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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & SHRI SIDDHARTHA NAUTIYAL
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre, (in short “NFAC”), Delhi in DIN & Order No. ITBA/NFAC/S/250/2021-22/1035621602(1) vide order dated 16.09.2021 passed for Assessment Year 2013-14.
2. The assessee has taken the following grounds of appeal:-
“1.1 The order passed u/s.250 passed on 16.09.2021 by NFAC, Delhi for A.Y.2013-14 upholding the disallowance u/s.40A(3) of Rs.3,14,600/- is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. NFAC has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned disallowance. 2.1 The Ld. NFAC has grievously erred in law and on facts in confirming the disallowance u/s.40A(3) of Rs.3,14,600/-. The ld. NFAC has failed, to appreciate that when the impugned payments were undoubtedly genuine arid the recipient was identified, the payment made out of cash withdrawal from account with Siddhi Co-
Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 2– operative Bank, the impugned disallowance was wholly unjustified as held in case of Anupam Tele Services. 2.2 That in the facts and circumstances of the case as well as in law, the Ld. NFAC ought not to have upheld disallowance u/s.40A(3) of Rs.3,14,600/- when the identity and genuineness of the purchases was duly proved.”
The brief facts of the case are that in this case the return of income was filed by the assessee on 03.10.2013 declaring total income of Rs.1,15,77,881/- and showing book profit of Rs.1,18,43,439/- under Section 115JB of the I.T. Act. The case was selected for scrutiny through CASS and assessment under Section 143(3) of the Act was completed on 03.03.2016 at assessed income of Rs.1,15,77,881/-. The case was reviewed by the Pr. Commissioner of Income Tax-4, Ahmedabad under Section 263 of the Act and during the course of proceedings, the PCIT observed that in the ledger A/c of business promotion expenses an amount of Rs.3,14,600/- was paid to Panch Ratna Jewellers for purchase of jewellery in cash. The PCIT was of the view that as per the provisions of Section 40A(3) of the I.T. Act, the claim of expenditure of Rs.3,14,600/- to Panch Ratna Jewellers for purchase of jewellery made in cash on 10.09.2012 was not allowable. The PCIT passed order under Section 263 of the Act on 28.03.2019, setting aside the order passed under Section 143(3) of the Act, with a direction to "make a fresh assessment after making proper enquiries and verification about the cash payment of Rs.3,14,600/- on 10.09.2012 to Panch Ratan Jewellers for purchase of jewellery for the purpose of business promotion and claimed in the P&L Account. Pursuant to the direction of the PCIT, the AO issued a notice under Section 142(1) of the Act, in compliance to which the assessee submitted that they had withdrawn Rs.3,14,600/- from bank account held with Siddhi Coop Bank Ltd vide cheque No. 14887 and the said amount was paid in cash to the jeweller as the party insisted for cash payment. The assessee further contended that the seller is a Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 3– genuine one and payment and transaction is also genuine, and therefore, provisions of Section 40(3) are not attracted in its case. Accordingly, the assessee requested to consider this as an exceptional circumstances. The AO did not find the contention in order and disallowed an amount of Rs.3,14,600/- by invoking the provisions of Section 40(3) of the I.T. Act and added the same to the income of the assessee, by observing inter-alia, as under:
“Therefore, the reply of the assessee dated 16.04.2018 has been considered carefully. However, the same is not found to be acceptable. Section 40(3) of the Income Tax Act 1961 provides for disallowance of expenses in respect of which a payment or aggregate of payments is made to a person in a day, otherwise than by an account payee cheque drawn on bank or account payee bank draft, exceeds Rs.20,000/- and Section 40A(3A) provides for the payment in excess of Rs. 20,000/- in a day made otherwise than account payee cheque or account payee bank draft, for an allowance made in the assessment for any year on the basis of incurred liability, to be treated as income of the year in which such payment is made. Rule 6DD of the Income Tax Rules, 1962 provides the cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by, a crossed bank draft. No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed cheque in the cases and circumstances specified in Rule 6DD. 4.4. The contention of the assessee, that provisions of Section 40A (3) of the Act are not applicable in respect of payment made in cash where payee insisted for cash payment is not acceptable. It may be mentioned that the provisions of section 40(3) were brought on the Statute by Finance Act to meet this kind of situation. The very purpose of the section is to discourage such transaction and parallel economy. Again, nowhere in the act, it is mentioned that if the source of the cash is proved then no disallowances need to be made. Whatever be the exceptions are already mentioned in the act. Thus the contention of the assessee is futile and not acceptable. 4.5. Further, in the case of Attar Singh Gurumukhi Singh V/s Income Tax Officer 191 /TR 667(SC) Hon'ble Supreme Court of India has observed that section 40(3) and Rule 6DD are intended to regulate the business transactions to prevent the use of unaccounted money or reduce the chance to use black money for business transactions. Again, the assessee has also relied upon some of the decisions but in view of the observation by the Hon’ble Apex court of the country the same are not applicable in the instant case. 4.6. Therefore, in the light of the above discussion, legal position and the facts and circumstances of the case, the business promotion expenses to the tune of Rs.
Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 4–
3,14,600/- is not allowable U/s 40(3) of the Act. Accordingly, an amount of Rs. 3, 14,600/- is disallowed and added back to the income of the assessee.
