TaxTMI 
TaxTMI 
2020 (1) TMI 683
X X X X Extracts X X X X
X X X X Extracts X X X X
....roceedings, the Assessing Officer observed that the assessee has made payment of Rs. 2,38,67,250/- in cash exceeding prescribed threshold in contravention of Section 40A(3) of the Act towards purchase of grit and other items for construction to various persons as detailed at pages 5-7 of the assessment order. A show cause notice was issued to the assessee as to why the cash payment made in contravention of Section 40A(3) of the IT Act may not be added to the total income of the assessee. In response, the assessee submitted that the contract work was executed in rural area and the payments were made in cash for purchase of raw material due to non-availability of banking facility in the village area. It was further submitted that the stone crushers are located in the remote hilly areas where there is no banking facility and the suppliers do not accept the cheque payments and the assessee has to make payment in cash due to compelling circumstances. It was further submitted that there was complete ban on the mining in the State of Haryana since 2010 and the assessee had to purchase the grit, stone & dust from the State of Rajasthan and the business of assessee's firm is mainly in the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Income Tax Act were available to the assessee ab-initio. The assessee was given sufficient time to submit such evidences during the course of assessment proceedings and it was not prevented by any cause or reason. In this regard, vide show cause notice dated 27/02/2015 & 11/03/2015, the assessee firm was asked as to why the cash payment made in the areas falling under the Gram Panchyats as submitted by the assessee during the appellate proceedings may not be added u/s 40A(3) of the Act. In response to that show-cause, the assessee filed written submission stating therein that the contract work has been executed in Rural Area and the payment have to be made in cash for purchase of raw material due to non banking facility nearby but the assessee did not submit the certificates despite adequate opportunity was accorded to it. Without prejudice to the above, additional evidences in the form of certificates from the Sarpanch of Gram Panchayats have been verified by the Inspector of this office. The Inspector of this office has submitted his report stating that the Gram Panchyats under consideration does not have any bank branch within the geographical territory of the Panchaya....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an Kshatriya Gramin Bank) 2. Babai (Baroda Rajasthan Kshatriya Gramin Bank & SBI) Papurna-three Kilometer Babai-Five Kilometer. 3. Zerpur, Tehsil- Mahindragarh 1. Mahendra Garh (SBI, PNB, Canara Bank, CBI, Indian Bank, HDFC, ICICI, Kotak Mahindra etc.) 2. Pali (Haryan Gramin Bank) Mahendra Garh- Seven Kilometer. Pali-Eight Kilometer. Therefore, the additional evidences submitted by the assessee during the appellate proceedings may be entertained on merits." 5. The ld. CIT(A), after considering the submissions of the assessee and the remand reports of the Assessing Officer, has given a finding that the banking facility was not available in the Gram Panchayat area wherein the payment made shown by the assessee but the Assessing officer has categorically mentioned in the remand report that banking facility is available nearby 2-3 KMs from the gram panchayat and in the modern, 2-3 Kms distances doesn't mean anything. Further, he held that since certain payments have been made through RTGS, the argument of banking facility not available doesn't arise because the recipient have got the bank account for receiving the payment. Accordingly, he upheld t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted that the case of the assessee is squarely covered U/s 6DD(g) of the Income Tax Rules. Regarding the second remand report by the AO as well the findings of the ld. CIT(A), it was submitted that the Rules are very clear in its language and cannot be given any other interpretation as there is no ambiguity and therefore, does not matter if there is a banking facility situated 2-3 Kms outside the village as there is no banking facility in the village where the payment is made, the condition so specified in Rule 6DD are fulfilled and both the lower authorities therefore, erred in wrongly interpreting the said provision. 8. It was further submitted that neither the AO nor ld. CIT(A) has doubted the genuineness of payment made to suppliers in respect of goods purchased by the assessee or the identity of the suppliers as the Assessing Officer as himself stated in the assessment order that the payment are made to the renowned suppliers. 9. It was further submitted that as the mining activities had been banned in the State of Haryana, assessee had no other option but to buy construction material from State of Rajasthan as the transport of grit is very expensive and to buy raw materi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Coordinate Benche decision in the case of M/s Lord Chloro Alkali v. ACIT where it was held that no disallowance should be made where the industries are situated in backward areas and is not having banking facility. It was submitted that the said decision has subsequently been affirmed by the Hon'ble Rajasthan High Court (in DB ITA No. 38/2017 dated 20.11.2017) and the SLP filed by the Department has been dismissed by the Hon'ble Supreme Court. 13. Further, reliance was placed on the Hon'ble Rajasthan High Court decision in case of Harshila Chordia vs. ITO 208 CTR 208 wherein it was held that exceptions contained in Rule 6DD are not exhaustive and that the said Rule must be interpreted liberally. It was accordingly submitted that genuineness of the transaction and identity of the payee has not been doubted and the business expediency has been established, the addition so made by the Assessing officer should be deleted. 