TaxTMI 
TaxTMI 
TaxTMI 
2020 (2) TMI 254
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.... on the decision of Hon'ble ITAT Jodhpur Bench in the case of Sumit Industries ITA No. 12/jodh/2008, where it has been held that Government of Rajasthan established Rajasthan Electricity Regulatory Commission in January, 2000 and AVVNL was declared body of Government of Rajasthan". 3. On the facts & circumstances of the case & in law, Ld. CIT(A) grossly erred in confirming the addition despite of his holding that judgment cited by the assessee are applicable to facts of this case." 2. Briefly stated, the facts of the case are that the assessee is engaged in business of mining and crushing of stones and sale of grits. The return of income was filed on 26.06.2015 declaring total income of Rs. 77,93,960/- which was taken up for limited scrutiny through CASS, the notice u/s 143(2) was issued and assessment completed u/s 143(3) dated 29.12.2017 where the addition of Rs. 71,55,130/- was made u/s 40A(3) of the Act. 3. During the course of assessment proceedings, the Assessing officer observed that the assessee has made payment towards electricity charges amounting to Rs. 71,55,130/- in cash to the Ajmer Vidyut Nigam Limited (AVVNL) and therefore, the assessee was asked to show cause a....
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....ll were produced for verification. It was submitted that the assessee was having the bank account in Vijaya Bank at Jhunjhunu which is an outstation branch and Vijaya Bank do not have any branch in Udairpurwati. As per AVVNL directions, the cheque must be of local clearing bank only. Cheque issued by the Vijaya Bank, Jhunjhunu will be consider as outstation cheque and it will take 10 days to get the cheque cleared in account of AVVNL. It was practically not possible for the assessee to arrange the payments at least 10 days before the billing due date and moreover the AVVNL does not accept outstation cheque so the assessee was having a valid reason to make the payment in cash only. It was accordingly submitted that the assessee was having a valid business reasons which force him to make the electricity payment in cash and also the payer and the receipt are genuine and expenditure on electricity charges should not be disallowed u/s 40A (3) of the Act. 4. The submissions of the assessee were considered but not found acceptable to the Assessing Officer. As per the Assessing Officer, for availing the exemption under section 40A(3) of the IT Act, 1961, burden of proof is on assessee to ....
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....g, the ld. AR referring to the intent behind introduction of section 40A(3) stated that the payment has been made to a government company towards electricity charges and that too, under compelling business circumstances where AVVNL was not ready to accept cheque payments after the due dates and thus, there is no violation of intent. It was further submitted that AVVNL should be considered as Government for the purposes of section 40A(3) of the Act read with rule 6DD(b). It was further submitted as under:- "1. That all the electricity bills need to be deposited in AVVNL, Udairpurwati office only and the Assessee's mining site is 20 kms far from Udairpurwati. Apparently there is no bank branch at mining site of the assessee. 2. AVVNL, Udairpurwati accepts the cheques of local clearing banks i.e. State Bank of India, Udairpurwati only. 3. That the assessee does not have any account in State Bank of India. Assessee's bank account is with Vijaya Bank,Jhunjhunu and Vijaya bank does not have any branch at Udairpurwati. 4. All the above payments to AVVNL have been made after the expiry of due date and AVVNL does not accepts cheques after due date. 5. As per payment conditions of....
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....r contra, the ld. DR relied on the findings of the lower authorities. It was submitted that AVVNL has been established under the Companies Act by the Govt. of Rajasthan and therefore, it is a separate legal entity and even though it is a Government Company, it cannot be equated with Government as provided in rule 6DD and for the purposes, reliance was placed on the Coordinate Bench decision in case of M/s Modi Levigated Kaolin Pvt. Ltd., Sikar vs. ACIT, Sikar (ITA No. 195/JP/2016 dated 15/05/2017) wherein it was held that "Clause (b) of Rule 6DD cannot be stretched to the extent of bringing every Government entity/company into the fold of exempt category. Therefore, had the intention of the legislation was to exempt the Government electricity company, it would have been mentioned in the Clause (b) of Rule 6DD". 10. It was further submitted that the village Chapoli is located only 13 km away from Tehsil Udairpurwati in Jhunjhunu District, Rajasthan where the banking facilities was available and the assessee could have made the cheque payment to AVVNL Office located at Udairpurwati. She accordingly supported the findings of the Assessing Officer which have been confirmed by the ld. ....
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....within due dates, however for the payments under consideration, it was not having sufficient bank balance and thus was not in a position to make the payment within due date and as soon as the funds are realized from its business and credited to its bank account, it has made the withdrawals and made the payments after the due dates. We find force in the arguments of the ld AR that where it was not having sufficient bank balance, then in such circumstances, it was practically not possible to make payments within due date as so prescribed. At the same time, the nature of business activity of assessee is such that it requires continues supply of electricity and any disruption/disconnection due to non-payment of electricity charges will have significant business disruptions and adverse consequences. Therefore, we find that the test of business expediency is clearly established in the instant case which continues to be a relevant factor while examining the applicability of provisions of section 40A(3) as held by the Coordinate Bench in case of M/s A Daga Royal Arts, Jaipur vs ITO (ITA No. 1065/JP/2016 dated 15/05/2018 wherein it was held as under: "18. We have heard the rival contentio....
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....r 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 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. 21. The Hon'ble Supreme Court referring to the provisions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as e....
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....l 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 provisions are not intended to restrict the business activities and restraint so provided are only intended to curb the chances and opportunities to use or create black money and....
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....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 and Rule 6DD(j) was omitted. Thereafter, by virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exce....
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....h 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 as it was existing at the relevant time and enumerated circumstances in the circular was exhaustive of exceptional circumstances. The Hon'ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the p....
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....d 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 evasion of tax is relevant consideration and which should be examined before invoking the rigours of section 40A(3) of the Act." 13. We find that similar view has been taken by the Coordinate Bench in case of Ayub Ali (supra) where it was held as under: "6. We have heard the rival contentions and perused the ma....
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.... discontinued. Therefore, having regard to the nature of business activity of the assessee and that assessee did not have banking facility where payment of electricity bill is to be made and considering the business expediency and other factors, I am of the view the case of the assessee would clearly fall in exception to Rule and no disallowance should be made under section 40A(3) of Income Tax Act. The learned Accountant Member has, therefore, rightly followed the decision of the coordinate Bench on identical issue in the case of Shri Rahul Pancholi (supra) in which on identical facts and issue, the departmental appeal was dismissed. Interestingly, the learned Judicial Member who has dismissed appeal of the assessee on the same set of facts, was the party to the order in the case of Shri Rahul Pancholi (supra). The learned Accountant Member was, therefore, right in his approach in allowing the appeal o the assessee by following the order of the coordinate Bench rather of the same Bench. The learned Judicial Member did not discuss in detail as to why he has not followed the order in the case of Shri Rahul Pancholi (supra) to which he himself is a signatory. The learned Judicial Mem....