TaxTMI 
TaxTMI 
2021 (12) TMI 95
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....f by placing reliance on the Apex Court ruling in the case of Attar Singh Gurmukh Singh Vs. ITO and the jurisdictional High Court decision in the case of Sri Laxmi Satyanarayana Oil Mills Vs. CIT reported in (2014) 49 Taxman 363 (AP High Court) which were rendered before the amendment to Rule 6DD allowing exceptions to the provisions of Section 40A(3) of the IT Act in cases where genuineness of payment and identity of payee are established, was deleted". 3. Learned CIT-DR next took us to the CIT(A)'s detailed discussion deleting the impugned Section 40A(3) disallowance as under: "6. Decision: The appellant company is in a retail business of medicines and optical instruments and is having 50 medical shops in Hyderabad and Bangalore. The appellant company mainly purchases its medicines and optical instruments from two of its group concerns M/s Value Pharma Holistic Remedies Pvt. Ltd. (VPHRPL) and M/s Value Vision Opticals Pvt. Ltd. (WOPL). The appellant has a turnover of Rs. 17,40,23,492/-. The purchases made during the year were Rs. 13,70,09,209/- and there was an increase in the inventory by 2,00,62,812/-. Thus, the cost of sales was Rs. 11,69,46,397/-. Thus, t....
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....not find that the price difference pertaining to the payments made in cash to the group concerns (of quantum of Rs. 7,59,00,557/-) vis-a-vis the payments made in cheque (of quantum of Rs. 5,42,45,189/-) to those group concerns. The appellant further filed confirmations that the cash received on counter sales were directly allowed to be taken by the respective parties. The appellant stated that the cash realized by sales were directly remitted to VPHRPL and VVOPL against their outstanding balances. Thus, the conclusion prima facie can be drawn that the appellant was running a bona fide and a genuine business and reflecting proper book results and the purchases made from the group concerned were at arm's length irrespective of the mode of payment being cheque or cash. The provisions of section 40A(2)(b) have also not been invoked in the case of the said purchases from these two group concerns. The AO noted that the payment are made in cash and therefore the provisions of section 40A(3) of the Income Tax Act were applicable in this regard. The AO observed that section 40A(3) is very clear in this regard, wherein the payments made of more than Rs....
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....s 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. See: Mudiam Oil Company v. ITO, [1973] 92 ITR 519 A.P. If the payment is made by a crossed cheque drawn 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 blackmoney 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. As to the second question it may be stated that the word 'expenditure' has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word 'expenditure' for the purpose of the Section. The expenditure for purchasing the stoc....
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....s from the above judgements, the purchases made by the appellant would come under the purview of section 40A(3) as held by the Hon'ble Apex Court, however the Hon'ble Apex Court further observes that the terms of section 40A(3) are not absolute and the appellant can prove the genuineness and bonafides of transactions, identity of the buyer to claim to be not to be considered within the rigours of section 40A(3). In the case of Walford Transport (Eastern India) Vs. CIT (1999) 240 ITR 902, it was observed "From a perusal of the decision of different High Courts referred to above, it clearly emerges that the purpose of section 40A(3) of the Act is not to penalized the assessee for making cash payment of an amount of Rs. 2,500/- or above. The purpose is only prevent and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade lox by showing fictitious of false transactions." The Gujarat High Court in the case of Anupam Tele Services Vs ITO in TA No. 556 of 2013 vide judgement dated 22.01.2014 for an issue under consideration for A.Y. 2006-07 which was subsequent to the a....
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....t requirements to invoke the exceptions carved out in rule 6DD(j) of the Income-tax Rules, 1962. In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the Appellate Commissioner. The Tribunal also did not disturb such facts but relied solely on Rule 6DD (j) of the Rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of Rule 6DD, consequences envisaged in Section 40A(3) of the Act must follow. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons [a] The paramount consideration of Section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh [Supra], section 40A(3) of the Act does not eliminate considerations of business expediencies. [b] In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow - [i] the princ....
