TaxTMI 
TaxTMI 
2011 (10) TMI 639
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....converted into residential and commercial purpose by obtaining approval from Jaipur Development Authority in accordance with provisions of Rajasthan Land Revenue and JDA. The assessee divided the land in plots of various sizes and carries various developmental activities like roads, water facility, electric facility as per norms of JDA. The assessee sells plots directly or through broker to the customers. The assessee is also engaged in selling of plots on commission basis in respect of lands, which is owned by another person, but the assessee enters into contract to develop it in all respect, sale it on its own on the agreed price and earning commission on sale consideration as per pre-determined rates as per agreement. 6. The assessee filed its return of income for both the years and both the years were selected for scrutiny. During the assessment proceedings, the AO noticed that assessee has made cash payments to farmers in villages from whom the lands shown to have been purchased. The AO also noted that to some farmers the payments were made by cheque also. However, on returning the cheques, cash payments were made. Such cash payments were noticed by the AO at Rs. 1,47,85,55....
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....e after banking hours. Therefore, this explanation was also rejected by the AO. In view of these facts and circumstances, the AO made an addition @ 20% of such cash payments made by the assessee to the seller farmers under section 40A(3) for both the years respectively. The figure of disallowance has been mentioned somewhere above in this order. 8. Assessee preferred appeal before ld. CIT (A). Detailed submissions were filed before him which are discussed by ld. CIT (A) at pages 4 & 5 of his order for assessment year 2006-07 and at pages 4 to 7 for assessment year 2007-08. Thereafter the ld. CIT (A) by observing his observations at pages 5 & 6 for assessment year 2006-07 confirmed the finding of the AO, as under :- "Contention of the AR is considered. Most of the arguments taken by the A/R are the same as taken before the AO. The AO has considered all the arguments placed before him and rejected it before invoking provisions of Section 40A(3). The assessment order is a reasoned one and therefore the action of the AO is approved. Sh. Gyan Chand Agarwal, MD, has not acted as an agent but as a director. No evidence could be produced by the appellant that Sh. Gyan Chand Agarwal h....
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....dition of Rs. 29,57,110/- made by the AO is hereby confirmed. First ground of appeal is thus decided against the appellant." 9. Similarly, the ld. CIT (A) rejected the contention of the assessee for assessment year 2007-08 and confirmed the action of the AO. 10. Now assessee is in appeal here before us for both the years. 11. Detailed arguments have been advanced by ld. A/R. Written submissions were also filed which are placed on record. Attention of the Bench was drawn on pages 97 to 108 of the paper book where confirmed copy of voucher for making cash payments are placed on record and therein it has been mentioned that cash payments have been made after banking hours. However, the AO has not accepted this explanation which was filed with supporting evidence. Further reliance was placed on various case laws mentioned in the written submission. 12. On the other hand, ld. D/R, firstly placed reliance on the orders of the AO and ld. CIT (A). It was further submitted that provisions of section 40A(3) are very clear by which it has been provided that if cash payments have been made then disallowance @ 20% will be made. The AO has considered all the explanation filed ....
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....asmuch as, the company cannot act in its own person but has only to act through directors who, qua the company, have the relationship of an agent to its capacity. S.No. Name of person Date of Payment Amount Payment made Against 1. Gopal Lal Gupta 10.08.2005 44000.00 Land at Bhankarota 2. Vinod Gupta 10.08.2005 44000.00 Land at Bhankarota The ld. AO held that the plea of the assessee that its Managing Director was acting as an agent is after thought and to save the assessee from rigor of section 40A(3). In fact, the AO rejected the assessee's explanation without considering the entire facts and circumstances of the case. The total payments to these two persons were of Rs. 26,88,000/- out of which payment of Rs. 26,00,000/- was by account payee cheques. The cash payment was only of Rs. 88,000/-. Such minor payment in cash can only be in compelling circumstances. There cannot be intention of save the assessee from rigor of provisions of section 6DD. On 10/08/2005, the Managing Director of the assessee company Shri Gyan Chand Agarwal visited the site of the land for measurement of the land. Shri Gyan Chand Agarwal paid Rs. 88,000/- to ....
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....Hajyawala) 13. Chhittar 28.05.2005 164750.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 14. Balu 28.05.2005 164750.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala 15. Narayan 28.05.2005 821750.00.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 16. Mangilal 01.06.2005 410875.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 17. Harinarayan 01.06.2005 410875.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 18. Budha 01.06.2005 713000.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 19. Gopal 02.06.2005 1649500.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 20. Bhoriya 02.06.2005 849500.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 21. Radheyshyam 02.06.2005 849500.00 Land at Jetpura The seller of the land is resident of villag....
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.... been defined under Income Tax Act, therefore, its dictionary meaning should be taken. The village has been defined as " a group of houses and associated buildings, larger than a hamlet and smaller than a town, situated in a rural area :" (Oxford Dictionary) Therefore, the banks situated at district head quarters or nearby towns should not been taken as situated in village. If the interpretation taken by the ld. AO is considered correct than it means that all the villages have banking facilities and if so, the very purpose of this clause would be defeated. The object of provisions of section 40A is to curb flow of black money and not to put an impediment over the trade and business. It is correct to say that it would be very difficult for banking companies to open outlet/branch in each and every village. The legislature after considering this practical difficulty has introduced the saving clause (h) (now clause (g) of rule 6DD to save the persons from the rigor of section 6DD if the payment is made in a village which is not served by any bank, to a person who ordinary resides, or is carrying on business in such village. Reliance is placed on the following decisions :- (i) ....
