SOHAIL AZHAR,KOLKATA vs. ITO, WARD - 32(2), KOLKATA, KOLKATA

SHRI M.BALAGANESH, AM This appeal of the assessee arises out of the order of the Learned CIT(A), XIX, Kolkata in Appeal No. 133/CIT(A)-XIX/ITO, Wd.32(2)/Kol/10-11 dated 19/09/2011 for the assessment year 2008-09 against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.1. The brief facts of this issue are that the assessee is engaged in the business of export of finished leather in the name of his proprietorship concern styled as M/s. Aleena Exports, During the course of assessment proceedings the ld.AO observed that the assessee has maintained saving bank account vide account no. 429203 with ABN Amro Bank, 7 Azimganj House, 3-5, Camac Street, Kolkata. The ld. AO also found that the transactions in this bank account have not been disclosed by the assessee in his regular books of account. He found that the total deposit of Rs.35,83,500/- has been deposited in cash in the said bank account and withdrawals thereon are made by cheques. The assessee when confronted with the said bank account replied that the said bank account was not part of his business account. Hence, the same was not disclosed in the return and further prayed for adoption of peak credit balance in the said bank account to be taxed as his income. The ld.AO found that since no withdrawals were made by cash from the said bank account, subsequent cash deposits could not be explained by previous cash withdrawals and rejected the theory of peak credit balance and brought to tax the entire cash deposits of Rs.35,83,500/-. On 1st appeal, the ld. CIT(A) has upheld the addition made by the AO. Aggrieved, the assesee is in appeal before us on the following modified ground:- 1) That the AO as well as the Ld. C!T(A) failed to properly analyze the credit & debit in the Bank A/c No.429203 with ABN Amro Bank (presently named as Royal Bank of Scotland N.V). The entire cash deposit of Rs.35,83,500/- has been added without considering the fact that all withdrawals are made by A/c payee cheques and are related to payments for purchase of leather. The sources of such deposits are sale proceeds of leather goods in cash in the open market. The AO has himself accepted this fact subsequently in the order dt.20.03.2013 passed u/s 143(3)/147 for the Asst. Year 2007-08. As such, only rate of profit need to be applied on the out of books sales as reflected in the said bank A/c and the balance of the addition need to be deleted.

2.2. The Learned AR argued that the cash deposits represent sale proceeds of leather and cheque withdrawals made thereon are towards purchase of leather. He argued that the said bank account maintained with said ABN Amro Bank by the assessee was opened in the assessment year 2007-08. The assessment for the assessment year 2007-08 has been re-opened by the ld.AO to consider the transactions in the subject mentioned bank account (i.e ABN Amro Bank) and the re-assessment for the assessment year 2007-08 has been completed by the ld.AO u/s. 143(3) r.w.s 147 of the Act dated 20-03-2013. In the said re-assessment, the ld.AO had agreed the entire cash deposits being sales proceeds of leather arising out of local sales and cheque withdrawals made thereon towards local purchase of leather and assessed only profit derived thereon amounting to Rs. 43,754/- as against total cash deposits of Rs. 74,41,000/-. The ld.AR placed his reliance on the said re- assessment order passed for the assessment year 2007-08 and prayed for adoption of the same for the assessment year under appeal also as admittedly the ld.AO himself states that the assessee has got no other sources of income. In response to this, the ld. DR vehemently opposed the arguments of the ld.AR that the contention of source of cash deposit emanating out of local sales of leather was never taken before the lower authorities. The ld.AR for the assessee further argued that the decision taken by the ld.AO for the earlier assessment year i.e. 2007-08 does not have any bearing on the assessment year under appeal. Accordingly, he prayed before us for non-interference in the orders of the lower authorities.

