TaxTMI 
TaxTMI 
2018 (6) TMI 1240
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....f land in the month of April and May, 2012 from 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. 22....
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....e section. The expenditure for purchasing the stock-in-trade 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....
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....ct. It was submitted that the same can have no adverse effect on the 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 b....
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....ed by the appellant. (vi) I have also examined the al ternate contention of the 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 ....
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....herein and thus Rule 6DD has taken into account, the circumstances having regard to the nature and extent of banking facilities available, 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....
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....T(A) appearing at CIT(A) order Pages 8 -14 may please be considered in correct perspective. 3.2 Ld. CIT(A) at page 18 of his order has rejected the appellants contention that said 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....
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....ns. Accordingly, Rule 6DD was notified in the year 1969 setting out the exceptions. 3.9 Attention is drawn towards the decisions of Hon'ble Jurisdictional Rajasthan High Court in the case of Harshila Chordia vs. ITO 298 ITR 349 wherein 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....
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....he judicial pronouncements relied upon by the assessee firm pertain to preamended period and are of no help to the assessee firm. It is submitted that the considerations of exceptional and unavoidable circumstances in Rule 6DD was deleted w.e.f. 25.07.1995 only and, hence, the case laws relied upon by the assessee firm pertain to post amendment period 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 R....
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....ore invoking the provisions of section 40A(3). 3.17 It is further submitted that the Department has not gone for revision petition or for SLP against the judgment of Hon'ble Punjab & Haryana High Court and in such a situation the case law is a binding precedence. 3.18 Attention is drawn towards the following cases wherein judgment of Hon'ble Punjab High Court in the case of Gurdas Garg (supra) has been still followed: S.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 e....
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...., Chandigarh Bench 09.10.2015 2010-11 D. TAMILRAJAN (2016) 47 CCH 392 ITAT, Cochin Bench 30.06.2016 2009-10 M. KANNAPPAN (2016) 47 CCH 0654 ITAT, Chennai Bench 10.08.2016 2010-11 Rakesh Kumar (2016) 46 CCH 270 ITAT, Amritsar Bench 09.03.2016 2010-11 Shila Mondal, ITA No.336/Kol /2014 ITAT, Kolkata Bench 12.08.2016 3.20. Ld. CIT(A) has placed reliance on the decision of Hon'ble ITAT Chennai Bench in the case of DCIT vs. A. Ramamurthy (2016) 46 CCH 0323 (Chen Trib) whereas the assessee firm has 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 re....
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....as been rightly made under section 40A(3) of the Act and which should be sustained. 18. We have heard the rival contentions and perused the material available on record. It would be relevant to refer to the provisions of section 40A(3) of the Act which reads 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 an allowance 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, e....
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....he Hon'ble Supreme Court. 21. The Hon'ble Supreme Court referring to the provisions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant point in time, has held as under:- "6. As to the validity of section 40A(3), it was urged that if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy tax on an assumed income would be a restriction on 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....
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....e not intended to restrict the business activities and restraint so provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. The Hon'ble Supreme Court has thus laid great emphasis on the intention behind introduction of these provisions and it would therefore be relevant to examine whether in the present case, there is any violation of such intention and if ultimately, it is determined that such intention has been violated, then certainly, the assessee deserves the disallowance of the expenditure so claimed. 24. The Hon'ble Supreme Court 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 t....
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....virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of lastest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike. 27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we 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 i....
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....as exhaustive of exceptional circumstances. The Hon'ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the provisions of clause (j) under rule 6DD would operate to be exhaustive of such circumstances and had not been properly understood its implication. It was further observed by the Hon'ble High Court that primary object of enacting section 40A(3) in its original incarnation was two-fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community. The consequence 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....
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.... 33. In case of Anupam Tele Services v. Income Tax Officer, the matter which came up for consideration before the Hon'ble Gujarat High Court, the facts of the case were that the assessee who is involved in the business of distribution mobile and recharge vouchers of Tata Tele Services Ltd had made payment of Rs. 33,10,194/- to Tata Tele Services Ltd., by cash on different dates. The assessee had made such payment through account payee cheques till 22nd Aug, 2005, when a circular was issued by Tata Tele Services Ltd., requiring the appellant to deposit cash at the company's office at Surat. In that factual background , the Hon'ble High Court held as under:- "17. Rule 6DD of the IT Rules, 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 aim....
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....n any case doubted. These were the conclusions on facts drawn by the CIT(A). The Tribunal also did not disturb such facts but relied solely on r. 6dd(j) of the rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of r. 6DD, consequences envisaged in s. 40A(3) of the Act must follow. 22. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons: (a) The paramount consideration of section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of the Act does not 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 ....
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....t exhaustive of the circumstances in which the proviso to section 40A(3) is applicable and it only illustrative. The Hon'ble High Court refers to the decision of the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia v. ITO (Supra) and the decision of Hon'ble Supreme Court in case of Attar Singh Gurmukh Singh v. ITO (Supra). The High Court further observed that the ld. CIT(A) has given a finding that the identity of the payee i.e. vendors in respect of land purchase by the appellant was established, the sale deeds were produced, the genuineness thereof was accepted and the amount paid in respect of each of these agreement was satisfied before the Stamp Registration Authority and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not 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 transactio....
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....e intent behind introduction of section 40A(3) and catena of decisions right from Attar Singh Gurmukh Singh, Smt. Harshila Chordia, Gurdas Garg, Anupam Tele Services referred supra has decided the issue in favour of the assessee and against the department. 39. The issue which is being disputed before us has to be considered and decided in light of facts on record and the legal position which emerges from the above referred decisions. The facts of the case are that during the year under consideration, the assessee firm has purchased 26 pieces of plot of land in the month of April and May, 2012 from 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. 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....
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....0,000 18,00,000 5,07,00 9-Apr-12 - 9,00,000 9,00,000 27,00,000 9-Apr-12 21,93,000 3,34,000 11-Apr-12 - 2,00,000 2,00,000 29,00,000 11-Apr-12 3,73,000 3,34,000 12-Apr-12 - - - 29,00,000 - - 3,34,000 13-Apr-12 - - - 29,00,000 - - 11,97,100 19-Apr-12 - 30,00,000 30,00,000 59,00,000 23-Apr-12 21,36,900 11,57,000 24-Apr-12 30,00,000 25,00,000 55,00,000 1,14,00,000 24-Apr-12 55,40,100 11,57,000 25-Apr-12 - - - 1,14,00,000 - - 11,57,000 30-Apr-12 - - - 1,14,00,000 - - 11,57,000 4-May-12 - - - 1,14,00,000 - - 11,57,000 7-May-12 - - - 1,14,00,000 - - 11,57,000 8-May-12 19,00,000 23,00,000 42,00,000 1,56,00,000 8-May-12 38,55,000 15,02,000 12-May-12 - - - 1,56,00,000 - - - 15,02,000 14-May-12 - - 1,56,00,000 - - - 15,02,000 15-May-12 - - 1,56,00,000 - - 15,02....