TaxTMI 
TaxTMI 
2012 (3) TMI 550
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....owance to 10% observing as under: 3. The expenditure incurred by way of cash is genuine or not. The cash payments consists payments of Rs. 2500/- and below Rs. 2500/-. In respect of cash payments above Rs. 2500/- In respect of cash payments above Rs. 2500/- the assessee has maintained proper record of receipts, name & address etc. In respect of payments less than Rs. 2500/- no proper record to identify the payee is available/produced. The AO observed that the assessee is unable to produce names and address of the payees, without which the genuineness of payment could not be verified. Before the AO it was submitted by the assessee that such payments made to the winning punters was not their expenditure at all (on the basis of method of accounting followed by them). Further, the claim is found to be not in consonance with law and in accordance with accepted legal provisions, all the collections made by sale of tickets is treated as the income/receipts and all the payments made to the winning punters is the expenditure. Therefore, the assessee pleaded that it was not their expenditure and it is not bound to produce any proof for such expenditure. 4. Hence, AO asked the assessee ....
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....A) further observed that the entire claim of such cash payments made at Rs. 243,13,66,899/- cannot be allowed deduction. In the facts and circumstances of the case, the CIT(A) observed that some disallowance out of such cash payments claimed as expenditure, is called for in this case. However, CIT(A) was of the opinion that the disallowance made by the AO in the assessment order at 15% of such claim, was on higher side and that it would be fair and reasonable to make such disallowance at 10% of the said claim of cash payments made at Rs. 243,13,66,899/-. 7. Aggrieved the Assessee is on appeal before us. We find that this issue is covered in favour of the Assessee by the order of the ITAT in Assessee's own case for the AYs 2004-05 and 2005-06 in ITA No212, 710/Hyd/08 and 972, 973/ Hyd/08 dated 26.09.08. The ITAT has deleted a similar disallowance observing as under: Ad-hoc disallowance out of winnings payments of less than Rs. 2500/- each: Before we adjudicate upon the next issue relating to ad hoc disallowance, we will understand sub section 1 of the section 37 of the Act which reads as follows: 37: General: 1) Any expenditure not being ex....
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....tting server. At the end of the day, after winning amounts are paid, the entire data gets copied into a floppy, for uploading the same into the accounting server. From the accounting server, the main cash book is generated. At the end of each race day, cash register report is certified by the independent Companies Act, 1956 (1 of 1956) and from this, the main cash book is generated. The above procedure consistently followed by the assessee appears to be a fool proof one, and constitutes a contemporaneous evidence. It clearly establishes the payments of winning amounts of less than Rs. 2500/- each. When the entire accounts and data are maintained meticulously, with the computer depicting every minute details of each event and ticket, there appears no scope for making any ad hoc disallowance. Considering the peculiar facts and circumstances under which the assessee carries on its business of conducting the races, in which multitudes of public at large, who constitute the customers of the assessee, tender the betting amounts in cash for each race/each event, get back the winnings amounts in cash within minutes of the conclusion of each race event, and may even reinvest such w....
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....of cinema theatre and restaurant, observing that in those businesses no payments are made by the assessee's in those businesses to their customers. The distinguishing feature brought out by the department rather comes to the aid of the assessee in as much as the assessee not only receives innumerable amounts from the multitude of its customers before each racing event, but also disburses the amounts due on winning tickets within minutes of the conclusion of each racing day puts the assessee in a more complex position than an assessee in the cinema theatre or restaurant business who indulges only in multiple transactions of receipt of cash as against the assessee who indulges in multiple transactions of receipts as well as payments in cash. As far the notings referred to in the daily report dated 14.2.2004, we find that they are only a rectification entries to be passed and they have nothing to do with the receipts or payments in respect of race transactions. But these entries appear to be imperative for the betting terminal operator to give a proper account of his cash dealings at the end of the day. Thus, the notings appear to be only minor aberrations which are brought t....
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....ent was through computerized system, duly audited by the Independent CA at the end of each racing day, and since the payments were effected only on the basis of the winning ticket numbers etc. through the system of accounting followed, the assessee has proved all the four conditions noted above in support of its payments. In the other cases cited by the DR, the the case of APL India and Arihant Builders Vs. ACIT (supra), the courts upheld the disallowance of the expenditure on account of speed money paid and rejection of books of accounts respectively. In the circumstances, we delete the entire ad hoc disallowance of Rs. 18,04,50,000 made by the ao as against Rs. 12.03 crores sustained by the CIT(A). Consequently, grounds of the assessee on this issue are allowed and the solitary ground of the Revenue in its appeal is rejected. 8. We find that the earlier order of the ITAT have elaborately dealt with the issue. The Department has not brought anything to show that the facts of the case are any different from that for the AY 2004-05 and 2005-06 covered by the ITAT order. The activity of the Assessee is such that they have to deal daily with numerous individuals in a short....
