INCOME TAX OFFICER, WARD-1(3), MYSORE vs. SRI K S HARISH,, MYSORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ B ’ BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. No.1114/Bang/2014 (Assessment Year : 2008-09) Income Tax Officer, Ward 1(3), Mysore. …. Appellant. Vs. Shri K.S. Harish, Prop. M/s. Ganesh Trading Company, Mysore Hassan Road, K.R. Nagar, Mysore District. ….. Respondent. PAN ABVPH 2974G Appellant By : Shri P.K. Srihari, Addl. CIT (D.R.) Respondent By : Shri Narendra Sharma, Adv. Date of Hearing : 23.12.2014. Date of Pronouncement : 9.1.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals), Mysore dt.28.5.2014 for Assessment Year 2008-09. 2. The facts of the case, briefly, are as under :- 2.1 The assessee, a trader in FMCG items like tea, biscuits, detergents, agarbattis, sale of beedies on commission, etc., filed his return of income for Assessment Year 2008-09 on 29.9.2008 declaring total income of Rs.1,33,020. The case was taken up for scrutiny and the

2 ITA No.1114/Bang/2014 assessment was completed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dt.20.12.2010, wherein the income of the assessee was determined at Rs.12,24,633 as against the returned income of Rs.1,33,020 in view of the following additions / disallowances thereto :- (i) U/s.40A(3) : Rs.10,68,694 (ii) U/s. 43B : Rs.479. (iii) Disallowance u/s.36(1)(iii) : Rs.22,440. 2.2 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.20.12.2010, the assessee preferred an appeal before the CIT (Appeals), Mysore. The learned CIT (Appeals) disposed off the assessee's appeal by the impugned order dt.28.5.2014 allowing the assessee partial relief; i.e. by deleting the disallowance u/s. 40A(3) of the Act and confirming the disallowance u/s.36(1)(iii) of the Act amounting to Rs.22,440. 3.1 Revenue is aggrieved by the order of the CIT (Appeals), Mysore dt.28.5.2014 and has preferred this appeal, raising the following grounds :- “1. In the facts and in the circumstances of the case, the CIT (Appeals) erred in deleting addition under section 40A(3) made by the Assessing Officer relying upon the decision of ITAT, Bangalore, in the case of Sri Renukeshwara Rice Mills Vs. ITO which was rendered after analyzing the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO 191 ITR 667 that was rendered when Rule 6DD(j) allowed business expediency, that was in statute, which is not the case for Assessment Year 2008-09. 2. The CIT (Appeals) further erred in deleting the addition overlooking Revenue favourable decisions of the Hon'ble High Court of Madras in the case of CIT Vs. Venkatadhri Constructions 255 CTR 385 (Mad) and Hon'ble Kerala High Court in the case of CIT Vs. K. Abdu & Co. 170 Taxmann 297. 3. The CIT (Appeals) further erred in appreciating the fact that though some of the payments were made through cheque to the supplier (Akshay Industries) and all payments

3 ITA No.1114/Bang/2014 made to other suppliers were also through cheques, the assessee resorted cash payments, that too, to the tune of Rs.10,68,694, totally ignoring the provisions of section 40A(3). 4. For these and such other grounds that may be urged at the time of hearing, the order of the CIT (Appeals) be set aside and that of the Assessing Officer confirmed.” 3.2 The only issue for our consideration and adjudication is the disallowance u/s.40A(3). The Assessing Officer observed that the assessee has made cash payments in excess of Rs.20,000 on various dates to M/s. Akshay Industries of Bangalore for purchase of goods and that the total of such cash payments during the period under consideration was Rs.10,68,694. In this regard, the Assessing Officer issued a show cause notice to the assessee as to why the disallowance u/s.40A(3) of the Act @ 100% of such expenditure, should not be made. In reply thereto, the assessee submitted that he had not made cash payments to M/s. Akshay Industries. It was submitted that he has remitted the money directly into the bank account of the supplier on various dates in SBI at K.R. Nagara for on line remittance to the parties account at SBI, Bangalore, on the instance of the payee and for immediate business purposes and therefore the above payments would not fall within the ambit of the provisions of section 40A(3) of the Act. It was submitted that these were not payments in cash, but payments into bank account. In support of its contentions, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Sri Renukeswara Rice Mills V ITO in ITA No.1102/Bang/2002, reported in 287 ITR 66 and the decision of Hon'ble Apex Court in the case of Attar Singh Gurumukh Singh V ITO (191 ITR 667). The Assessing Officer however rejected the assessee's contentions. The Assessing Officer was of the view that the decision of the Hon'ble Apex Court was rendered in relation to section 40A(3) and since Rule 6DD(j) for the