14. It was also submitted that the AO has wrongly considered following three payments which have been made through cheques amounting to Rs. 21 lakhs and account transfer which is clearly not a subject matter of disallowance U/s 40A(3) of the Act:- S.No ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hyats under consideration does not have any bank branch within the geographical territory of the Panchayats." 18. The ld CIT(A) has also returned a similar finding stating that the banking facility was not available in Gram Panchayat area. Therefore, where there is a clear finding of both the lower authorities, the Assessing officer as well as ld CIT(A), we do not see any justifiable basis to deny the claim of the assessee that the payments so made falls under exception so carved out in Rule 6DD(g) as the language of Rule 6DD(g) is clear and unambiguous to the effect that "the payment is made in a village or town, which on the date of such payment is not served by any bank" which, in the instant case, is clearly demonstrated and verified by the lower authorities through physical inspection that there is no banking facility in the Gram Panchyat areas where the payments have been made by the assessee to the payees and thus, on this ground itself, no disallowance should be made invoking provisions of section 40A(3) of the Act. 19. Further, regarding the contention of the ld AR as to the intention of the legislature behind introduction of section 40A(3) and various authorities qu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.' 19. The aforesaid provisions have to be considered and interpreted in light of various authorities which have been quoted at the Bar and relied upon by the ld AR and ld DR in support of their respective contentions. 20. In case of Attar Singh Gurmukh Singh (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" ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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-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] 24 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 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 (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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te 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 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 v. Swastik Roadways [2004] 3 SCC 640. 32. The legal proposition that arises from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aimed 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 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 m....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Chordia v. 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 Ajmer Food Products (P.) Ltd. v. JCIT [IT Appeal No. 625 (jp) of 2014, dated 28-9-2016] 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 (supra), the matter which came up for consideration before the Hon'ble Punjab & Haryana High Court, the facts of the case are pari mat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Dhuri Wine v. Dy. CIT [2017] 83 taxmann.com 20 (Chd. - Trib.) 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 v. Asstt. CIT [IT Appeal No. 102 (Asr.) of 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 ....
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 selected th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d chosen to make the payments in cash fortified through registered sale deed. The payment has been made out of the explained sources, through the registered document and as a disclosed transaction. 42. We find force in the contentions so raised by the ld AR. The transactions have been executed by the assessee within a span of one and half month and there are transactions where the payment has been made through cheque and there are transactions where the payment has been made through cash. The said contentions are supported by the fact that on the same day, there are cash and cheque payments as evidenced from the details of the transactions appearing at page 7 and 8 of the assessment order. It is therefore clear that the assessee was having sufficient bank balance and only at the insistence of the specific sellers, the assessee has withdrawn cash and made payment to them and wherever, the seller has insisted on cheque payments, the payment has been made by cheque. This makes out a case that the assessee has business expediency under which it has to make payment in cash and in absence of which, the transactions could not be completed. The second proviso to section 40A(3) ref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee has been utilised in making the cash payments. The genuineness of the transaction has been established as purchase of construction material for road construction and lastly, the test of business expediency has been met as it is the admitted position that the mining activities had been banned in the State of Haryana and the assessee had no other option but to buy construction material from State of Rajasthan where the suppliers and stone crushing units had insisted on cash payments at the time of delivery of material. Further, as held by the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), 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 evasion of tax is relevant consideration for which section 40A(3) has been brought on the statute books and which has been satisfied in the instant case. 21. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referr....