AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2018 (8) TMI 1191
X X X X Extracts X X X X
X X X X Extracts X X X X
....the reason that the assessee made cash payments for hiring trucks beyond the limits prescribed u/s 40A(3) of the Act. Aggrieved the assessee carried the matter in appeal. Before the ld. First Appellate Authority , he contended that the payments were made due to business expediency and at the instance of the truck drivers and the transactions were genuine and not doubted by the Assessing Officer. He relied on a number of case-law. The ld. CIT(A) rejected the contentions of the assessee and confirmed the order of the Assessing Officer. 3. Further aggrieved, the assessee is in appeal before us. The ld. Counsel for the assessee repeated the contentions raised before the lower authorities on the issue of disallowance u/s 40A(3) of the Act. He submitted that the nature of business of the assessee requires hiring of trucks from the market and while making payments to the truck drivers, cross cheques are not accepted in many cases and the assessee is bound to pay in cash. He submitted that the Assessing Officer did not verify any of the expenditure nor he has doubted the same and has only made a technical disallowance. He filed a paper book which consists of a number of vouchers a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to state that my case falls under the exceptional circumstances category which does not fall under the provisions of section 40A(3) of the IT Act 1961. The limit of payments in cash as prescribed in the provisions of 40A(3) of the IT Act 1961 was introduced long time back when the diesel cost was very low compared to the todays' market rate. If I follow the rules and the regulations laid down in the above said provision I shall not be able to carry on my business. The truck drivers does not accept cheques / drafts as he does not have any back accounts and he is on the road to transport goods." 4.1. The ld. Counsel for the assessee submitted that the fact that the truck drivers, insist on cash payments for smooth supply of trucks, is not denied by the revenue. It is also not disputed that to ensure that at no point of time, the assessee is deprived of trucks, he was forced to pay in cash. The Assessing Officer in this case has not doubted the business expediency or genuineness of these transactions. We also find that the copies of the bills produced evidence that payments were made though agents. Under these circumstances, the propositions of law, discussed in the order of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cash by the assessee to brokers who, in turn, was required to make payments to the concerned truck owner/drivers on behalf of the assessee. He submitted that the fact that the payments have been made by the assessee to brokers was not in dispute at all. He further submitted that the AO repeatedly mentioned in the show cause notices issued by him that the concerned payments have been made by assessee to its brokers. Copies of such show cause notice with respect to disallowance u/s.40A(3) for all the four years are placed at page nos.33 to 49 of the paper book. It was further argued that the assessee has also brought this fact to the notice of the AO as well as ld. CIT(A) that payments were made to brokers vide its written submissions, copies of which are placed at page no.11 to 26 of the paper book. In view of the above, it was contended that there was no violation of provisions of section 40A(3) r.w.s. Rule 6DD of the Income Tax Rules, since the cash payments have been made to brokers. Reliance was placed at page no.11 of the CIT(A)‟s order and page no.1 of the paper book. It was further submitted that even the learned CIT(A) has recorded a finding that the assessee has not m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at what the assessee earns as income is merely the freight difference and the same is in the nature of commission. When the assessee earns merely freight difference, the freight paid to the brokers is not its expenditure at all. Once the payments are not in the nature of expenditure, there is no question of disallowance of any expenditure invoking the provisions of section 40A(3). He placed reliance on the decision of the ITAT, in the case of G.A. Roadlines Vs. ITO, 44 SOT 145 (Hyd) and ITO Vs. Shri Ashish V. Patel, ITA No.676/ahd/2013 order dated 28.6.2013. 7. On the other hand, the learned DR argued and supported the order of the AO, and submitted that the payments were not made to the brokers, but to the parties. 8. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO observed that the assessee has made cash payments for freight charges to brokers, which was in excess of the limit prescribed under section 40A(3) of the Act. He, therefore, by invoking the provisions of section 40A(3) of the Act, made disallowance of 10,69,899/- for A.Y.2007-2008, 7,05,198/- for A.Y.2008- 200....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere acting as agent for these two assessees for making purchases on behalf of these two assessees. It was also confirmed by them that they were taking payment in cash from these two assessees and payment was made in cash to the suppliers of the goods. It was also confirmed that they were taking commission ranging from 0.5% to 0.75% on supply of waste papers to the assessee. In the light of these facts, it is seen that the provisions of clause (k) of Rule 6DD of the IT Rules are squarely applicable and hence, in the facts of the present case, no disallowance u/s 40A (3) of the Act is justified. Hence, on this aspect, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we confirm his order on this aspect, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we confirm his order on this aspect." 