4 ITA No.1114/Bang/2014 relevant year, does not employ the same factors and has undergone changes, the decisions relied upon by the assessee are not applicable. In this view of the matter, the Assessing Officer made the disallowance of Rs.10,68,694 on account of payments made to M/s. Akshay Industries, Bangalore u/s.40A(3) of the Act. 3.3 On appeal, the learned CIT (Appeals) deleted the disallowance and allowed the payments of Rs.10,68,694 made to M/s. Akshay Industries, Bangalore following the decision of the co- ordinate bench of this Tribunal in the case of Sri Renukeshwara Rice Mills (supra), holding as under at paras 5.1 and 5.2 of his order : “5.1 I have considered the arguments carefully. The crux of the issue in this case is whether, the provisions of section 40A(3) applies to a case where the payment is made in cash directly into the bank account of the payee. It is cited by the Assessing Officer, Rule 6DD(j) is deleted w.e.f. 1.4.96. However, the decision of the Hon'ble ITAT, Bangalore in the case of Sri Renukeshwara Rice Mills cited supra is pertaining to Assessment Year 1998-99 which is subsequent to the amendment. Hon'ble ITAT relied on the ratio laid down by Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO 191 ITR 667 at page 672 and 673 and gave the findings. ; the relevant portion of the order of the Hon'ble ITAT is as follows : “We have carefully considered rival submissions and relevant facts of the case. Hon'ble Supreme Court while, interpreting the provisions of section 40A(3) in the case of Attar Singh Gurumukh Singh V. ITO 191 ITR 667 at page 672 and 673 held thus - “ Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD. This section must be read along with the Rule 6DD and if read together it is clear that the provisions of the section are not intended to restrict the business activities. It only empowers the assessing officer to disallow the deductions claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The same is insisted only to enable the assessing authority to ascertain whether it was out of the income from disclosed sources and even the terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded, since it is open to the assessee to furnish the circumstances under which the payment was not practicable or would have caused genuine difficulty to the payee. 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

5 ITA No.1114/Bang/2014 specified under the rule. Thus section 40A(3)and Rule 6DD are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chance to use black money for business transactions. Moreover while interpreting a taxing statute the Court cannot be oblivious of the proliferation of black money which is in circulation in our country- Thus any restraint intended to use or create black should not be regarded as curtailing the freedom of trade or business. The Hon'ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted tht section 40A(3) is intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of block money for business transactions. In the present case, it is seen that the assessee for purchase of rice, paid the amount directly to the bank account of the payee. The effect of issue of crossed cheque/DD is that the payee named therein receives the payment through banking channels. The purpose is dual. In the first instance it is to see that the payee and payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transaction. In the case before us, it is seen that instead of issuing cheque / DD the assessee prepared a challan and along with the cash the challan was presented to the bank of the payee for the credit of the same in the account of payee. In the result it is ensured that the payee and payee alone receives the payment and the origin and conclusion of transaction is traceable. Thus payment of sum directly in the bank account of payee fulfils the criteria for ensuring the object of introduction of section 40A(3). This is not a direct payment to the payee but only to the credit of this bank account without the payee actually receiving the cash. We accordingly hold that such payment is not in violation of provisions of section 40A(3)and hence no disallowance is called for.” 5.2 From the above, it is clear that the decision of Hon'ble ITAT, Bangalore is that in a case where instead of issuing cheque / DD, if the assessee paid cash into the bank account of payee for the credit of the same in the account of the payee, the result is that it is ensured that the payee and the payee along receives the payment and the origin and conclusion of transaction is traceable. Thus, payment of amounts directly into the bank account of the payee fulfils the criteria for ensuring the object of section 40A(3). This is not a direct payment to the payee but, only to the credit of his bank account without the payee actually receiving the cash. The facts are identical with that of the case of the appellant. Under the given set of facts, it is held by Hon'ble Tribunal that such payments are not in violation of the section 40A(3) and hence no disallowance on such payments are called for under the section. Once the payments are not attracted by the provisions of section 40A(3), THE EXEMPTIONS CITED IN Rule 6DD are not relevant. Hence, respectfully following the decisions of jurisdictional Hon'ble ITAT, which is binding, I hold that these payments into the direct credit of payees account are not covered under section 40A(3) and hence A.O. is directed to delete the addition on this count.”

