TaxTMI 
TaxTMI 
2016 (11) TMI 1034
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....sues are identical and facts are common, we dispose of both these appeals by his common order for the sake of convenience. 2. The only issue to be decided in all the appeals is as to whether the learned Commissioner of Income-tax (Appeals) is justified in upholding the disallowance made under section 40A(3) of the Act in the facts and circumstances of the case. 3. The abovementioned three appeals have been filed by the same assessee for the assessment years 2007-08, 2008-09 and 2010-11. The facts and issues in all these three assessment years are same. The only issue is whether the learned Assessing Officer was justified in disallowing cash payments (in excess of Rs. 20,000 on each occasion) made by the assessee to M/s. Asansol Bottling and Packaging Co. Pvt. Ltd. for purchase of its stock-in-trade in terms of section 40A(3) of the Income-tax Act. The common facts in these cases are as follows : 4. The assessee is a retail vendor of country liquor and Pachai. The country liquor is an excisable commodity. Its purchase and sale are strictly controlled by the State Government. Previously, the retail dealers like the assessee used to deposit the cost price, excise duty, bottli....
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....eals) was that by the notification dated August 29, 2005, the wholesale licensees were appointed by the State Government for collecting the cost price, excise duty, bottling charges, etc. It was claimed that in such a situation, the cash payments made to the bank account of M/s. Asansol Bottling and Packaging Co. Pvt. Ltd. should be treated as payments made to the Government and hence no disallowance is called for in view of provisions of rule 6DD(b) of the Income-tax Rules which provides that where the payment is made to the Government, no disallowance under section40A(3) is required. The learned Commissioner of Income-tax (Appeals) has rejected this argument on the ground that the said provisions of rules 6DD(b) also require that such payment is required to be made in legal tender under the rules, framed by the Government. He has pointed out that the Excise Department did not frame any rule requiring payment to be made in cash. All the three appeals were dismissed by the learned Commissioner of Income-tax (Appeals) and the assessee is now in second appeal before us. 6. The learned authorised representative took us to the relevant clauses of the notification dated August 29, 20....
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....well known even to a layman that, if not the entire, a major part of the banking function of the State Bank of India involves financial transactions on behalf of its clients/customers/constituents/beneficiaries. This fact was certainly known to the Central Board of Direct Taxes when it framed rule 6DD. If the intention was to exclude the cash transactions of the clients/customers, etc., of the State Bank of India, rule 6DD(a)(ii) would have been drafted accordingly. In the absence of any such restriction, it has to be held that all cash payments to the State Bank of India are eligible for exemption as provided under rule 6DD(a)(ii). 7. He placed reliance on the decision of the co-ordinate Bench of the Bangalore Tribunal in the case of Sri Renukeswara Rice Mills v. ITO reported in [2005] 93 ITD 263 (Bang-Trib.) wherein it was held that the cash payment in the accounts of the payee in a bank is sufficient to get exemption in terms of rule 6DD. It is submitted that the decision of the hon'ble Bangalore Bench in the abovementioned case is more reasonable and pragmatic and therefore the same is to be followed in preference to the hon'ble Kerala High Court decision in the case....
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.... He argued that the genuineness of transactions were not disputed by the Revenue. The payment is made to wholesale licensee and payment has gone into the coffers of the West Bengal Government. He further argued that if the entire purchases made in cash is disallowed, then effectively the learned Assessing Officer would be taxing the entire sale proceeds as income of the assessee which would only result in an anomalous situation. He further argued that the law cannot be interpreted in such a manner as it would result in creating absurdity if section 40A(3) is invoked in a strict sense. The assessee in the instant case did not have any other option but to go through the process initiated by the Government of West Bengal and the payment is made to the instrumentality of the State. 10. He placed reliance on the following decisions in support of his various contentions : (a) The hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO reported in [1991] 191 ITR 667 (SC) ; (b) The hon'ble Rajasthan High Court in the case of CIT v. Kalyan Prasad Gupta reported in [2011] 239 CTR (Raj) 447; (c) The hon'ble Karnataka High Court in the ca....