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....d assessee convinced him to accept the payment by cheques. The assessee made the payments by cheque upto 8.12.2004. The cheque no. 232413 to 232416 were issued post dated and on that date, the cheques were dishonored because of insufficient funds in bank. The first cheque No. 232413 dated 15.04.2005 dishonored, the next cheque dated 25.04.2005 also dishonored and the next two cheques dated 9.05.2005 also dishonored. The agriculturist lost trust over the assessee. So the agriculturist refused to take the further payment by cheques and threaten to cancel the agreement of sale. In such compelling circumstances, the assessee had to make the payment in cash on 12.05.2005 and onwards. Your honour would see that no payment was made in cash till the date of dishonor of cheque. In such circumstances no disallowance u/s 40A(3) should be made for the payments made to Shyoram (S.No. 3, page 3 of Astt. Order.). Reliance is placed on the following decisions :- (i) CIT vs. S.B. Saini Bros. 161 ITR 415 (P&H) (ii) CIT vs. Meeihdoot Sales, 200 ITR 490 (Del.) In these cases the exceptional or unavoidable circumstance was inferred from facts of large number of cheques issued by the ....
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....ncome Tax, 155 ITR 519 (Raj.) held that Income-tax is a tax on the real income and the purpose of introducing s. 40A(3) was to block the loopholes of making cash payment and claim as deductions with a view to frustrate investigation as to the identity of the recipients and the genuineness of the claim. Proviso to s. 40A(3) shows that the Legislature intended not to make the provision of s. 40A(3) very strict and absolutely mandatory. The rigour of the whole restriction was loosened by the proviso and by making r. 6DD. Therefore the proviso and rule 6sDD both should be considering for giving relaxation from the rigour of section 40A(3). The Second Proviso to section 40A(3) is as under :- Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding (twenty thousand) rupees is made otherwise than by crossed cheque drawn on a bank or by crossed 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." Thus, the Second Proviso to section 40A(3) emphasizes 'having regard to ....
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.... that cash payments were indispensable - Disallowance rightly deleted - CIT vs. Chrome Leather Company (P) Ltd.(1999) 235 ITR 708 (Mad) followed. (iii) Madras High Court decision in the case of CIT v. Chrome Leather Co. Pvt. Ltd., 235 ITR 708 : held that payment by crossed cheque was not practicable and that identity of payee and genuineness of payment were established - amount paid in cash could not be disallowed u/s 40A(3). (iv) Gujarat High Court decision in the case of CIT v. P. Pravin And Co. 274 ITR 534 : held that the requirement under rule 6DD of the Income-tax Rules 1962, regarding practicability of payment otherwise than in cash and consideration of business expediency has to be judged from the point of view of the businessman and not of the revenue authorities. (v) In the case of Joint Commissioner of Income Tax vs. Swarup Vegetable Products Industries Ltd. (2005) 96 ITD 468 (Del.) Hon'ble ITAT Delhi 'G' Bench held that Factory located in a village where assessee has not maintained any bank account' constituted exceptional circumstances. (vi) In the case of Assistant Commissioner of Income Tax vs. Gopaldas Vallabhdas (1997) 59 TTJ (Ind) 768 Hon'ble ITAT Indor....
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....ed bank draft in the circumstances specified under the rule. It will be clear from the provisions of s. 40A(3) and r. 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. (See Mudiam Oil Co. vs. ITO (1973) 92 ITR 519 (AP) : TC18R.450). If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute, the Court cannot be oblivious of the proliferation of black money which is under circulation in our country. 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". In view of the above submission, the humble assessee prays your honour kindly to delete the addition made by the AO by applying provisions of section 40A(3) of Income Tax Act." 14. As stated above, similar submissions have been filed for A.Y. 2007-08. After going through the above written su....
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....se (g) is about the payment made in a village or in a town which on the date of such payment is not served by any bank and 14.4. Sub clause (j) is in respect to the payment made on a day on which the bank was closed either on account of holiday or strike. 14.5. These two clauses may be helpful to the assessee as the case of the assessee is that the purchases were made from the persons who resides in the villages where on the date of payment the village was not served by any banking facility and in some cases the payments have been made after banking hours to the villagers and in support of this contention it was submitted that the time of payment has been mentioned on the payment voucher itself. The AO and ld. CIT (A) has rejected the contention of the assessee that they have not filed any supporting evidence. In our view, the observations of AO as well as of ld. CIT (A) in this respect are not correct. It is seen that all the purchases were made from the persons who were residing in villages. The list of farmers or persons are mentioned in the written submissions which are tabulated somewhere above in this order. The names of villages are also mentioned. The amount of pay....
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....n observing that no supporting evidence was filed that the payments were made after banking hours. Neither any person was called nor enquiry was made that the payments were made after banking hours or they resided in the villages. 14.9. The provisions of section 40A(3) are very stringent and, therefore, it was the duty of the AO that before attracting stringent provision he should have made enquiry about the persons whether they live in the villages or not and whether payments have been made after banking hours or not. There is no dispute that payments have been made from disclosed sources as all the payments have been accounted for. The provisions of section 40A(3) was brought on Statute initially to curb the practice of introducing black money. However, the provisions of section 40A(3) says that if the cash payment exceeds Rs. 20,000/- and they do not fall under the exceptional clause of Rule 6DD, then addition @ 20% of such cash payment has to be made. However, the background of the case has to be seen and it should be enquired whether there is any real difficulty with the assessee to make payment in cash. In the present case it is seen that assessee was forced to make cas....