6 ITA No.1114/Bang/2014

3.4 The learned Departmental Representative was heard in support of the grounds raised. The learned Departmental Representative supported the findings in the order of the Assessing Officer on the issue of disallowance u/s.40A(3) of the Act. The learned Departmental Representative assailed the impugned order of the learned CIT (Appeals) in deleting the disallowance by relying upon the decision of the co-ordinate bench of ITAT, Bangalore, which was rendered after analyzing the decision of the Hon'ble Apex Court in the case of Attar Singh Gurumukh Singh (supra), rendered when Rule 6DD(j) allowed business expediency, that is not relevant for Assessment Year 2008-09. The learned Departmental Representative, inter alia, also placed reliance on the decision of the Hon'ble Madras High Court in the case of CIT V Venkatadhri Constructions (225 CTR 385) (Mad) wherein it was held that cash paid through bank account does not fall under the exceptions laid down u/R 6DD of the IT Rules, 1962 and the provisions of section 40A(3) are applicable to such payments. 3.5 Per contra, the learned Authorised Representative of the assessee supported the finding of the learned CIT (Appeals) in the impugned order deleting the disallowance u/s.40A(3) of the Act. Apart from this, the learned Authorised Representative brought to our notice the decision of a co-ordinate bench of this tribunal in the case of ITO, Ward 1(1), Mysore V Shri Y.Subramanya in ITA No.1606/Bang/2013 dt.10.12.2014, wherein on similar facts, as in the case on hand, the Tribunal after considering the decisions in the cases of Attar Singh Gurumukh Singh (supra), Sri Renukeshwara Rice Mills (supra) and Venkatadhri Constructions (supra), confirmed the deletion of the disallowance made u/s. 40A(3) made by the Assessing Officer.

7 ITA No.1114/Bang/2014 The learned Authorised Representative submitted that since the issue in question has been decided in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the case of Y.Subramanya (supra) on similar facts, the order of the learned CIT (Appeals) ought to be confirmed and consequently the appeal of revenue dismissed. 3.6.1 We have heard the rival contentions at length and perused and carefully considered the material on record; including the judicial decisions cited by the parties. The issue for consideration before us is, whether the provisions of section 40A(3) of the Act applies to a case where the payments are made in cash directly into the bank account of the payee. In the case on hand, the assessee made cash payments for purchases of various items directly into the bank at SBI, K.R. Nagara Branch for on line transmission to the SBI, Bangalore account of the payee M/s. Akshay Industries, Bangalore on the insistence of the payee and for business convenience. This ensures that the payee alone receives the payment and the origin and conclusion of the transaction was traceable. We find that on similar facts, as submitted by the learned Authorised Representative, a co-ordinate bench of this Tribunal in the case of Shri Y. Subramanya (supra) has considered the similar issue and the judicial decisions cited by both parties and deleted the disallowance under section 40A(3) of the Act, holding as under at para 5 of its order :- 5. Having regard to the rival contentions and also the material on record, we find that the assessee has made payments for purchase of edible oil by way of deposit of the amount in cash directly into bank account of the payee through pay-in challan and thus it is the contention of the assessee that direct remittance to bank account amounts to bank transactions and not cash transactions. The Hon’ble Madras High Court in the case of Venkatadhri Constructions (cited supra) was dealing with a case of an assessee who had made cash payment exceeding Rs.10,000/- by remitting it to