9. We find that in the instant case also, it is not in dispute that the payments were made by the assessee to the brokers from whom the trucks were hired on payment, and in turn was required to make the payment in cash to the truck- drivers in each. As per Oxford Dictionary & Thesaurus-II Page no.15, an agent is: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 20,000 each-AO disallowed payment made in cash invoking provisions of s 40A(3)-CIT(A) deleted disallowance made by AO holding that genuineness of transaction was not disputed and assessee took a very practical step in making payment in cash to stay in business in a competitive environment-Tribunal allowed revenue‟s appeal relying on clause (j) of r 6DD-Held, s 40A (3) aims to curb and reduce possibilities of back money transactions-It does not eliminate considerations of business expediences-Assessee was compelled to make cash payments under peculiar circumstances as principal company, to which assessee was a distributor, insisted that cheque payment from a cooperative bank would not do, since the realization takes a longer time-If assessee had not made cash payment, it would have received the recharge vouchers delayed by 4/5 days and thereby would severely affect its business operations- Rigors of s 40A(3) to be lifted-Further the exceptions contained in r 6DDD are not exhaustive and that rule must be interpreted liberally- Impugned order set aside-Assessee‟s appeal allowed. 9.4. We also find that the Hon‟ble Gauhati High Court in the case of Walford Tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e facts and circumstances of the case and accordingly the provisions of section 40A(3) of the Act could not be made applicable in the instant case. Hence we do not find any infirmity in the order of the ld CIT(A) in this regard. Accordingly, the grounds raised by the revenue are dismissed. " The Jaipur Bench of the Tribunal in the case of M/s. A Daga Royal Arts (supra), discussed the entire law on Section 40A(3) of the Act, and held as follows:- "20. In case of Attar Singh Gurmukh Singh v. ITO (supra), the matter which came up for consideration before the Hon'ble Supreme Court, the facts of the case were that assessee had made payment in cash exceeding a sum of Rs. 2,500/- for purchase of certain stock-in-trade. Payments were not allowed as deductions in the computation of income under the head "profits and gains of business or professions" as the same were held to be in contravention of section 40A(3) read with that 6DD of the Income rules. In that factual background, the question regarding validity of section 40A(3) and applicability of the said provisions to payment made for acquiring stock-in- trade came up for consideration before the Hon'ble Supreme Court.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransactions. - Mudiam Oil Co. v. ITO [1973] 92 ITR 519 (AP). If the payment is made by a crossed cheque on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black-money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black-money should not be regarded as curtailing the freedom of trade or business." 22. Further, the Hon'ble Supreme Court upheld the applicability of section 40A(3) to payment made for acquiring stock-in-trade and raw materials and also affirmed the decision of Hon'ble Rajasthan High Court in case of Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj) to the effect that the payments made for purchasing stock-in-trade or raw material should also be regarded as expenditure for the purposes of section 40A(3) of the Act. 23. The Hon'ble Supreme Court has therefore upheld the constitutional validity of section 40A(3) of the Act and has held that the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd by notification dated 10.10.2008, it now provides for an exception only in a scenario where the payment was required to be made on a day on which banks were closed either on account of holiday or strike. A question which arises for consideration is whether the legal proposition so laid down by the Hon'ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to which such delegated legislation is subservient has been retained in its entirety. Alternatively, can it be said that what has been prescribed as exceptional circumstances in Rule 6DD as amended are exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations. 26. If we look at the legislative history of section 40A(3) and Rule 6DD, we find that initially, section 40A(3) provides for disallowance of 100% of the expenditure unless the matter falls under exception as provided in Rule 6DD(j) Later on, section 40A(3) has been amended to provide for disallowance of 20% of the expenditure incurred in cash....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elow and thus seems fortified by the said decisions. 29. We refer to the decision of the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (supra), where the facts of case were that the assessee had made certain cash payments towards purchase of scooter/mopeds which exceeded Rs. 10,000/- in each case to the principal agent instead of making payment through the cross cheques or bank draft. The Assessing Officer invoked the provisions of section 40A(3) and held that they were no exceptional circumstances falling under rule 6DD which could avoid consequences of the provisions of section 40A(3) of the Act. The ld. CIT(A) held that such exceptional circumstances did exist. However, the findings of the ld. CIT(A) were reversed by the Tribunal and the matter came up for consideration before the Hon'ble High Court. 