AI Drafter 
TaxTMI 
TaxTMI 
2016 (9) TMI 1437
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....d Representative appeared on behalf of assessee and Shri G. Mallikarjuna, Ld. Departmental Representative represented on behalf of Revenue. 2. First issue raised by Revenue in Ground No.1 is that Ld. CIT(A) erred in deleting the addition made by the AO disallowing a sum of Rs. 3,23,88,960 u/s. 40A(3) and 40A(3A) of the Act on account of cash payment exceeding the prescribed limit. 3. The facts in brief as have been brought on record are that the assessee, a Private Limited Company, engaged in the business of manufacturing of finished leather. During the course of assessment proceedings, the AO found that the assessee has made payments exceeding Rs. 20,000/- in a single day through bearer cheques, totaling to Rs. 3,23,88,960/-, to suppliers of raw hide, in violation of the provisions of section 40A(3) of the Act. It was submitted before the AO that the payments were made to the producers of raw hide and, therefore, the provisions of Section 40A(3) of the Act are not applicable in view of Rule 6DD(e) of the IT Rule, 1962. The assessee also submitted that the purchase bills, transport bills and sales tax bills to prove the genuineness of the parties. However the AO from the peru....
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....he producers of animal husbandry (including livestock, meat, hides and skins) or diary or poultry farming is not covered by the provision of section 40A(3) of the Act. similarly Rule 6DD(f) provides that any payment made for purchase of the products manufactured or processed without the aid of power to the producer of such products is not covered by section 40A(3) of the Act. iii) That the Hon'ble Jurisdiction High Court in the case of CIT v CPL Tannery [2009] 318 ITR 179 (Cal) has held as under:- "BUSINESS EXPENDITURE DISALLOWANCE PAYMENTS IN CASH TO PRODUCERS OF HIDES AND SKINS GENUINENESS OF TRANSACTIONS NOT DOUBTED OR DISPUTED BY ASSESSING OFFICER DISSALLOW NOT JUSTIFIED INCOME TAX ACT, 1961, s.40A(3) INCOME TAX RULES, 1962, R.6DD(f)(ii)." iv) That the Hon'ble Kerala High Court in the case of CIT v Interseas (2010) 233 CTR (Ker) 77 has held that payment made for purchase of hides and skins is covered by Rule 6DD hence no disallowance can be made by applying provision of section 40A(3) of the Act. v) In ITO v. Kenaram N.Saha & Subhash Saha [2009] 116 ITD 1 (Kol- Trib.)(SB) it was held that the payment for purchase of hides and skins would be c....
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.... did not apply. viii) In the light of the above observation & findings and on the facts and circumstances of the case, I am of the view that the Assessing officer was not justified in making the addition of Rs. 3,23,88,960/- under section 40A(3)/40A(3A) of the Act. ix) In view of above discussed legal and factual position, I am of the considered view that the payment of Rs. 3,23,88,960/- made by the appellant is covered by Rule 6DD of the Income tax Rules 1962, and accordingly the disallowance of Rs. 3,23,88,960/- made by the AO u/s 40A(3) of the Act is hereby deleted and these grounds of appeal of the appellant are allowed." Being aggrieved by the order of ld. CIT(A), Revenue is in appeal before us. 5. Before us the ld. DR submitted that the assessee failed to bring the evidence to prove that the payment in cash exceeding Rs. 20,000.00 was made to the producers of the raw hides and skin. As per the ld. DR the assessee has violated the provisions of section 40A(3), therefore the deduction is not available to the assessee. The Ld. DR also contended that the suppliers of skin and hides were are having good turn over in their business. Therefore, it cannot be said that ....
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....losed herewith. It is clear from the same that the sales tax authorities have issued the way bill in the name of the producer and the bill also shows that the sellers were the producers whose bill accompanied the way bill. The said copies are enclosed herewith along with the ledger of the parties from where the facts stated above are corroborated. Thus there was prima facie evidence that the purchase was made from the producers of hide and skins. The AO has not brought on record to prove to the contrary except that the notices u/s 133(6) was not served on them. Simply because notices were not served it cannot be inferred that the purchase was not made from producers. The assessee also maintained day to day stock register of the raw, hide and skins and such purchase of raw hide and skins were duly entered in the stock register. There was no evidence to suggest that such purchase was not made from the producers of raw, hide and skins. The attention of the Ld. AO was drawn to the Tax Audit Report wherein it was specifically mentioned that the assessee was maintaining day to day stock register of the raw material and the same was also verifiable from the quantity details filed before t....
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....chased. In similar facts & circumstances the various Hon'ble Courts have decided this issue in favour of assessee by observing that the provision of Section 40A(3) was inserted by the Finance Act 1968 with the purpose mentioned in the explanatory note Para 73 which read as under : It will be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provision was inserted by Finance Act 1968 with the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 06.07.1968 reiterates this view that "this provision is designed to counter evasion of a tax through claims for expenditure shown 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." In this regard, it is pertinent to get into the following decisions on the impugned subject:- Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC) "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....