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....different days during the previous year, as per the provisions of Rule 6DD(j), no disallowance u/s 40A(3) of the Act shall be made, where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike. The CIT(A) held that it is only in respect of those cash payments which were made under such circumstances, stipulated under Rule 6DD(J) that an assessee can be allowed exemption from the purview of disallowance u/s 40A(3). The CIT(A) pointed out that in the instant case, as mention by the Assessing Officer, the branch of ING Vysya Bank, located at Race Course, was operating on Sundays. The CIT(A) held that those payments made by it on Sundays, during the previous year, cannot be allowed exemption relying on observation of the Assessing Officer that the said bank, located at Race Course, would not deny services to the general public including different customers of the assessee company, on its working day and since on Sundays, the assessee had access to banking facility from the operation of the said ING Vyasya bank, located in their business premises and also the customers of the assessee company had access to such bank. 13. Fur....
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.... applicable, as such the ratio of those cases have no application to the facts of the present case. In the case of Sri R.R. Mills (supra) the assessee made the payment of sum directly in the bank account of the payee which fulfils the criteria for ensuring the object of introduction of section 40A(3) of the Act and as such, the ratio of that decision is also not applicable to the facts of the present case. Moreover, the arguments of AR that all the payments above Rs. 20,000 are subject to deduction of tax at source u/s 194BB at the maximum marginal rate of 30% plus surcharges. Thus, the tax is fully covered and paid to the govt. The object of S.40A(3) is to be prevented tax evasion. There is a force in the arguments of the AR but we are unable to accept the same, since disallowance u/s 40A(3) of the Act is mandatory, unless covered by any of the exceptional circumstances prescribed under Rule 6DD of the IT Act. Considering the inherent features of the assessee's business and peculiar facts and circumstances of the case, under which the assessee was constrained to make payments in cash where have weighed with us, while deleting the ad hoc disallowance made by reven....
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....f, pavilions, other assets, staff salaries, office expenses and so on. It is such business expenses which are caught within the web of S.40A(3), if payments in respect of such expenses are made in cash in violation of the provisions of s. 40A(3). In any event, since the lower authorities have not examined the nature of the payments to punters to find out whether such expenditure falls within the scope of the provisions of S.40A (3), in the interest of justice, we deem it fit to restore this aspect to the file of the Assessing Officer for examining the nature of the payments to the punters, i.e. whether such payments amount to the particular type expenditure which alone are caught by the provisions of S.40A(3). Considering the totality of facts and circumstances of the case, we set aside the orders of the Revenue authorities on this issue and restore the matter to the file of the Assessing Officer to examine the nature of the payments to punters, so as to ascertain whether they amount to the particular type of business expenditure which alone falls within the scope of the provisions of S.40A(3), and if so, exclude the such of those payments which fall within the exceptions ....
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....eptional or unavoidable circumstances or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof. And also furnishes evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and identity of the payee". The above clause (j) of Rule 6DD has been omitted by the IT (fourteenth amendment) Rules 1995 w.e.f. 27.5.1995. It is pertinent to refer at this juncture, to the decision of Hon'ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma Vs. Union of India and others (239 ITR 687), wherein considering the constitutional validity of the provisions of S.40A(3) of the Act in the light of the above amendment made to Rule 6DD of the IT Rules, the Hon'ble High Court observed and held at page 693 of the Reports (239 ITR) as follows: "In view of the aforesaid principles as laid down and the object as sought to be achieved u/s 40A(3) of the Act, any changes made in the subordinate legislation would not in any way affect the substantive provision. Moreover, by....
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....on completion of the race/s, they are required to be paid their winnings on presentation of their winning ticket. Therefore the Assessee is required to make their payments immediately after the race/s are completed at the venue. It will be impossible for them to write out the cheques to the winners and give it to them on the completion of the race. And the betters will not accept cheques as they will be utilizing the same for betting in the next races. Having accepted Horse racing as a genuine acceptable line of activity, we have to appreciate the difficulties in disbursing the winnings at the venue of the race club to so many winners almost instantaneously. 19. Sec 40A(3) itself provides that the exceptions will have to be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Taking all these factors, considering the nature of activity of the Assessee and the necessity for them to pay cash to the winners immediately, we are of the opinion that the condition under Rule 6DD for exemption viz., transactions should have taken place on Bank Holidays should be read down in the case of the A....
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....ide the full particulars. In the Assessee's appeal supra, on the same issue we had deleted the entire disallowance made on this account, following the decision of the coordinate bench in Assessee's own case AYs 2004-05 and 2005-06 in ITA No212,710/Hyd/08 and 972, 973/ Hyd/08 dated 26.09.08. In this view of the matter as the entire disallowance has been deleted, the Departmental appeal that the disallowance should be at 15% does not stand and the departmental ground on this issue is dismissed. 28. The next ground of appeal by the revenue is that the amount of Rs. 2,68,27,314/- paid to other clubs should be disallowed under sec 40(a)(ia) as they constituted commission and no tax was deducted at source u/s 194H. The CIT(A) deleted the disallowance observing as under: Thus in view of such order passed by the CIT(A) -II, Hyderabad pertaining to the above issue for assessment year 2007-08 in the case of the assessee, and following acceptance of such decision by the department and after considering such submissions of AR, the said disallowance of Rs. 2,68,27,314/- made by the Assessing Officer u/s 40(a)(ia) of the Act in the assessment in this case is not sustainable. ....