AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (7) TMI 2011
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....e assessee in violation of the provisions of section 40A(3) of the Act. Accordingly, the Assessing Officer disallowed the expenditure which amounted in all to Rs. 38,98,380/- u/s 40A(3) of the Act. 4. Before the Ld.CIT(Appeals), the assessee contended that no disallowance u/s 40A(3) of the Act was warranted since the genuineness of the transaction had not been disbelieved by the Assessing Officer and further that there were compelling reasons for making the aforesaid payments in cash since the land owners were female and were in urgent need of funds and insisted the assessee to make payments in cash. The assessee, therefore, contended that the payment was made on account of the said transaction in cash due to the said business expediency. The assessee contended that in view of the same, since the genuineness and business expediency of the transaction had been established, no disallowance u/s 40A(3) of the Act was warranted. Reliance in this regard was placed on the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO, Ludhiana 1991 SCR (3) 405 and the decision of the Hon'ble Punjab & Haryana High Court in the case of Gurdas Garg Vs. CIT ....
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....rom the internet which was tendered in Court and Rule 6DD reproduced in several judgements including in Attar Singh Gurmukh Singh (supra), Smt. Harshila Chordia (supra), Cit vs. Ashoka Steel Industries and Flour Mills [2007] 293 ITR 192 (P&H), vs. Brij Mohan Singh & Co. [1994] 209 ITR 753 (P&H) and Girdhari Lal Geoenka vs. CIT[1986] 179 ITR 122 (cat.) The material difference really is in clause 6-j of Rule 6DD. On further research we found that Rule 6DD was amended by the Income Tax (7th Amendment Rules), 2008. Sub Rule 2 of Rule 1 states that the same shall come in to force with effect from the assessment year 2009-10 which is the assessment year in question in this case the amendment appears to have been by a notification dated 10.10.2008 issue by the Ministry of Finance (Department of Revenue) CBDT. The opening part of the notification reads as follows;- " S.O. 2431 (E) - In exercise of the powers conferred by section 295 read with proviso to sub section (3A) of section 40A of the Income Tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby made the following rules further to amend the Income Tax Rules, 1962, namely:- 1) These rules may ....
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....cumstances listed therein. The case of appellant is not covered by any of the circumstances mentioned in the aforesaid Rule. Appellant has taken plea that the sellers of the plots were in urgent need of funds and they insisted to pay consideration in cash is not acceptable as no material was brought on record to substantiate this contention. Hon'ble Andhra Pradesh High Court in the case of S Venkata Subba Rao vs. CIT 173 ITR 340 have held that the explanation of the assessee that the parties insisted on cash payment and there is no evidence to corroborate this contention the payments made is not allowable deduction. Similarly has been held by Hon'ble Patna High Court In the case of Narayan Bijoy Kumar vs. CIT 163 ITR 695 that assessee showed a certificate from the other party insisting for case payment which is not sufficient as no cause was shown necessitating cash payment. Therefore in view of the above, it is held that assessee has made cash purchases for his business and violated the provisions of section 40A(3) of the Act, Hence the disallowance made by the assessing officer of Rs. 38,98,380/- u/s 40A(3) is upheld." 6. Aggrieved by he same, the assessee has come up ....
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....rmukh Singh vs. ITO, Ludhiana 1991 SCR (3) 405 and the decision of Hon'ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT Bathinda 63 Taxmann 289. (ii) It was submitted that assessee's case is similar to the cases referred above as the assessing officer has not doubted the genuineness of the payment made to the sellers." 9. The Ld. DR, on the other hand, relied upon the order of the CIT(Appeals) and emphasized that no benefit can be derived by the assessee from the decisions relied upon by it since they were rendered in the context of Rule 6DD(j) of the Income Tax Rules, read alongwith section 40A(3) of the Act, which was prevalent at that point of time and the same having since then been amended and deleted from the Rules, the said decision would not be applicable in the facts of the present case. 10. We have heard the contentions of both the parties and gone through the orders of the authorities below and also the documents and decisions cited before us. 11. The issue before us pertains to disallowance of expenditure made u/s 40A(3), which provides for disallowance of expenditures incurred other than by way of account payee bank draft or ....
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....vided 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 case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words "twenty thousand rupees", the words "thirty-five thousand rupees" had been substituted. (4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made....
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....hich 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 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 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-mo....
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.... 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 crossed bank draft in the circumstances specified under the rule." 25. Here, it is relevant to note that there has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors 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 impugned assessment year i.e. AY 2013-14. However, Rule 6DD(j) ha....
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.... 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 section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining 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 h....
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....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/s 40A(3) for failure to make payments through bank is not absolute in terms nor automatic but exceptions have been provided and leverage 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 ....
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....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. 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 empowers the A.O. 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....
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....isted 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, 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 Chord/a vs. ITO (2007) 208 CTR (Raj) had observed that the exceptions contained in r. 6DD are not exhau....
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....o 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 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) h....
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....ra) in which the Hon'ble High Court had stated that the order was rendered on reading pre-amended provisions of Rule 6DD which included sub clause(j), merits no consideration and the same is, therefore, dismissed. Even otherwise, we find, that despite the categorical observation of the jurisdictional high court that the parties are free to take appropriate action since the decision has not been rendered considering the exclusion of Rule 6DD(j),nothing was brought to our notice regarding any action taken by the Revenue against the said order by way of review petition filed or any other manner. It therefore stands to reason that the decision of the jurisdictional high court has been accepted as being applicable in the post amendment scenario of the Rules. In view of the above, we hold that the disallowance u/s 40A(3)( of the Act could not have been made for the reason that the business expediency was not covered in the circumstances enumerated in Rule 6DD of the Income Tax Rules, 1962. 15. As for the alternate contention of the Revenue that the assessee was unable to prove business expediency, we are unable to agree with the same also. The assessee had contended that the la....