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....ases made in cash and in cheque are at the same prices and the provisions of section 40A(2)(b) have not been invoked in the case of the said purchases. Thus, it can be concluded that the purchases are made at fair market value and the identity of the supplier is not doubted therefore, the said transactions are genuine and also the appellant has reflected a healthy gross profit of 33%% with regard to the business. The appellant has further flied the requirement of receipt on counter sales to be collected by the supplier as under: VALUE VISION OPTICALS PVT. LTD The Income Tax Officer, .................Sir, Sub: Submission of clarification letter for cash counter sales received from Value Pharma Retail Private limited during the FY 2014-15 - Reg. Ref: PAN: AADCV2130Q The Value Viosion optical Private Limited is a group company of Value Pharma Retain Private limited, Value Pharma Holistic Remedies Private Limited and is into the business of whole sale trading of pharmaceuticals. During the Financial Year 2014-15 our company has Supplied Opticlas, Frames, lenses and contact lenses etc to Value Pharma Retail Private limite....
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....dies Put. to all of its retail stores to collect the cash collections and Pharma holistic Remedies Put. will provide its authorized person and sends daily to retail stores of Value Pharma Retail (Hyd) Put. Ltd., to collect the cash and remit the same against purchases account and will finalize the books from time to time. Memorandum of Understanding This memorandum of understanding is made and executed on this the day of 1st March of 2014 in Hyderabad in between Value Pharma Retail (Hyd) Pvt. Ltd., and Value Pharma Holistic Remedies Pvt. Ltd., Value Pharma Retail (Hyd) Put. Ltd., has retail pharmacy out lets and purchases all its required drugs/ Medicines/ General items from Value Pharma holistic Remedies Put. Ltd., Value Pharma holistic Remedies Put Ltd is a wholesaler in Pharmacy and sells drugs/ Medicines/ General items to retailers against cash purchase. Hereby both parties agreed that 'the Value Pharma Retail (Hyd) Put. Ltd., will access the authorized person of Pharma holistic Remedies Put. to all of its retail stores to collect the cash collections and Pharma holistic Remedies Put. will provide its authorized person and sends daily to retail....
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....VVHRPL do not have a strong asset base and they have hypothecated stocks and receivables along with other guarantees. Thus, the borrowings of 2.42 crore which are secured borrowings in the case of VVHRPL and the borrowings of 2.55 crores in the case of VVOPL which is also secured borrowings is primarily based on the hypothecation of receivables. Thus, the receivables which are primarily from the appellant company, if deposited well before time reduces the interest cost of the group company and also does not cross the thresholds of the borrowings. Thus, the arrangement made to collect the counter sales of the appellant company by the supplier group companies was only to reduce their interest cost by making deposits at the earliest. Though the above method is not the best method to be adopted in the present availability of e-transactions and super fast banking modes, wherein the same amount of cash collection could have been deposited in the appellant's bank account and would have been transferred immediately to the group company and thus the transaction would not have been made in cash and the provisions of section 40A(3) would not have been invoked by a simple process ....
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....s 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 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 business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. 19. Several High Courts followed this dictum and took the view that the provision must be interpreted liberally and the assessees cannot be subjected to undue rigor. The Rajasthan High Court in Smt. Harshila Chordia v. ITO [2008/298 ITR 349 went a step further, and held that the circumstances....
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....s the CBDT were live 10 these issues, the provisions referred to above, wer enacted or incorporated. The Assessing Authority has taken a hyper technical view and failed to discern the spirit underlying the relevant provisions. Though the Appellate Authority exhibited on element of objectivity, it was only in a limited aspect. The Tribunal has ignored the purport of the relevant provisions of law and refused to grant any relief to the assessee. 23. We are of the view that once the assessee has placed the proof of payment of the consideration, in cash, in excess of Rs. 2,500/-, for its transaction to the seller, and the latter admitted the payment, there is no question of disallowing such amount by the Assessing Authority. 24. The question referred to is answered in favour of the assessee and against the department. The above instance is similar to the case of appellant where the group concerns had a lien on the sales made over the counter as they were the main suppliers of the appellant and had in turn taken overdraft facility. The immediate deposit not only reduce the interest cost but more importantly saved the appellant from crossing the overdraft limit....