30. The Hon'ble High Court observed that the principal reason which weighed with the Tribunal in discarding the explanation furnished by the assessee was that the case of the assessee did not fall in any of the clauses enumerated in the circular issued by the CBDT about the explanatory note appended to clause (j) was to operate a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e exceptional and unavoidable circumstances within the meaning of section Clause (j). The Hon'ble High Court observed that the circular in paragraph 5 gives a clear indication that rule 6DD(j) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and the identity of the receiver is established, the requirement of rule 6DD(j) must be deemed to have been satisfied. The Hon'ble High Court observed that apparently section 40A(3) was intended to penalize the tax evader and not the honest transactions and that is why after framing of rule 6DD(j), the Board stepped in by issuing the aforesaid circular and this clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO vs. Swastik Roadways reported in [2004] 2 RC 539; [2004] 3 SCC 640. 32. The legal proposition that arises from the above decision of the Hon'ble Rajasthan High Court is that 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom undisclosed sources, The terms of s. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. 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 A.O. the circumstances under which the payment in the manner prescribed in s. 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 crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of s. 40A(3) and r. 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions:" 20. It was because of these considerations that this Court in case of Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the payment and the identify of the payee are the first and foremost requirements to invoke the exceptions ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the said rule must be interpreted liberally." 34. In case of M/s Ajmer Food Products Pvt. Ltd., Ajmer vs. JCIT (supra), a similar issue has come up before the Co-ordinate Bench and speaking through one of us, it was held as under: "4.5 The genuineness of the transaction as well as the identity of the payee are not disputed. Further, the appellant has explained the business expediency of making the cash payments to both the parties which has not been controverted by the Revenue. Following the decision of Gujarat High Court in case of Anupam Tele Services (supra) and Rajasthan High Court in case of Harshila Chordia (supra), the addition of Rs. 45,738/- under section 40A(3) is deleted." 35. In case of Gurdas Garg vs. CIT(A), Bathinda (supra), the matter which came up for consideration before the Hon'ble Punjab & Haryana High Court, the facts of the case are pari materia to the instant case and the ratio of the said decision clearly applies in the instant case. In that case, the facts of the case were that the assessee was engaged in trading in properties and during the course of assessment proceedings, the AO observed that there are transactions where ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the proposition so laid down by the Hon'ble High Court in case of Gurdas Garg (supra) 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 has to make the cash payments, the genuineness of the transactions have also to be verified. 37. The Co-ordinate Bench in case of Rakesh Kumar vs. ACIT (ITA No. 102(Asr)/2014 dated 09.03.2016) relying on the decision of Hon'ble Punjab and Haryana High Court in case of Gurdas Garg (supra) has held that the genuineness of the payment has not been doubted as the Assessing Officer himself has held that sale deeds of properties were registered with the Revenue department of the Government. Therefore, following the decision of Hon'ble Punjab and Haryana High Court, the payment for purchase of land was allowed. 38. We further note that in case of M/s ACE India Abodes limited (DB Appeal No. 45/2012 dated 11.09.2017), a similar issue has come up before the Hon'ble Rajasthan High C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s held by the AO that maximum cash payments were made to persons residing in Jaipur city and in single family, repeated cash payments were made which itself shows that there were no unavoidable circumstances to make cash payments to the sellers. What is therefore relevant to note that the AO has appreciated the necessity of determining the unavoidable circumstances which could have led the assessee to make cash payments. During the course of assessement proceedings, it was submitted by the assessee 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 this regard, the ld AR submitted before us that the assessee had purchased the lands both through cash and cheques. Based on the requirement of the seller, assessee had selected the mode of payment. For the sellers, who had insisted the payments in cash, assessee had withdrawn the cash from bank on the same date of registry and made the payments to seller accordingly. The withdrawals from bank and payments to seller have been tabulated below as per dates be....