TaxTMI 
TaxTMI 
2019 (5) TMI 531
X X X X Extracts X X X X
X X X X Extracts X X X X
....xcess of Rs. 20,000/- for supply of timber to various local merchants. Aggrieved the assessee carried the matter in appeal. Before the ld. First Appellate Authority, the assessee submitted that none of the cash payments in question exceeded the limit prescribed u/s 40A(3) of the Act. He produced a cash book and ledger account to demonstrate the fact that the amount of cash payment did not exceed Rs. 20,000/- on any single day to any single person. In other words, his contention is that the payments to a single person in cash did not exceed Rs. 20,000/- per day and hence there is no violation of Section 40A(3) of the Act. The ld. CIT(A) records that the assessee produced a hand written cash book and ledger account before him and these were explained by his accountant and the accountant showed the cash book which was cross-checked with the narrations made in the ledger account. The ld. CIT(A) called for the remand report from the Assessing Officer. The Assessing Officer reiterated that an amount of Rs. 99,03,526/- was paid by the assessee in cash, in amount's exceeding Rs. 20,000/-, to a single entity, on a single day. The claim of the assessee that it falls under the exemption....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs of the authorities below as well as case law cited, we hold as follows:- 7. The ld. CIT(A) at para 9 of his order clearly states that he had examined the cash book and ledger account and cross-checked the same with the narrations of the accountant of the assessee that each payment, on each day to each person was less than Rs. 20,000/- in cash. While doing so, he has not made any adverse comment on the claim of the assessee. A perusal of the copy of the ledger account which is at pages 10 to 44 of the paper book demonstrates the payments made by cash to each of the parties on any single day has not exceeded Rs. 20,000/-. There were both purchases and sales from each of the parties and it was only the difference that was settled in cash on various dates. This copy of the ledger account and the various evidences, such as voucher copies filed were not disputed by the ld. D/R. The factual claims of the assessee supported by the copy of the ledger account etc. could not be controverted by the ld. D/R. The Assessing Officer has not conducted any third party verification. He has given factually incorrect figures in his remand report. Under these circumstances, we are of the opinion t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....angement, such goods are transported through trucks owned by it as well as through hired trucks. It was submitted that as regard payments in respect of hiring charges of the trucks, the said payment was made in 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... no.17 of the paper book. It was argued that merely for the sake of convenience, assessee recorded freight income received from the companies as well as the freight expenses paid through brokers. It is submitted that 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 ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reported by the AO that the AO had also issued notice u/s 131 of the Act to three such agents on random basis out of total eighteen agents and out of these three persons, two appeared before the AO and confirmed that they were 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 wer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s till August 2005-Subsequently TATA issued circular and assessee was required to make payment by cash, since it had bank account with cooperative bank- Assessee made payment in cash on different dates and such payment exceeded Rs. 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 conta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....In view of our aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the subject mentioned cash payments would fall under the ambit of exception provided in Rule 6DD(k) of the Rules in the 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. " 7.2. 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 tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black- money for business transactions. - 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-i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are concerned, as existed at relevant point in time and as considered by the Hon'ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impunged assessment year i.e. AY 2013-14. However, Rule 6DD(j) has been amended and 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 ini....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....everage has been left for little flexing by making a general provision in the form of clause (j) in rule 6DD. Thereafter, the Hon'ble High Court refers to the clause 6DD(j) and the circular dated 31st May, 1977 issued by the Board in the context of what shall constitute 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'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nditure 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 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 busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt case, rigors of s. 40A(3) of the Act must be lifted. 23. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007) 208 CTR (Raj) had observed that the exceptions contained in r. 6DD are not exhaustive and that 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dy adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency." 36. The Co-ordinate Bench in case of M/s Dhuri Wine vs DCIT (ITA No. 1155/chd/2013 & others dated 09.10.2015) has held that 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 dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the details of the properties purchased, as per copies of the sale deed furnished, held that the assessee had made cash payments regularly and no specific circumstances have been brought to his knowledge that the cash payments were made due to some unavoidable circumstances. It was 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 se....