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....e same need not be interpreted further as the constitutional validity has been upheld by the hon'ble apex court. 12. He argued that the notification issued by Excise Department, Government of West Bengal dated August 29, 2005 only sets out principles and rules for regulation of country liquor. That does not mean that the Government itself becomes a party to it. Liquor being a vulnerable commodity is tightly regulated by the State. The said notification nowhere compelled the assessee to make cash payments in violation of section 40A(3) of the Act. He argued that the Government wants to distance itself from dealing in the vulnerable commodities like country liquor and accordingly came forward to grant licence to deal with the same to private parties. That does not enable the private party to become Government. He further placed reliance on the decision of the hon'ble Kerala High Court in the case of K. Abdu and Co. v. ITO reported in [2008] 170 Taxman 297 (Ker). Accordingly, he argued that no interference is called for in the order of the learned Commissioner of Income-tax (Appeals). 13. We have heard the rival submissions and perused the materials available on record i....
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....transport pass' means the transport pass issued in Form III appended to these rules ; (vii) 'warehouse' means the warehouse for supply of country spirit to retail vendors, established at convenient places by the Commissioner at the expense of the State Government, or at the expense of a person to whom the exclusive privilege of supplying or selling country spirit by wholesale has been granted under section 22 of the Act, or of a licensed wholesale vendor of country spirit ; (viii) 'wholesale licensee' means the wholesale vendor of country spirit to whom license has been granted in West Bengal Excise Form No. 26. (2) Words and expressions used in these rules and not defined, but defined in the Act, shall have the meanings respectively assigned to them in the Act. 3. Issue only on payment of duty. - No country spirit in labelled and capsuled bottles shall be issued without payment of duty from a country spirit bottling plant. No country spirit in bulk shall be issued without payment of duty from a country spirit warehouse. 4. Personal Ledger Account to be maintained by the wholesale licensee. - The wholesale licensee sh....
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....wholesale licensee after the issue has been made. (5) The Excise officer-in-charge of the warehouse shall issue transport pass to the retail vendor in Form III appended to these rules. (6) Notwithstanding anything contained in any provisions of the rules, orders and notifications in this context, the wholesale suppliers of country spirit in labelled and capsuled bottles shall allow a rebate of five paise per bottle irrespective of measure from the bottling charge to the retail country spirit licensees whose licensed premises are located at a distance of 50 kilometres or more by the shortest route from the issuing warehouse on the basis of a certificate to be issued by the Collector in respect of distance. At the end of the month, the wholesaler shall submit a bill in duplicate to the Officer-in-Charge of the warehouse claiming refund of the amount granted as rebate. The Officer-in-Charge shall, on receipt of the bill, refund the amount claimed after verifying his records through adjustment in the personal ledger account maintained for the purpose of privilege fee. In case there is no personal ledger account for privilege fee at the warehouse, the....
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....to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and reasonableness of the payment." 17. In this regard, it is pertinent to get into the following decisions on the impugned subject : "Attar Singh Gurmukh Singh v. ITO reported in [1991] 191 ITR 667 (SC) (headnote) Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs. 2,500 (Rs. 10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted upon to enable the ass....
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....ssioner of Income-tax (Appeals) has invoked section 40A(3) for payment exceeding Rs. 20,000 since it is not made by crossed- cheque or bank draft but by bearer cheques and has computed the payments falling under the provisions to section 40A(3) for Rs. 78,45,580 and disallowed at 20 per cent. thereon Rs. 15,69,116. It is also made clear that without the payment being made by bearer cheque these goods could not have been procured and it would have hampered the supply of goods within the stipulated time. Therefore, the genuineness of the purchase has been accepted by the learned Commissioner of Income-tax (Appeals) which has also not been disputed by the Department as it appears from the order so passed by the learned Tribunal. It further appears from the assessment order that neither the Assessing Officer nor the Commissioner of Income- tax (Appeals) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine. Anupam Tele Services v. ITO in [2014] 366 ITR 122 (Guj) ; [2014] 43 taxmann.com 199 (Guj) Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash ....
