’ble Apex Court in the case of CTO vs Swastik Roadways reported in (2004) 3 SCC 640 had held that the consequences of non-compliance of Madhyapradesh Sales Tax Act , which were intended to check the evasion and avoidance of sales tax were significantly harsh. The court while upholding the constitutional validity negated the existence of a mens rea as a condition necessary for levy of penalty for non- compliance with such technical provisions required held that “in the consequence to follow there must be nexus between the consequence that befall for non-compliance with such provisions intended for preventing the tax evasion with the object of provision before the consequence can be inflicted upon the defaulter.” The Supreme Court has opined that the existence of nexus between the tax evasion by the owner of the goods and the failure of C & F agent to furnish information required by the Commissioner is implicit in section 57(2) and the assessing authority concerned has to necessarily record a finding to this effect before levying penalty u/s 57(2).

Though in the instant case, the issue involved is not with regard to the levy of penalty, but the requirement of law to be followed by the assessee was of as technical nature as was in the case of Swastik Roadways (3 SCC 640) and the consequence to fall for failure to observe such norms in the present case are much higher than which were prescribed

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under the Madhya Pradesh Sales Tax Act. Apparently, it is a relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the Circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. We hold that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions. Admittedly, this is not the case in the facts of the assessee herein. The assessee had directly deposited cash in the bank account of the supplier M/s IFB Agro Industries Limited which fact is also acknowledged by the concerned supplier before the Learned AO in the assessment order itself. It is also pertinent to note that the Hon’ble Rajasthan High Court in the case of Smt.Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Raj) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally.

4.6. We also find that the impugned issue is squarely covered by the decision of the co- ordinate bench of this tribunal in the case of Ashok Mondal vs ITO in ITA No. 873/Kol/2012 for Asst Year 2009-10 dated 6.2.2014, wherein it was held that :- “7. We have considered the rival submissions. At the outset a perusal of the decision in the case of Smt.Pushpalata Mondal shows that the Tribunal had decided the case by following the decision of Hon'ble Kerala High Court in the case of K.Abdu & Co. referred to supra wherein the issue was in relation to Rule 6DD(a) of IT Rules. The issue in the asessec's case is in respect of the payments made under the rules framed by the Government and such payment was required to be made in legal tender. A perusal of the Government Notification issued by the Govt. of West Bengal clearly shows that the dealers are agents of the Government and the payments made are to the Government. It also makes it categorically required that the payment is to be made before lifting of the country spirit. Consequently we are of the view that the issue is squarely covered by the decision of the Coordinate Bench of this Tribunal in the case of M/s.Amrai Pachwai & C.S.Shop referred to supra wherein it has been held as follows :-

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"6. We have considered the rival submissions. At the outset a perusal of the assessment order clearly shows that the AO has recognized the assessee's business in trading of country spirit and country liquor. Copy of Form of Licence issued by Durgapur Municipal Corporation and copy of Form III issued by Department of Excise, Govt. of W.B. were also found at pages 177 and 179 of the assessee's paper book. In any case the validity of licence of the assessee to trade in country spirit and country liquor is not the issue before us. The issue is whether the payments made by the assessee for the purchase of country spirit from the territorial licensee bottling plant, IFB Agro Industries Ltd., City Centre, Durgapur falls within the exemption provided under rule 6DD(b) of the I.T.Rules, 1962. Admittedly, the AO has recognized that the provision of Rule 6DD(b) of the I.T Rules, 1962 is applicable in case of payments made to government directly. This is found in page 2 of the assessment order. A perusal of the Kolkata Gazette Tuesday 20th Sept 2005 shows that the Government of West Bengal, Department of Excise has issued a notification, wherein the warehouse has been identified to mean the warehouse for supply of country spirit to the retail vendors, established at convenient places by the Commissioner at the expense of the State Government, or at the expense of a person to whom the exclusive privilege of supplying or selling country spirit by wholesale has been granted u/s 22 of the Act of a licensed wholesale vendor of country spirit. Further, it has been specifically identified that the authorised representative of the wholesale licensee shall realize the necessary amount of duty, cost price and bottling charge, if there be any, at the prescribed rate and such other imposition, as may be prescribed by law, from the retail vendor to whom the country spirit is to be issued from the concerned warehouse. It is also specifically mentioned in section (2) of the said notification that no retail vendor of country spirit shall deposit duty direct into the local treasury for issue of country spirit to be taken by him from the warehouse concerned which clearly shows that the warehouse is for the supply of the country liquor, specifically, the warehouse is under the direct control and custody of the State Govt. The State Government has closed its doors in so far as the local treasury is concerned and the payment for the purchase of country spirit or country liquor has to be made to the warehouse, run by the government. This shows that any payment made to the warehouse, which is under the direct control of the state government, is a payment made directly to the government. Once, this is accepted then the provisions of Rule 6DD(b) of the I.T Rules, 1962 which clearly spells out that the payment made to the government in legal tender under the rules framed by the Government, is exempted from the rigours of

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section 40A(3) of the Act. Here, it is noticed that the payments made by the assesee for purchase of country spirit and country liquor is to the government as per the notification issued by the government and is in legal tender specified by the notification. In the circumstances, we are of the view that the payment made by the assessee for the purchase of country liquor and country spirit from the territorial licensee bottling plant, IFB Agro Industries Ltd., City Centre, Durgapur is protected by the exemption in terms of Rule 6DD(b) of the 1.T.Rules 1962. In the circumstances, the addition as made by the AO and as confirmed by the Id. CIT(A) by invoking the provisions of section 40A(3) of the I. T.Act 1961 stands deleted.

In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the addition made in the sum of Rs. 64,36,222/- u/s 40A(3) of the Act. Accordingly, the grounds and the additional ground raised by the assessee are allowed.

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