TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 1240
X X X X Extracts X X X X
X X X X Extracts X X X X
....various persons for a total consideration of Rs. 2,46,28,425/-, out of which payment amounting to Rs. 1,71,67,000/- were made in cash to various persons, payment amounting to Rs. 59,48,920/- were made in cheque to various persons, and Rs. 8,15,700/- and Rs. 6,84,296/- were paid in cash towards stamp duty and Court fee respectively. 3. During the course of assessment proceedings, a show-cause notice was issued to the assessee as to why the purchases made in cash should not be disallowed u/s 40A(3) of the Act. In its submission filed vide letter dated 24.02.2016, the assessee submitted that it has purchased the plots of land in the month of April and May, 2012 as capital asset but later on, the same have been converted into stock-in-trade and the reflection and presentation in the annual accounts has been made accordingly. It was further submitted that the payment for purchase of land has been made in cash because the sellers were new to the assessee and refused to accept the cash. It was submitted that the delay in making the cash payment, it could have lost the land deals. In support, reliance was placed on the CBDT Circular No. 220 (F No. 206/17/76- IT (A-11)) dated 31.05.1977. F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits u/s 28 on principles of commercial accounting. It was accordingly held by the AO that the payment made for purchase of stockin- trade would be covered by the term "expenditure" and which would be subject matter of disallowance u/s 40A(3) of the Act. 8. It was further observed by the AO that the maximum purchases were made from the persons who are residing in Jaipur city and there are banking facilities in the city. It was further observed by the AO that in single family, repeated cash payments were made which shows that there were no unavoidable circumstances to make cash payment to the sellers and the AO accordingly made disallowance of Rs. 1,71,67,000/- in respect of purchase of property in cash invoking the provisions of section 40A(3) of the Act. However no disallowance was made in respect of cash payment for stamp duties and court fees paid by the assessee. 9. Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A). It was contended before the ld. CIT(A) that the pieces of land were purchased as investment in the month of April, M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he fact of cash being paid for acquiring investment in the form of land. 12. It was further submitted that even if the purchases are treated as stockin- trade, section 40A(3) does not in blanket manner mandate disallowance in respect of all situations where cash payment has been made. It was submitted that the cash payments were made on the specific condition put up by the seller and they being resident of Jaipur or belonging to the same family does not make any difference. In this regard, it was further submitted that CBDT Circular No. 220(F No. 206/17/76-IT (A-II) dated 31.05.1977 was brought to the notice of the AO and which was binding on the AO and his action of ignoring the said circular is illegal. 13. It was further submitted that the lands were purchased through registered sale deeds, identity of the sellers and genuineness of the transactions is fully established and the AO has not raised any doubt over the genuineness of the payments and it was accordingly submitted that where the genuineness of the payments which are as per the registered sale deeds are not doubted by the AO, no disallowance could be made. In support, reliance was placed on the decision of Hon'ble Pun....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... appel lant that the sellers of the plots insisted for cash payments and due to business exigencies, i t made the cash payments in violation of provisions of section 40A(3) of the Act and these payments were genuine and the AO has also not raised any doubt about the genuineness of these payments and thus the provisions of section 40A(3) of the Act are not applicable. It would be relevant to reproduced the provisions of section 40A(3) of the Act as under:- "(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. (3A) Where ............ exceeds twenty thousand rupees: Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under subsection (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such case....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., considerations of business expediency and other relevant factors. However, in the instant case under consideration, the appellant was not able to specify under which clause of Rule 6DD its case falls. It may be mentioned that the Rule 6DD has been amended by the Income Tax (7th Amendment Rules), 2008 w.e.f. AY 2009-10 and the most of the judicial pronouncements relied upon by the appellant pertained to pre amended Rule 6DD. Hence, these are distinguishable and are of no help to the appellant company. (x) The appellant relied upon the decision of Hon'ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT (supra), wherein it was held that where the genuineness of payments is not disbelieved, the disallowance u/s 40A(3) cannot be made and the decision of Hon'ble ITAT, Amritsar Branch, Amritsar in ITA no 102(Asr)/2014 for A Y 2010- 11 wherein Hon'ble ITAT, has held that disallowance u/s 40A(3) for cash payments cannot be made if genuineness is not doubted. It may be mentioned that in the case of Gurdas Garg Vs CIT (Supra), the appeal for the AY 2009-10 was before the Hon'ble Court, however the said decision was pronounced on the basis of pre amended Rule 6DD....