TaxTMI 
TaxTMI 
2019 (9) TMI 685
X X X X Extracts X X X X
X X X X Extracts X X X X
....the appellant is an authorized Book Maker of Royal Calcutta Turf Club for 'Horse Racing' and he is carrying on this business for the last two decades. However, he runs authorized business of Book Maker in form of two entities, MI s H.D. Som(A) & Co. and H.D. Som(B) & Co. The appellant is the proprietor of both the entities and maintains consolidated P&L AI c under his proprietorship. 4.1 During the year, the Ld. A.O. found that the appellant had paid Operational Charges to the tune of Rs. 65,70,374/- to M/s Royal Calcutta Turf Club(RCTC) out of which cash amounting to Rs. 49,43,544/- was paid in violation of section 40A(3). When confronted, the AIR argued that both the entities under the proprietorship business of the appellant are separate entities with separate agreements with RCTC and with separate staff. Thus, the clubbing of deposits made in cash on a single day for both the entities by the A.O. as he has done at Table-l of page 3,4 & 5 of the assessment order is incorrect and the case of the appellant is therefore, not covered u/s 40A(3). The A.O. at Para 4.6 of his order at Page No.6 refuted such a claim by stating as below: "The audited accounts of the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....CTC in response to your notice under 133(6) of 1. T. Act, it is evident that they have also maintained separate accounts (ledgers) for both the entity, in respect to transaction with the assessee. Moreover, RCTC issued separate documents (FMPL) to both the entities for payment of operational charges and other charges. Thus in a particular day the payments of 'operational charge' by H.D. Som & Co. (A) and H.D. Som & Co. (B) are independent transactions. Thus, the assessee 'operational charge' paid for by H.D. Som & Co. (A) and H.D. Som & Co. (B) are separate expenditure. The section 40A(3) of the Income Tax Act, 1961 provides "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 bank or account payee demand draft exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure". Since during the year under scrutiny, no single expense on account of operational charge exceeded Rs. 20,000/ -, provision u/ s 40{a(3) of the Act should not be invoked. Thus relief of Rs. 49,43,,544/ - is sought." 4.3 During the appellate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ay 100284 - 103093 - 203377 Total 1312243115465 115465 1305085 129045 2861838 3. Reliance is placed on the following citations: 119 ITD 62(Kol) (TM) Shanta Ram Mehta Meaning of in a sum in S. 40A(3) - provisions refers to single payment & not aggregate of payments, irrespective of any number of payments where the amount does* not exceed the limit, the rigour of S. 40A(3) will not apply. 366 ITR122(Guj.) Anupan Tele Services v ITI A. Y. 2006-07 - S. 40A(3) must be read with Rule 6DD - Payment in cash at the request of payee - Transaction genuine - Reasonable explanations for payment in cash - payments could not be disallowed. 4.4 During the appellate proceedings, Remand Report was called for from the A.O. and such report dt.Ol.08.2017 was received in this office. As far as addition of Rs. 49,43,544/- u/s. 40A(3) of the Act is concerned, the A.O. stated that all the issues raised by the appellant have been duly considered in the course of assessment and he thereby endorsed the addition made by the A.O. u/ s 40A(3). A copy of the remand report was provided to the appellant through a notice dt.04.08.2017. In response, the Ld. A/R repeated his argument as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt in cash alone of a banking holiday when cheque payments could have been easily made. In the case of Jai Talkies v. ITO(ITAT, Del.) 57 TTJ 745 it has been held that making payment on bank holiday do not ipso facto permit the assessee to make cash payment. I am of the view that there existed no special circumstance where the appellant was compelled to make cash payment and cash alone to the exclusion of draft or a cheque. The appellant has also taken shelter in certificate issued by RCTC that during the Financial Year 2012-13 there were receiving operational charges from the Book Maker in cash. This certificate, I am of the view, is only self-serving the certificate. The internal regulation of any club will not have any overriding bearing on the provisions of the Income Tax Act which is legislated by the Parliament of India. In the case of Narayan Bijoy Kumar v. CIT(Patna) 163 ITR 895, the Hon'ble Patna High Court considered the certificate given to the assessee by another party insisting for cash payments. The hon'ble High Court considered this certificate and did not find it sufficient cause necessitating cash payment. Accordingly, I do not find certificate issued by RCT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ided on 18-11-2015 holds that impugned disallowance provision does not apply in case of overwhelming genuine payments coupled with business exigencies which may go beyond the prescribed rule 6DD of the Income Tax Rules, 1962 as follows:- 3. The only issue to be decided in this appeal is as to whether the disallowance u/s 40A(3) of the Act could be made in the facts and circumstances of the case amounting to Rs. 1,14,52,363/- (60,50,890 + 54,01,473). 4. The brief facts of this case is that the assessee is a distributor of Hutch Sim Cards and derives income from trading of wholesale and retail sale of mobile sets and top up charges apart from distribution commission for sim cards under the name and style of 'Shibani Hutch Communication', a proprietary concern. The assessee had also shown interest income on fixed deposits and Kisan Vikas Patras. The books of account were not produced by the assessee before the Learned AO inspite of several opportunities provided to him. The asssessee had entered into an Associated Distributor Agreement with Shri.Amit Dutta who is the distributor of Hutch sim cards had appointed assessee as the Associate Distributor. Pursuant to this agreem....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... could be made. He argued that the assessee has made payment to his agent Mr.Amit Dutta and hence payments would fall under the exception provided in Rule 6DD(k) of the IT Rules. In response to this, the Learned DR vehemently supported the orders of the lower authorities. 4.3. We have heard the rival submissions and perused the materials available on record. We find that the payments made by cash in violation of section 40A(3) of the Act have been duly acknowledged by the recipient Shri.Amit Dutta who had deposed before the learned AO and confirmed the fact of receipt of monies in cash. Hence the genuinity of payments made by the assessee stands clearly established beyond doubt. Even for the amounts enhanced by Learned CITA in the sum of Rs. 54,01,473/-, the genuineness of the payments and the necessity to incur the said expenditure for the purpose of business of the assessee was never disputed by the Shri Manorajan Raha Learned CITA. We hold that since the genuinity of the payments made to the parties is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case. It will be pertinent to go into the intention behind ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le. It will be clear from the provisions of section 40A(3) and rule 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." CIT vs CPL Tannery reported in (2009) 318 ITR 179 (Cal) The second contention of the assessee that owing to business expediency, obligation and exigency, the assessee had to make cash payment for purchase of goods so essential for carrying on of his business, was also not disputed by the AO. The genuinity of transactions, rate of gross profit or the fact that the bonafide of the assessee that payments are made to producers of hides and skin are also neither doubted nor disputed by the AO. On the basis of these facts it is not justified on the part of the AO to disallow 20% of the payments made u/s 40A(3) in the process of assessment. We, therefore, delete the addition of Rs. 17,90,571/- and ground no.1 is decided in favour of the assessee. CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.7.2008 - Jurisdictional High Court decision "It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts - Further, seller also issued certificate in support of this - Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3) - Held, yes [ Para 23] [In favour of the assessee]" CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) In this case the court upheld the view of the tribunal in not applying section 40A(3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee. 4.5. It is pertinent to note that the primary object of enacting section 40A(3) was two fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to Shri Manorajan Raha inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non- observation of section 40A(3) must have nexus to the failure of such object. Therefore, the ....