2014 (11) TMI 559

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....s not attracted. 2. Assessee is an arrack contractor and arrack was distributed by the Government of Karnataka for sale in bottled format. The Karnataka Government has appointed bottlers for this purpose and the asseessee was required to collect the arrack duly filled in bottles for onward sale. The assessee incurred an expenditure of Rs. 50,86,307/- towards bottling charges. He paid the said amount by cash. When the same was noticed in a search conducted under Section 132 of the Act, he was asked to show cause as to why the said amount should not be disallowed as the payment of cash was in contravention of Section 40A(3) of the Income Tax Act. His reply was that the cash payments were made only whenever the managing partner was not avai....

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.... of the payee. Under Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967, no liquor shall be sold except for cash and it appears that this would apply even in respect of bottling charges paid to the licencees. Therefore, he was of the view that the circumstances narrated clearly indicate that the provisions of Section 40A(3) are not applicable in the assessee's case as the case is covered by Rule 6DD(j) and therefore, disallowance was set aside. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal held that Rule 14 of the Rules permits cash transactions in regard to arrack trade between the government and persons like the assessee. When the supplier insisted on payment of cash in t....

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....sisted on cash payments which explanation is not covered under Rule 6DD(j) of the Rules?" 4. Section 40A(3) of the Income Tax Act reads as under:-            "Where the assessee incurs any expenditure in respect of which 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, no deduction shall be allowed in respect of such expenditure." 5. Rule 6DD(a) and (j) of Income Tax Rules, 1962 reads as under:-     "6DD. (a) where the payment is made to-     (i) the Reserve Bank of India or any banking company as defined in clause (c....

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....on Ltd., Trivandrum;     (xiii) the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay;     (xiv) the Punjab State Industrial Development Corporation Ltd., Chandigarh;     (xv) the National Industrial Development Corporation Ltd., New Delhi;     (xvi) the Mysore State Industrial Investment and Development Corporation Ltd., Bangalore;     (xvii) the Haryana State Industrial Development Corporation Ltd., Chandigarh;     (xviii) any State Financial Corporation established under section 3 of the State Financial Corporations Act, 1951 (63 of 1951);     6DD(j) in any other case, where the assessee sati....

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....evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and the identity of the payee, then the said amount shall be treated as a valid expenditure and Section 40A(3) is not attracted. 7. In the instant case, to fall within that exception, the assessee relies on Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967. Section 2 of the said rules explicitly makes it clear that the said rules applies to all the licences issued under the Karnataka Excise Act, 1965 for sale of liquors and every such licence shall be deemed to include the conditions prescribed by these rules as general conditions. In other words, the said rules applies to the sale effected by assessee who has a licence to s....