8 ITA No.1114/Bang/2014 the account of the payee and the Hon’ble Madras High Court held that it would not be a ground to accept the case of the assessee that sec.40A(3) of the Act will not be applicable. It was held that the assessee therein had not brought out any exceptional circumstances for remitting the amount to the credit of the payee’s account. On perusal of the said judgment, we find that the decision of the Hon’ble Supreme Court in the case of Attar Singh Gurumukh Singh (cited supra) was not brought to the notice of the Hon’ble Madras High Court. In the case before the Hon’ble Supreme Court, the assessee therein had made payments exceeding Rs.2,500/- (which was the prescribed limit for the relevant assessment year therein) in cash and on the disallowance made u/s 40A(3) read with rule 6DD of the Act, the Hon’ble Supreme Court observed that the terms of sec.40A(3) are not absolute and consideration of business expediency and other relevant factors are not excluded. It was further held that genuine and bonafide transactions are not taken out of the sweep of the section and it is open to the assessee to furnish to the satisfaction of the AO, the circumstances under which the payments in the manner prescribed in sec.40A(3) was not practicable or would have caused genuine difficulty to the payee and that it is also open to the assessee to identify the person who has received cash payment. It was further held that rule 6DD provides that the assessee can be exempted from the requirement of payment by a crossed cheque or a crossed bank draft in the circumstances specified therein. This decision was taken note of by the co-ordinate Bench of this Tribunal in the case of Sri Renukeswara Rice Mills (cited supra) wherein the assessee had purchased rice from the regional market yard and made payment directly into the bank account of the concerned agent by depositing cash under a challan to ensure that payee alone receives payment and origin and conclusion of transaction was traceable. The Tribunal, after considering the decision of the Hon’ble Supreme Court in the case of Attar Singh Gurumukh Singh (cited supra) has observed that where assessee prepared a challan and along with the cash the challan was presented to the bank of the payee for the credit of the payee it ensured that the payee and payee alone receives the payments and both the origin and conclusion of the transaction is traceable thereby fulfils the criteria for ensuring the object of introduction of sec.40A(3) of the Act. It was thus held that it is not a direct payment to the payee but only to the credit of his bank account without the payee actually receiving the cash and therefore there was no violation of the provisions of sec.40A(3) and hence no disallowance is called for. From the above cited three judgments, we find that the decision of the Hon’ble Supreme Court in the case of Attar Singh Gurumukh Singh (cited supra) has not been considered by the Hon’ble Madras High Court, whereas it has been taken note of by the Tribunal in the case of Sri Renukeswara Rice Mills (cited supra). As held by the Hon’ble Supreme Court, genuine and bonafide transactions are not taken out of the sweep of sec.40A(3) of the Act itself irrespective of the provisions of rule 6DD of the IT Rules. In the case before us, the purchases and sales of the assessee have not been doubted by the AO and the payment made for such purchases are sought to be disallowed u/s 40A(3) on the ground that they are made in cash. However, as rightly pointed out by the CIT(A), the assessee has not made payment in cash to the payee but has made payment to the bank account of the payee through a challan on the insistence of the payee and for its immediate business purposes. Therefore the

9 ITA No.1114/Bang/2014 genuineness of the transaction and the identity of the recipient are clearly established and the assessee has also explained the business expediency for such payments in its statement of facts before the CIT(A) which is reproduced by the CIT(A) in his order at page 5, para 6(4.3) . Further the Hon’ble Karnataka High Court in the case of Vijaykumar Patil & others (151 ITR 48) has held that the decision of the non-jurisdictional High Court is only persuasive and is not binding on the subordinate judiciary of another High Court. Therefore, though there is no decision contrary to the decision of the Hon’ble Madras High Court in the case of Venkatadhri Constructions (cited supra), we find that in the said case, the assessee had not given any exceptional circumstances for remitting the amount to the credit of payee’s account, whereas in the case before us, the assessee has explained the business expediency for remittance in payee’s bank account and further the payer and payee were at two different locations, and therefore the facts of the case before us are similar to the case of Sri Renukeswara Rice Mills (supra) which has followed the decision of the Hon’ble Supreme Court in the case of Attar Singh Gurumukh Singh (cited supra). Therefore, we are inclined to follow the decision of the co-ordinate bench of the Tribunal in the case of Sri Renukeswara Rice Mills (cited supra). As the order of the CIT(A) is in consonance with the decision of the Tribunal, we see no reason to interfere with the order of the CIT(A).” 3.6.2 Following the aforesaid decisions of the co-ordinate benches of this Tribunal in the cases of Sri Renukeshwara Rice Mills (supra) and Shri Y. Subramanya (supra), we find no reason to interfere with the impugned order of the learned CIT (Appeals) in deleting the disallowance u/s.40A(3) of the Act. Consequently, the grounds raised at S.Nos.1 to 4 by revenue are dismissed. 4. In the result, revenue’s appeal is dismissed. Order pronounced in the open court on 9th Jan., 2015.

Sd/- Sd/- (P. MADHAVI DEVI) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp