TaxTMI 
TaxTMI 
2010 (3) TMI 1118
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....f land mainly relate to the state of Tamil Nadu apart from some land in Punjab. The AO has mentioned in his order that payments for land purchases were made by the appellant company in cash and such payments amounted to Rs. 8,03,46,751. The AO has also mentioned that the auditors in the audit report as per Annex. V certified that the aforesaid expenditure for purchase of land was covered under the exception of r. 6DD(h) of the IT Rules relevant for the provisions of s. 40A(3) of the IT Act. The relevant Annexure of the audit report is placed at paper book pp. 94 to 96. During the course of the assessment proceedings the AO called upon the assessee to furnish complete details of the cash payments and at p. 2 of the assessment order he has stated that a reply dt. 13th Jan., 2004 was filed giving details of persons from whom land was purchased and payments were made in cash. Sample copy of sale agreement and agreement for purchase of land was also submitted along with photocopies of receipts in respect of the payments made. The format of the receipt has been reproduced at p. 2 of the assessment order. The AO has mentioned that in most of the receipts the place of payment has been ment....
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.... the format of the receipt and was of the view that payments were made at a place where banking facilities were available. He has also stated that the cases relied upon by the appellant-company were with regard to r. 6DD(j) which was deleted and was not applicable to the present assessment year. The AO has also mentioned that the appellant-company was having a wide network of bank accounts at the various places in the country and it could have got bank accounts opened for the sellers of the land. The AO has also mentioned that some of the payments have been made at Noida which is served by banks. The AO has also referred to some judicial pronouncements to substantiate his view that provisions of s. 40A(3) are applicable to the present case. On this basis the AO disallowed 20 per cent of the entire payment of Rs. 8,03,46,751. 6. Aggrieved by the AO's order, the matter was carried before the CIT(A) who confirmed the entire addition vide his order dt. 22nd Aug., 2007. The learned CIT(A) broadly agreed with the conclusions drawn by the AO and upheld the addition with the following observations at pp. 4 and 5 of his order : "The contention of the Authorised Representative as well....
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....ost developed township of the country. The AO has taken support of decision of Hon'ble Madhya Pradesh High Court reported in Bhilai Motors vs. CIT (1984) 41 CTR (MP) 125: (1987) 167 ITR 147(MP) where insistence by seller for cash payment was not held to be covered in any exceptions to s. 40A(3) and held that provisions of s. 40A(3) are mandatory and no discretion has been given to the AO. The requirement of law is that straightway disallowance of 20 per cent of such payment should be made and the AO has rightly done so. As the appellant has taken support of r. 6DD(j), claim of the appellant is not tenable in view of the jurisdictional High Court's decision in the case of Nahgi Lal vs. CIT (1987) 66 CTR (Raj) 109: (1987) 167 ITR 139(Raj). The Hon'ble High Court in this case held that it is not sufficient for the assessee merely to establish that the purposes were genuine and the payees were identifiable. The assessee is further required to prove that due to exceptional and unavoidable circumstances payment by cheques was not practicable and hence cash payments were made. In the appellant's case by not establishing any exceptional or unavoidable circumstances it fails....
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.... be furnished 45 transactions-as the same are covered by banking facilites. 63,69,420 175 Total 3,36,36,938 8. Copies of 29 certificates filed before the AO are placed at pp. 177 to 217 of the paper book. This covers 617 transactions involving sale consideration of Rs. 4,53,78,973. In respect of three transactions payments have actually been made through cheques for Rs. 13,30,840. The remaining amount of Rs. 3,36,36,938 is in respect of 161 transactions in respect of which the assessee had submitted before the AO vide letter dt. 3rd March, 2004 (paper book p. 176) that it would be able to submit certificates within a few days. Before the learned CIT(A) further certificates/confirmations involving 116 transactions were filed, copies of which are placed at pp. 218 to 240 of the paper book. The learned CIT(A) was requested to admit this additional evidence under r. 46A as the appellant-company was not provided sufficient opportunity. The appellant-company filed details of villages where banking facilities are not available as per certificates of Village Administrative Officers before the learned CIT(A), copy of which is at p. 174 of the paper book. Thus, d....
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.... that it is totally against human probability that huge cash payments were made in the office of the Sub-Registrar. All the sellers reside at villages which have no banking facilities and the sellers admittedly have no bank accounts. It is further argued that, even if it is presumed that the payments were made in the office of the Sub-Registrar, no disallowance can be made under s. 40A(3) in view of the fact that all the sellers reside or carry farming activities in such villages where banking facilities are not available. It is submitted that r. 6DD(h) has to be interpreted in the light of the provisions of s. 40A(3), especially the second proviso which emphasizes "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors". The learned Authorised Representative distinguished the cases relied upon by the lower authorities. The learned Authorised Representative placed further reliance on the following decisions : (i) Kanti Lal Purshottam & Co. vs. CIT (1986) 53 CTR (Raj) 19 : (1985) 155 ITR 519 (Raj); (ii) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989) 179 ITR 122 (Cal); (iii) CIT vs. K.K....