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 26 plots purchased, in April, 2012, were part of investment. For this he referred to Tax Audit Report as well as Audited Financial Statement. It is submitted that the firm while in real estate business can purchase certain real estate for business purpose and can also purchase certain real estate for investment purpose. This aspect is also accepted by CBDT in its circular dated 31/05/1977 as per which there is no restriction under the law for a trader of a particular item like jewellery, diamond, real estate or share to hold the same as investment also. Further, the assessee firm before lower authorities have submitted that it had paid the registration charges and stamp duties of Rs. 14,99,996 for getting the land registered in its name, which is not a general practice of a real estate businessman. This fact was not controverted by ld. lower authorities. 3.3 Ld. CIT(A) also erred in holding that the contention of the assessee that the lands were purchased as investments and the alternate plea that due to business exigencies, payment was made in cash is contradictory to each other. In this regard it is submitted that the assessee firm is a business entity which aims at maximizing....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... it was held that list of exceptions provided under rule 6DD is not exhaustive. Meaning thereby that more could be read into it, if the same does not violate the reason for which section 40A(3) was introduced. Thus, the contention of ld. CIT(A) that the appellant was unable to specify under which clause of Rule 6DD its case fall is baseless. After introduction of Rule 6DD, in the year 1970, vide IT (Fourth Amdt.) Rules, 1970, clause (j) to Rule 6DD was introduced which provided as under. "Rule 6DD: (j) in any other case where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft- a. due to exceptional or unavoidable circumstances; or b. 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," 3.11 Thereafter, CBDT issued Circular No. 220 dated 31.05.1977 providing an illustrative list of exceptional cases wherein cash payment could not attract disallowance u/s 40A(3) by virtue of Rule 6DD(j). 3.12 The above Rule 6DD....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d only as all the cases have dealt with the post amendment assessment years. 3.15 Attention is again drawn towards the judgment of Hon'ble Punjab and Haryana High Court pronounced on 16th July, 2015 pertaining to the assessment year 2009-10 in the case of Gurdas Garg v. CIT(A), Bathinda [2015] 63 taxmann.com 289, in this case reference of CBDT circular no. 220 dated 31.05.1977, was made. This CBDT circular was introduced with reference to rule 6DD(j). Even after 25.07.1995, when rule 6DD(j) providing for exceptional circumstances was dropped, the reference by Hon'ble High Court denotes its relevance which is reproduced below for ready reference Needless to mention that assessee case is covered in clause (d) of Para 4 of the said CBDT circular. "...7. The respondent/assessee's case is supported by several judgments. The Rajasthan High Court in Smt. Harshila Chordia v. ITO [2008] 298 ITR 349 held as under:- "14. About this clause, many doubts were raised and enquiries were directed to the Board as to what shall constitute exceptional and unavoidable circumstances within the meaning of Clause (j). That led to issuance of Circular by the Board on May 31, 1977 ([1977] 108 ITR (....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....No A.Y. Case law Court Date of Order 1 2010-11 Dhuri Wine (2016) 48 ITR (Trib) 289 ITAT, Chandigarh Bench 09.10.2015 2 2010-11 Rakesh Kumar (2016) 46 CCH 270 ITAT, Amritsar Bench 09.03.2016 3.18.i Hon'ble ITAT, Chandigarh Bench, in the case of Dhuri Wine (2016) 48 ITR (Trib) 289 (Chandigarh), pertaining to the AY 2010-11, pronounced on 09.10.2015, held as under: "...The proposition laid down by the Hon'ble High Court is quite unambiguous to the effect that even if the case of the assessee does not fall in any of the clauses of Rule 6DD of the Income Tax Rules, invoking the provisions of section 40A(3) of the Act can be dispensed with if the assessee is able to prove the business expediency because of which it have to make the cash payments, the genuineness of the transactions have also to be verified...." "...The learned CIT (Appeals) while adjudicating the contention of the assessee with regard to the genuineness himself has held that it is not sufficient for the assessee to establish that the payments were genuine and the parties were identifiable. He was of the view that the assessee is further required to prove that due to exceptional and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as placed reliance on plethora of judgments as mentioned above. Regard different views taken by different courts, it is submitted that Hon'ble Supreme Court in case of CIT v. M/s Vegetables Products Ltd. 88 ITR 192 (SC) has held that when different High Courts have different views the one in favour of the assessee should be adopted. The relevant extract is set out as under: "It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible that construction which favours the assessee must be adopted." 3.21 Ld. CIT(A) further rejected the assessee firm's contention that some of the sellers insisted for cash payment for lack of documentary evidence in this regard. It is submitted that ld. CIT(A) himself has admitted that more than 50% of payments were accepted through cheques. It support the contention of appellant that where ever cash was not demanded payments were made through cheques. Complete trails of cash being withdrawn from bank and paid to sellers was established before ld. CIT(A) [CIT(A) Page 6]. Ld CIT(A) has not disputed the said factual aspect. Once the factual aspect is accepted by ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees: Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees, 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 : Provided further that in the ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the right to carry on the business, besides being arbitrary. 7. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the 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 on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee has held that: "The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or cro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance. 28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ence which was provided was to disallow of deduction of such payments/expenses which were not through bank either by crossed cheques or by demand draft or by pay order. It was further held by the Hon'ble High Court that: "......Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration which has been overlooked by the Tribunal. 31. It was accordingly held by the Hon'ble High Court that it is the relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in light of Rule 6DD as clarified by circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. This is particularly so, because the consequence provided u/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les, 1962 provides for situations under which disallowance under s. 40A(3) shall not be made and no payment shall be deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, cl. (j) which is relevant, read as under: (j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; 18. It could be appreciated that s. 40A and in particular sub-cl. (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of account payee cheque drawn on a bank or account payee bank draft. 19. As held by the Apex Court in case of Attar Singh Gurmukh Singh (supra). "..In our opinion, there is little merit in this contention. Sec. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eliminate considerations of business expediencies. (b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow- (i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time; (ii) the assessee was, therefore, required to make cash payments only; (iii) Tata Tele Services Ltd. assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee; (iv) It is not disputed that the Tata Tele Services Ltd. did not act on such promise; (v) if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. We would find that the payments between the assessee and the Tata Tele Services Ltd. were genuine. The Tata Tele Services Ltd. had insisted that such payments be made in cash, which Tata Tele Services Ltd. in turn assured and deposited the amount in a bank account. In the facts of the present case, rigor....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... attracted. The Hon'ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions and it is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market and therefore it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to settle the deals. The Tribunal did not doubt this case. The Tribunal, however, held that the claim for deduction was not sustainable. In view of Section 40A(3) as the payments which were over Rs. 20,000/- were made in cash. The Hon'ble High Court accordingly observed that "the Tribunal has not disbelieved the transactions or the genuineness thereof nor has it disbelieved the fact that payments having been made. More importantly, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... various persons, and Rs. 8,15,700/- and Rs. 6,84,296/- were paid in cash towards stamp duty and court fee respectively. During the course of assessment proceedings, the assessee submitted copies of the sale deed, the particulars of which find mention on page 7 and 8 of the assessment order. On perusal of the said details, it is observed that the said details contains the name of the seller, date of sale deed, plot no., purchase value, stamp duty, Court fee and mode of payment - cash/cheque. Therefore, as far as the identity of the persons from whom the purchases have been made and genuineness of the transactions of purchase of various plots of land and payment in cash is concerned, the same is evidenced by the registered sale deeds and there is no dispute which has been raised by the Revenue either during the assessment proceedings or before us. The identity of the sellers and genuineness of the transactions is therefore fully established in the instant case. 40. From perusal of the assessment order, it is further noted that the AO, on perusal of the details of the properties purchased, as per copies of the sale deed furnished, held that the assessee had made cash payments regula....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2 - - 1,56,00,000 - - - 15,02,000 15-May-12 - - 1,56,00,000 - - 15,02,000 16-May-12 - 15,00,000 15,00,000 1,71,00,000 - - 30,02,000 17-May-12 - 15,00,000 15,00,000 1,86,00,000 17-May-12 30,69,000 14,33,000 Total 63,50,000 1,42,50,000 1,86,00,000 1,71,67,000 41. It was submitted by the ld AR that in order to secure the deal, assessee had no other option but to make the payment in cash. Cash payments were made from the disclosed sources being the amount withdrawn from bank. It was for sheer insistence of the seller that the payments were made in cash. Had the assessee denied the cash payment looking to the provisions of sections 40A(3), the deal could not have been finalized. In such circumstances, in the business interest and to complete the deal, the assessee had chosen to make the payments in cash fortified through registered sale deed. The payment has been made out of the explained sources, through the registered document and as a disclosed transaction. 42. We find force in the contentions so raised by the ld AR. The transactions have been executed by the assessee within a s....