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....t. Ltd vide order dated 15-2-2016 held that where expenses incurred in cash were genuine which were paid to the seller for purchase of land and there were practical expediency because of which the payments have to be made in cash no disallowance uj s. 40A(3) is called for and also in the case of Dhuri Wine, Chandigarh vide order dated 9-10-2015 held that where the Expenses incurred in cash were genuine and were paid to distilleries through Excise Department for purchase of liquor and there were practical expediency because of which the payments have to be made in cash and therefore such payment were not in the ambit of disallowance u/s. 40A(3). The Amritsar Bench of ITAT in case of Rakesh Kumar, Muktsar v. Assessee on 9th March, 2016 stated that- "In the present case, the genuineness of payment has not been doubted as Assessing Officer himself has held that sale deeds of properties were registered with the Revenue Department of Govt. Therefore, the case of the assessee is fully covered by the above decision of Hon'ble Punjab and Haryana High Court." In the case of CIT v. Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) has held as under: ....
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....concerns to be not covered under the provisions for disallowance u/s.40A(3) as no unaccounted money was involved and nor it was an out of books transaction. It is also important to note that in the case like the appellant's, if the sale made by the appellant is let say Y and the purchases made are X and let us presume that there is a 5% net profit on sales and there are no expenses for the sake of assumption, which implies that the tax has to be paid on 0.05 Y. If the cost of input is in cash under the circumstances mentioned above and all of it is in cash, the profit would thus be 0.05 Y + X which implies that the same is equivalent to Y. The appellant would thus pay tax on Y which means that all the sale are income and would land up paying a tax of 0.3 Y which is higher than the profit ever made or envisaged by the appellant rather the appellant has landed up paying a penalty to the extent of 5 times the profit and 20 times the tax which it would have been liable under bonafide circumstances. Therefore, the bonafide circumstances cannot be included under the purview of section 40A(3) as it was introduced by the Parliament to curb black money and tax evasion and not w....
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....ransactions were fairly priced, following the ratio of the Apex Court in the case of Attar Singh, the quantum of Rs. 7,59,00,557/- made in cash from the group concerns is held out of the purview of section 40A(3) and the addition made by the AO is deleted. In view of the above, the appellant gets relief on ground no. 1 and 2 and the ground no. 3 needs no adjudication as the relief has been allowed in ground no. 1 and 2". To sum up appeal is allowed. 4. We have given our thoughtful consideration to Revenue's foregoing stand in support of the impugned Section 40A(3) disallowance and find no merit in the same. There is hardly any dispute about the basic fact that both the payer and payee(s) herein are group entities only. The Revenue's argument in support of the impugned Section 40A(3) cash payment disallowance is that the operation thereof ought to be excluded merely because the twin entities herein are group concerns. We note from a perusal of the Ld.CIT(A)'s detailed discussion that not only he has examined all the relevant factual aspects but also considered the relevant judicial precedents (supra) whilst concluding that the overwhelming genuine expenditure pa....
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....3,364 (d) Short-term provisions 2.7 906,723 27,817 II. ASSETS Non-current assets 1 (a) Fixed assets (i) Tangible assets 2.8 252,588 428,427 (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long-term loans and advances (e) Other non-current assets 2 Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets 31,860 9,906 2.9 30,672,189 19,341,322 2.10 20,158,309 15,242,655 2.11 660,618 260,661 2.12 207,024 663,157 2.13 12,500 15,000 51,995,086 35,961,127 Significant Accounting Policies and Notes on Accounts 1 & 2 Profit and loss statement for the year ended March 31, 2015 Particulars (Amount in Rs.) Note 31.03.2015 31.03.2014 No. I. Revenue from operations 2.14 II. Other income 2.15 III. Total Revenue (I + II) IV. Expenses: 120,470,583 87,442,751 117,585 120,470,583 87,560,336 Purchas....