2006 (11) TMI 117 - HC - Income Tax

Revenue appeal allowed; additions of Rs.40,13,000 under s.40A(3) set aside for Rule 6DD(j) errors; Rs.6,98,000 remanded

SMT. HARSHILA CHORDIA Versus INCOME-TAX OFFICER

The HC allowed the revenue appeal, holding the Tribunal erred in sustaining additions of Rs.40,13,000 under s.40A(3) by adopting a hyper-technical view ... Disallowance of deduction from purchases of mopeds/Bajaj Scooters) - payments through bank only - scope of Clause (j) of Rule 6 DD - failed to prove the existence of exceptional and unavoidable circumstances under Rule 6DD - unexplained cash credits in books of accounts of the assessee by the comparative reading of audited and unaudited books of accounts - HELD THAT:- No dispute about genuineness of the transactions and the payment and identity of the receiver are established. The modus operandi of the assessee was accepted by the Tribunal while considering th question of the cash credit that deposit of each receipt of the cash money from its customers separately was not conducive to the type of the business which the assessee was running. Moreover, the assessee and the Principal dealer had stuck a wayout by opening a bank account at Udaipur so that neither the payment to principal dealer is delayed because of the bank middleman nor the assessee wasrequired to deposit every receipt from his customers and then draw a cheque and send it to the principal dealer. The one significant factor which is not disputed and which is found to be correct that the assessee was to receive his supplies from the principal dealer who was situated at Udaipur and thedealing was from buyer to buyer. Therefore, making the prompt payments to dealer, the cash consideration received from end purchaser and getting delivery of vehicles for such purchaser by payment of consideration received from him to principal dealer was the modus operandi. Thus, we are of the opinion that the conclusion reached by the CIT (Appeals) was correct and the Tribunal by ignoring the scope of Clause (j) of Rule 6 DD as explained by the Board's Circular has erred in reversing the finding reached by the CIT (Appeals) on hyper-technical view. We, therefore, allow this appeal and set aside the order of the Tribunal to the extent it sustains the additions of Rs.40,13,000/- under Section 40A (3). Unexplained cash credits in books of accounts of the assessee by the comparative reading of audited and unaudited books of accounts - Tribunal has curiously found that while re-payment of the aforesaid amount after 31.12.1991 would not affect the peak of cash credit but this amount is liable to be considered while considering the assessee's explanation by the assessing officer to whom the issue about the receipt of cash money from the customers and the delivery of the vehicles against such receipts has been remanded back. In our opinion, the two findings are contradictory in terms, if Rs.6,98,000/- could form the part of consideration received from the customers and paid to the dealer M/s. Ganesh Automobiles, it could not form the part of the unexplained cash credit. Therefore, the finding in respect of Rs.6,98,000/- should necessarily depend upon the outcome of the consideration to be made by the ITO in pursuance of the directions issued by the Tribunal and cannot be outrightly rejected at this stage and to that extent the order of the Tribunal is set aside and ultimate decision in that respect would depend on the consideration by the ITO about the issue relating to the unexplained cash credit in the light of the Tribunal's order. Until then no additions in respect of Rs.6,98,000/- or lesser amount can be sustained. Accordingly, while we set aside the Tribunal's order to the extent it sustains additions of Rs.40,13,000/-, we modify the directions of the Tribunal relating to deleting Rs.6,98,000/- as part of the cash credit and hold that it should also be part of consideration by the ITO in respect of other unexplained cash credit unembellished by any observation made in that regard. Issues Involved:1. Justification of the Tribunal's decision to disallow Rs. 40,13,000 under Section 40A(3) of the Income Tax Act.2. Justification of the Tribunal's decision to add Rs. 6,98,000 as peak cash credits.3. Applicability of Section 40A(3) read with Rule 6DD to the purchase of goods, specifically scooters.Detailed Analysis:Issue 1: Justification of the Tribunal's Decision to Disallow Rs. 40,13,000 under Section 40A(3)The Tribunal held that the addition of Rs. 40,13,000 under Section 40A(3) was justified as the payments made by the assessee to M/s. Ganesh Automobiles exceeded Rs. 10,000 and were made in cash instead of through crossed cheques or bank drafts. The Tribunal found that the assessee failed to prove the existence of exceptional and unavoidable circumstances under Rule 6DD that would justify such cash payments. However, the High Court observed that the Tribunal erred by considering the instances in the Circular issued by the Central Board of Direct Taxes (CBDT) as exhaustive. The primary objective of Section 40A(3) was to curb tax evasion and inculcate banking habits. The Tribunal overlooked the genuineness of the transactions and the identity of the payee, which are relevant considerations. The High Court referenced the Supreme Court's judgment in Commercial Tax Officer vs. Swastik Roadways, emphasizing the need for a nexus between the consequence of non-compliance and the object of the provision. The High Court concluded that the Tribunal's decision was incorrect and set aside the addition of Rs. 40,13,000.Issue 2: Justification of the Tribunal's Decision to Add Rs. 6,98,000 as Peak Cash CreditsThe Tribunal found that the addition of Rs. 6,98,000 as peak cash credits was justified based on the facts and circumstances of the case. The Tribunal noted that the assessee received cash from customers for the sale of scooters and made payments to the selling dealer, M/s. Ganesh Automobiles. However, the High Court observed that the Tribunal's findings were contradictory. If the amount of Rs. 6,98,000 was part of the consideration received from customers and paid to the dealer, it could not be considered unexplained cash credit. The High Court held that the issue of Rs. 6,98,000 should be reconsidered by the Income Tax Officer (ITO) in light of the Tribunal's directions regarding unexplained cash credits. The High Court set aside the Tribunal's order on this point and directed the ITO to re-examine the matter.Issue 3: Applicability of Section 40A(3) Read with Rule 6DD to the Purchase of GoodsThe High Court examined whether Section 40A(3) and Rule 6DD applied to the purchase of goods, specifically scooters. The Court noted that Section 40A(3) aimed to prevent tax evasion and promote banking habits by disallowing deductions for cash payments exceeding Rs. 10,000. Rule 6DD provided exceptions for situations where cash payments were unavoidable. The High Court emphasized that the exceptions listed in the CBDT Circular were illustrative, not exhaustive. The Court found that the assessee's transactions were genuine, and the identity of the payee was established. The assessee had opened a bank account to facilitate quick transfers and had given a signed cheque book to the dealer. The High Court concluded that the assessee's case fell within the parameters of Rule 6DD and the CBDT Circular. The Tribunal's restrictive interpretation was incorrect, and the High Court allowed the appeal, setting aside the Tribunal's order regarding the disallowance under Section 40A(3).Conclusion:The High Court allowed the appeal, setting aside the Tribunal's order to the extent it sustained the addition of Rs. 40,13,000 under Section 40A(3). The Court also directed the ITO to reconsider the issue of Rs. 6,98,000 as peak cash credits in light of the Tribunal's directions. The High Court emphasized the need for a liberal interpretation of Rule 6DD and the CBDT Circular, considering the genuineness of transactions and the identity of the payee.