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....s of the IT Act and r. 6DD. Sec. 40A(3), to the extent it is relevant for the issue is as under : "(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by **an account payee cheque drawn on a bank or account payee bank draft, twenty per cent of such expenditure shall not be allowed as a deduction : ................. 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 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." Rule 6DD, insofar it is relevant to the issue is as under : "6DD. No disallowance under cl. (a) of sub-s. (3) of s. 40A shall be made and no payment shall be deemed to be the profits a....
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.... payments are covered under s. 40A(3) of the IT Act. In our view this case does not in any way help the Department. 18. In the case of Bhilai Motors (supra), the ITO disallowed payments under s. 40A(3). The CIT(A) confirmed the disallowance and the Tribunal sustained it. The Hon'ble Madhya Pradesh High Court held that no question of law arises. This case has no relevance to the issue. In the case of Smt. Ch. Mangayamma (supra), the Hon'ble Andhra Pradesh High Court upheld the validity of the provisions of s. 40A(3). This case also does not help the Department in any way as the validity is not being disputed. The last case relied upon by the Department is the Hon'ble Gujarat High Court decision in the case of Hasanand Pinjomal (supra). In this case, in the context of r. 6DD(j), the Hon'ble High Court observed that practicability of cash payment must be considered from businessman's point of view and not Revenue's. We fail to understand as to how this case supports the view of the Department. For better understanding, the relevant part of the ratio of this case is reproduced below from the headnote : "Held, that s. 40A(3) was intended to serve the objective....
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....view of businessman and on the basis of business expediency. 21. In the case of CIT vs. K.K.S.K. Leather Processor (P) Ltd. (supra), the Hon'ble Madras High Court held as under (from the headnote) : "(ii) That the assessee had produced necessary grounds for making cash payment. The Tribunal noted that these payments were made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power. The Tribunal also noted from the order of the CIT, that considering the fact that the purchases were made from the unorganised sector, cash payments were indispensable. The order of the Tribunal with regard to the cash payments was justified.'CIT vs. Chrome Leather Co. (P) Ltd. (1999) 235 ITR 708(Mad)." 22. In the case of Girdharilal Goenka vs. CIT (supra), while interpreting s. 40A(3) the Hon'ble Calcutta High Court observed as under (from the headnote) : "The object of s. 40A(3) is to check evasion of tax and not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the AO has to find out whether the transaction is gen....
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....e, the genuineness of the payments had been established and the default was only technical. The assessee was entitled to the exemption under r. 6DD." 25. In the case of CIT vs. Achal Alloys (P) Ltd. (1996) 130 CTR (MP) 22: (1996) 218 ITR 46(MP) the Hon'ble Madhya Pradesh High Court observed as under at pp. 48 and 49 of the report : "............ The provision on hand is intended to destroy intentions of dealing with unaccounted moneys. The purpose behind insistence on cross-cheque or cross-draft is to assure and ensure 'genuineness' of dealing and proper assessment of taxable income. Even this provision has a proviso to mitigate the hardships. We notice from the appellate order that the appellate authority found that all the purchases were duly entered in the register through inwards and the production has been accepted. It further found that the genuineness of the payment was not exposed to any doubt. Payments in cash were duly signed by the payees and the insistence on making the cash payments is founded on the fulcrum that the payees did not have any bank account and that, being illiterates, required the payment in cash. The Tribunal was thus satisfied that no....
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....is new to the seller; or (ii) the transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iii) the transactions and payments are made on a bank holiday; or (iv) the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller; or (v) the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or (vi) specific discount is given by the seller for payment to be made by way of cash. In para 6, it was further observed that the above circumstances were not exhaustive but were illustrative and there could be cases other than those falling within the above categories, which would also meet the requirements of r. 6DD(j). Held, on the facts, that the Tribunal found that the assessee did not have any bank account at the place where the purchases were made. A similar finding was recorded with respect to the seller. One of the conditions of the circular dt. 31st May, 1977, thus, stood complied with to enable the assessee to claim deductio....
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....t of the purview of s. 40A(3) such cash payment which is made in a village or town which is not served by any bank to any person who ordinarily resides or is carrying on any business in such village or town. In the present case, while the appellant-company avers that payments were made at villages which did not have banking facilities, the Depanment insists that payments were made at a town where the office of the Sub-Registrar was located and such town had banking facilities. This inference is on the basis of the format of the receipt. There is no dispute that the sellers of the land are villagers engaged in farming activities and are residing at places and are carrying on farming activities at places which are not served by any bank and such sellers have no bank accounts anywhere. It has been emphatically argued on behalf of the appellant-company that all payments were made at the villages prior to registration of the sale. In our view this submission cannot be outrightly rejected. Normally, illiterate poor farmers would insist on cash payments, especially when such payments involve huge amounts, at the place of their residence for the simple reason that they would like to avoid ....