2.3. We have heard the rival submissions and perused the material available on record including the paper book filed by the assessee. We find that the undisclosed bank account of the assessee as maintained by the assessee with said ABN Amro Bank containing cash deposits of Rs.35,83,500/- and cheque deposit of Rs.86,455/-. We also find that the entire withdrawals from the said bank account are made by cheques. We also find that the said bank account has been re-opened in the assessment year 2007-08 and total cash deposits of Rs.74,41,000/- were made in the assessment year 2007-08, which has been accepted being sale proceeds arising out of local business of leather and withdrawals thereon towards local purchase of leather. We find that the situation is the same in the assessment year under appeal also. It is not the case of the ld.AO that withdrawals from the said bank account have been made for any other investments made by the assessee. However, we find lot of force in the arguments of the ld.DR that the argument of the ld.AR that cash deposits are nothing but the sale proceeds arising out of sale of leather from the local market have been raised for the first time before us. Admittedly, the assessee has stated before the lower authorities that cash deposits are not arising out of business receipts of the assessee. At the same time, we find no evidence that is brought on record that the assessee has indeed got any other business activity during the assessment year under appeal. In these circumstances, we deem it fit and appropriate in the interest of justice and fair play to set aside this issue to the file of the ld.AO, to decide the same in the light of re-assessment order passed for the assessment year 2007-08. If the source of cash deposits are accepted to be sale proceeds arising out of leather business in the local market and subsequent withdrawals thereon being purchases of leather for local market, then it is obvious only the profit should be brought to tax in the hands of the assessee. This issue requires further examination by the ld.AO. However, the assessee is at liberty to file further evidences/documents , if any, in support of his contentions before the ld.AO in the set aside proceedings. Accordingly, the Ground no.1 of assessee’s appeal is allowed for statistical purpose.

3.1. The brief facts of this issue is that the assessee has made the payments to various suppliers for purchase of finished leather in modes otherwise than crossed cheques or bank drafts. Admittedly, the assessee made the payments to the suppliers by way of bearer cheques in excess of Rs. 20,000/-. Details of which are mentioned in page 2 of the ld.AO. It was explained before the ld.AO that the assessee had made the payments by cash cheques being bearer cheques to one supplier, who in turn used to distribute the monies to other suppliers. The ld.AO found that there is no evidence that has been brought on record by the assessee for distribution of monies to other suppliers. He disallowed the entire payment of Rs.14,06,000/- as violation of section 40A(3) of the Act. in the assessment. On 1st appeal, the ld.CIT(A) has upheld the impugned addition of the ld.AO. Aggrieved, the assessee is in appeal before us on the following ground:-

2) That the Ld. CIT(A) erred in confirming disallowance of Rs.14,06,000/- u/s 40A(3) of the Income Tax Act/ 1961 without appreciating the fact that the same comprises of the payments to various suppliers against purchases made by the assessee. The disallowance so made & confirmed by the Ld. CIT(A) is wrong & need to be deleted.

3.3. The Learned AR reiterated the submissions made before the lower authorities and further argued that in the instant case the parties/suppliers have been identified. Hence, there is no effective violation of section 40A(3). Accordingly, he prayed before us for deletion of disallowance made by the ld.AO. In response to this, the ld.DR vehemently supported the orders of the lower authorities.

3.4. We have heard the rival submissions and perused the material available on record including the details of paper book filed by the assessee containing the cash book and ledger account of the assessee of various parties/suppliers to whom cash payments were made by the assessee. The facts in the instant case remain undisputed and hence the same are not reiterated herein for the sake of brevity. We find that though the assessee has made the payments in excess of Rs. 20,000/- by bearer cheques, the provisions of section 40A(3) of the Act as applicable for A.Y 2007-08 is reproduced herein below for the convenience:- (3) (a) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure ; (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 by 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.

3.5 We find that section 40A(3) has to be read together with exceptions in rule 6DD of the I.T Rules, 1962. One of the exceptions in clause (e) of Rule 6DD says that if the payment is made for the purchase of the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or…………… to the cultivator, grower or producer of such articles, produce or products. Thus, we deem it fit and appropriate to set aside this issue to the file of the ld.AO to examine the impugned issue and give a categorical finding that whether the subject mentioned payments made by the assessee falls under the exception/clause provided in Rule 6DD of the I.T Rules. Accordingly, ground no.2 raised by the assessee is allowed for statistical purpose.