4. Aggrieved with the reassessment order, the assessee preferred appeal before Ld. CIT(Appeals). During the course of appellate proceedings, in spite of affording opportunities of hearing, the appellant failed to file any explanation / justification in the matter. Accordingly, Ld. CIT(Appeals) dismissed the appeal of the assessee with the following observations:
“Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction. Section 40A(3) of the I T Act is an anti-tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion. Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book, To overcome the splitting of payments to the same person/party made during a day and to increase the efficacy of the provision, an amendment was made through Finance act 2008 and after 01.04.2008, where 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 twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be. EXCEPTION TO ABOVE PROVISION: The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.
Payment to Specified payee Rule 6DD(a)- Where the payment is made to (i) Reserve Bank of India or any banking company as defined in section 5(c) of Banking Regulation Act, 1949; (ii) State Bank of India or any subsidiary bank as defined in section 2 of SBI (Subsidiary Banks) Act, 1959; (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949; (v) Life Insurance Corporation of India.
Payment to Government Rule 6DD(b)- Where payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender.
Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 5–
3. Payment by certain modes Rule 6DD(c) - Where the payment is made by (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank, (iv) a bill of exchange made payable only to a bank; (v) the use of electronic clearing system through a bank account; (vi) a credit card; (vii) a debit card Note: "Bank" means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.
Adjustment in books Rule 6DD(d)- Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee. 5. Purchase of certain products; Rule 6DD(e):Where the payment is made for the purchase of – (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins)***** or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products, 6. Cottage industry Rule 6DD(f)- Where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products. 7. No bank service Rule 6DD(g) - Where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town. 8. Terminal benefit to employee - Rule 6DD(h) Where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50,000. 9. Temporary posting of employee - Rule 6DD(i) Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary as per section 192, and when such employee
Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 6– (i) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and (ii) does not maintain any account in any bank at such place or ship.
10. Bank closed - Rule 6DD(j) Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.
Payment to agent Rule 6DD(k)-Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.
Foreign currency Rule 6DD(i)- Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. On perusal of the facts of the case vis-a-vis the Provisions of Section 40A(3) of the Act and exceptions provided vide Rule 6DD of the I T Rules, it is crystal clear that the reason for cash payment offered by the appellant that the party insisted on cash payment, nowhere falls in the exceptions provided in Rule 6DD of the I T Rules. Provisions of Section 40A (3) were brought on the statute by the Finance Act lo discourage such transactions and parallel economy. In the Income Tax Act, it is nowhere mentioned that if the source of cash is proved, no disallowance need to be made. The exceptions where the provisions of Sec 40A(3) of the Act are not attracted, are clearly specified and mentioned in Rule 6DD of I T Rules and payment of cash where party insists for cash payment nowhere falls under these exceptions. It is statutorily provided in the Income Tax Act, that in case where 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 twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be. In view of the above discussion, the disallowance made by the AO is upheld arid this ground of appeal
is dismissed.”
5. The assessee is in appeal before us against the above order passed by Ld. CIT(Appeals).
Before us, the Counsel for the assessee drew our attention to the relevant pages of the paper book filed by the assessee and submitted that in instant facts, there is no doubt that the payments in question are genuine and further, the payments were made in cash only for the reason the Jewellers insisted on cash payment. Further, the source of cash payment was out of Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 7– withdrawals made from the bank account. The assessee please Reliance the case of Anupam Tele Services 43 taxmann.com 199 (Gujarat), where the High Court held that where principal company insisted that on payment by cheque, supply would be delayed, cash payment made by agent in bank account of principal had to be allowed. Besides the above, the counsel for the assessee also placed reliance on several other judicial precedents in support of it’s contention.
In response, DR placed Reliance on the Supreme Court decision in the case of Attar Singh vs. ITO 59 Taxman 11 (SC) which is a landmark case on this issue. It was submitted by the DR that the assessee had failed to prove any business expediency as to why the payments were made in cash. In every case, the assessee would submit that the seller had insisted on cash payment, and if disallowance under Section 40A(3) of the Act is vacated on this basis, this would defeat the very purpose for introduction of Section 40A(3) of the Act. Further, it was submitted that the fact that the source of such cash payments is explained cannot be a criterion for allowing payments in cash and striking down the applicability of Section 40A(3) of the Act.
We have heard the arrival contentions and perused the material record. In our considered view, the issue is directly covered by the decision of Hon’ble Supreme Court in the case of Attar Singh (supra), wherein the Supreme Court made the following relevant observations:
“Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the 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 on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed
Sangath Infrastructures Pvt. Ltd. vs. DCIT Asst.Year –2013-14 - 8– sources. The terms of section 40A(3 ) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.”
Further, in the instant case, admittedly the case of the assessee does not fall in any of the Exceptions provided Section 40A(3) of the Act. Further, the assessee has also not demonstrated any business expediency as to why the payments were made in cash. The explanation given by the assessee that the seller insisted on cash payment is a very general explanation and the same cannot be accepted, since this would defeat the very purpose of introduction of Section 40A(3) of the Act. Further, the argument that the source of the cash payment has been explained by the assessee is not a valid ground for not invoking the provisions of Section 40A(3) of the Act. Accordingly, we find no infirmity in the order of CIT so as to call for any interference.
In the result, the appeal of the assessee is dismissed. This Order pronounced in Open Court on 15/02/2024