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....t into the intention of the Legislature. In our opinion, the primary object of enacting section 40A(3) was twofold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration. In the instant case, the cash has been deposited directly in the bank account of the supplier, i.e., M/s. Asansol Bottling and Packaging Co. Pvt. Ltd. by the assessee. 19. We find that the hon'ble apex court in the case of CTO v. Swastik Roadways reported in [2014] 135 STC 1 (SC) ; (2004) 3 SCC 640 had held that the consequences of non-compliance of Madhya Pradesh Sales tax Act, which were intended to check the evasion and avoidance of sales tax were significantly harsh. The c....
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....case of Smt. Harshila Chordia v. ITO reported in [2008] 298 ITR 349 (Raj) had held that the exceptions contained in rule 6DD of the Income-tax Rules are not exhaustive and that the said rule must be interpreted liberally. 20. We also find that the impugned issue is also covered by the decision of the co-ordinate Bench of this Tribunal in the case of Ashok Mondal v. ITO in ITA No. 873/Kol/2012 for the assessment year 2009-10, dated February 6, 2014, wherein it was held that : "7. We have considered the rival submissions. At the outset a perusal of the decision in the case of Smt. Pushpalata Mondal shows that the Tribunal had decided the case by following the decision of the hon'ble Kerala High Court in the case of K. Abdu and Co. v. ITO [2008] 170 Taxman 297 (Ker) wherein the issue was in relation to rule 6DD(a) of the Income-tax Rules. The issue in the assessee's case is in respect of the payments made under the rules framed by the Government and such payment was required to be made in legal tender. A perusal of the Government Notification issued by the Government of West Bengal clearly shows that the dealers are agents of the Government and the payments made ar....
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....oned in section (2) of the said notification that no retail vendor of country spirit shall deposit duty direct into the local treasury for issue of country spirit to be taken by him from the warehouse concerned which clearly shows that the warehouse is for the supply of the country liquor, specifically, the warehouse is under the direct control and custody of the State Government. The State Government has closed its doors in so far as the local treasury is concerned and the payment for the purchase of country spirit or country liquor has to be made to the warehouse, run by the Government. This shows that any payment made to the warehouse, which is under the direct control of the State Government, is a payment made directly to the Government. Once, this is accepted then the provisions of rule 6DD(b) of the Income-tax Rules, 1962 which clearly spells out that the payment made to the Government in legal tender under the rules framed by the Government, is exempted from the rigours of section 40A(3) of the Act. Here, it is noticed that the payments made by the assessee for purchase of country spirit and country liquor is to the Government as per the notification issued by the Government....
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....ch is a State Government establishment. It is also pertinent to note that the expenditure in relation to such warehouse is borne by the State Government or by the licensee to whom the exclusive privilege is granted under section 22 of the Bengal Excise Act, 1909. Hence there could be no doubt that the warehouse is established by the State Excise Commissioner. Hence it could be safely concluded that the ware house so established by the State Excise Commissioner is a State Government establishment. It would also be pertinent to note that the said ware house has been specifically established for supply of country spirit to retail vendors (assessee herein) only and not to anybody else. It would be pertinent to look into the definition of "wholesale licensee" as per rule 2(viii) of the Excise Rules, 2005 as below : "Rule 2(viii) - 'wholesale licensee' means the wholesale vendor of country spirit to whom licence has been granted in West Bengal Excise Form No. 26." It would be pertinent to look into section 22 of the Bengal Excise Act, 1909 at this juncture as below : "22. Grant of exclusive privilege of manufacture and sale of country liquor or intoxicatin....