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....ess of assessment. We, therefore, delete the addition of Rs. 17,90,571/- and ground no.1 is decided in favour of the assessee. " CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.7.2008 - Jurisdictional High Court decision "It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding Rs. 20,000/- since it is not made by crossed cheque or bank draft but by hearer cheques and has computed the payments falling under provisions to Section 40A(3) for Rs. 78,45,580/- and disallowed @ 20% 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 ld. CIT(Appeal) 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 CIT(Appeal) has disbelieved the genuineness of the transaction. There was no....
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....nculcate 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 be fallen on account of non-observation of Section 40A(3) of the Act must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has produced the sales bills along with the transport details and road permit issued by the Government to the company. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash. We also find that the assessment was framed under section 143(3) of the Act for the assessments years 2012-13 and 2013-14 without making any disallowance under section 40A(3) of the Act. From this fact we find that the parties from whom the raw hide and skin purchased were accepted as producers. No such issue was raised by the AO in the assessment. 8. In view of above facts and circumstances of the....
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....tanding at the end of every year and were duly accepted in earlier years. Even while completing the assessment for the assessment year in question, sundry creditors of the earlier years have been accepted by the AO. I also find that there were sundry debtors of equal amount in the Balance sheet which shows that in this trade there remain outstanding sundry creditors and debtors. When purchase was accepted as genuine then the sundry creditors cannot be treated as bogus. vii) Regarding applicability of provisions of section 68, I find that the appellant has brought substantial material on record to show that these are sundry creditor for purchases paid in subsequent years and that part of the purchases from the very parties were already accepted by the Assessing Officer. Evidently, the creditors were held to be bogus on the ground that enquiry letters under sec. 133(6) of the Act were received back unserved with the remarks 'not known' leaving the Assessing Officer to conclude that the appellant has failed to discharge his onus of proving the capacity of the creditors and genuineness of the transactions. Apparently, in my opinion, the Assessing Officer has not appreciated th....
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.... Overseas Ltd. (supra). Therefore, it is abundantly clear that the provision of sec. 41(21) (a) are not applicable. No addition could be made for remission or cessation of trading liability as envisaged under section 41(1) of the Act for the assessment year under consideration. ix) In view of above discussed legal and factual position, I am of the considered view that the sundry creditors of Rs. 4,29,02,130/- cannot be treated as bogus sundry creditors and cannot be added to the income of the appellant. Accordingly, the impugned addition made by the AO is hereby directed to be deleted and thus, these grounds of the appeal of the appellant are allowed." Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. 12. Before us Ld. DR vehemently relied on the order of AO whereas Ld. AR submitted that the AO has made further addition of Rs. 4,29,02,130/- from Sundry Creditors. It is submitted that these creditors stood in the books of the company and the amount was never written off. The purchases of goods from these parties have been accepted to be genuine. There was no evidence to suggest that no liability to sundry creditors was payable. The details of th....
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....ry creditors without disallowing the corresponding purchases. From the above it is clear that the purchases in the instant case have been admitted but the corresponding sundry creditors have been added as total income of the assessee. In our considered view the action of the AO for making the addition of the sundry creditors without disallowing the purchases is based on wrong interpretation of Income Tax Laws. The sundry creditors can be added as income under section 41(1) of the Act once it is written off in the books of accounts. In the instant case the same has not been written off and very much reflecting in the books of the assessee. Therefore in our considered view the sundry creditors reflecting in the books of accounts cannot be disallowed and added to the total income of the assessee. In the instant case, the balances of many of the sundry creditors were outstanding coming from earlier years. Payments were made to some or the creditors during the year. The said payments have been accepted by the AO which means genuinity of the payments to these creditors as well as the genuinity thereof till last year have not disputed by the AO. In the instant case the firstly the AO has ....
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....ld not prove that the debt cannot be said to be unenforceable. It was held that the onus had wrongly been shifted by the revenue on the assessee. It was held that the liability existed since tile assessee had shown the liabilities outstanding in its balance sheet. Therefore, there was no occasion to treat the said amount as taxable under section 41 (1) and if department intends to assess the same by applying the provisions of section 41 (1), then the onus will be on the revenue to show that the liability which is appearing in the balance sheet has ceased finally and there is no possibility of the revival of the liability. Hence, addition could not be sustained under section 41(1). The said judgment of the Tribunal was confirmed by Delhi High Court on 23-12-2011 In the case of National Insulated Cable Co. v. ITO ITA No. 421/Del/2011 dt. 8-7-2011 (Del 'E'-Trib) it was held that the fact that the creditors were old creditors brought forward from earlier years has not been disputed by the department. These creditors have not been introduced during the year under consideration. There is no evidence or material on record to establish that the assessee liability to pay the amount to t....