TaxTMI 
TaxTMI 
2023 (11) TMI 630
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....or purchase of land. 2.2 That the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has erred in confirming the order of ld. AO to the extent of Rs. 24,500/- being payment made to M/s Shrini Automobiles. 3.1 That the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has passed the order mechanically and without taking on record the specific reasons for the year under appeal for payment of remuneration to the directors. 3.2 That the Id. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has erred in confirming the decision of the ld. AO who has erroneously considered that the enhancement in remuneration should lead to enhanced benefits to the company in the very same year. 3.3 That the ld. AO has disallowed 30 per cent of the Total of directors' salary which is ad hoc in nature and is not in accordance with the facts of the case and the provisions of law. 2. Ground no.1 is general in nature which has not been pressed by the Ld. AR of the assessee during the course of hearing therefore, no specific adjudication is required on this ground. 3. Ground no.....
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....e recorded in the sale deed then the disallowance is not warranted u/s 40A(3) of the Act. He has relied upon the decision of Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO 298 ITR 349 and submitted that the Hon'ble High Court has observed that the assessee has proved the payment are made to the seller and identity of the payee have also been proved. Once the assessee produced all the details and record for the purpose of proper identification to enable the ITO to satisfy himself about the genuineness of the transactions then the disallowance u/s 40A(3) is not justified. The ld. AR relied upon the judgment of Hon'ble jurisdictional High Court in case of CIT vs. Achal Alloys (P) Ltd. 218 ITR 46 and submitted that the Hon'ble High Court has held that where the payments in cash were duly signed by the payee and the instance on making cash payments was founded on fulcrum that payees did not have any bank account . Further the genuineness of the payments was not exposed to any doubt then the disallowance u/s 40A(3) is not justified. Thus, Ld. AR has pleaded that when the transaction is genuine and identity of the payee is not in dispute then the disallowance is not....
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....,05,30,000/-. It is evident from the sale deed that this amount of Rs. 25000/- each paid by the assessee is also reflected in the sale deed to these seven persons and balance purchase consideration was paid through Cheques as per details given in the sale deed itself. Therefore, the payment was made as token amount at the time of initial negotiation which is almost three months prior to the date of sale deed and thus we find merit and substance in the explanation of the assessee that the token payment was made at the time of initial negotiation with the land owner and thereafter the sale deed was executed wherein the payment of total consideration of Rs. 4,05,30,000/- has been explained with full details including these payments of Rs. 25000/- each to these co-owners. Similarly a sum of Rs. 1 lac was paid by the assessee to one Shri Sevaram and subsequently the sale deed dated 27.03.2014 was executed between the assessee and said Shri Sevaram wherein the total consideration of Rs. 79,10,000/- has been shown including a sum of Rs. 1 lac paid in cash. Therefore, the explanation of the assessee that these cash payments were made as token money at the time of initial negotiation of dea....
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....s 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 asses- see 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- 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 black-money which is ....
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....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 AU 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 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 AO 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 paymen....
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....ould 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 belifted. 24. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007)208 CTR (Raj) 208 (2008) 298 ITR 349 (Rai) had observed that the exceptions contained in r. 6DD are not exhaustive and that the said rule must be interpreted liberally." 12. The Hon'ble High Court has observed that if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. 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. The Hon'ble High....
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....for payment to be made by way of cash. 15. It was further clarified in paragraph 6 that the above circumstances are not exhaustive but illustrative. 16. Therefore, in our opinion, the Tribunal was clearly in error in not travelling beyond the circumstances referred to in paragraph 4 of the Circular and to consider the explanation submitted by the assessee on its own merit. 17. Significantly paragraph 5 reproduced herein below 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 identity of the receiver is established, the requirement of Rule 6DD(j) must be deemed to have been satisfied. Paragraph 5 of the Circular reads as under [1977] 108 ITR (St.) 8, 9: 5. It can be said that it would, generally, satisfy the requirements of Rule 6DD(j), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself a....
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....disallowance under this sub-section shall be made where my payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of having facilities available, considerations of business expediency and other relevant factors. The Appellate Tribunal found that the genuineness of the payee has not been doubted by the Assessing Officer. It was found that the payment of the exceeding the limit was made under exceptional and unavoidable circumstances. Placing reliance on Porwal Udyog (India) v. CIT (1982) 135 IIR.991 (MP) it was found that no disallowance was permissible. Why should every exercise begin with mistrust or no trust? In 1979, Ireland abolished wealth-tax, Germany, substantially lowered it. The U.S.A. cut capital gains tax and the UK reduced its maximum rate of personal tax from 83 to 60 per cent. In 1982, Sweden reduced its marginal rate of personal income-tax from 85 to 50 per cent. In this country, the Government purpons to simplify the income-tax law but pursues the course, may be due to....
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.... 14. Therefore, the disallowance u/s 40A(3) cannot be made without considering the business expediency and other relevant factors falling in the exceptions given in Rule 6DD of I.T. Rules. The Coordinate Bench of this Tribunal in asessee's own case for A.Y.2010-11 arising from the original assessment order passed u/s 143(3) (supra) has considered this issue in para 8 to 10 as under: "8. We have heard rival contentions and perused the records placed before us and gone through the paper book filed by the assessee. The issue raised in this appeal by the assessee revolves around the disallowance of Rs. 5,40,000/- u/s 40A(3) of the Act. We observe that the assessee is into the business of purchase and sale of land and civil construction business. It purchased land from Smt. Anar Bai for a total consideration of Rs. 36,00,000/-. Out of the total purchase consideration of Rs. 36,00,000/- assessee paid cash of Rs. 6,20,000/- (verifiable from the Essarjee Constructions Pvt.Ltd ITA No.900/Ind/2016 Registered sale deed as well as affidavit placed in the paper book). Out of the cash payment of Rs. 6,20,000/- Ld. A.O has disputed only sum of Rs. 5,40,000/- which in view of Ld. A.O was ....
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..... 38,88,000/- and Rs. 57,60,000/- in the profit and loss account on account of directors salary to Ms. Meenu Gupta and Mr. Sunil Gupta respectively. The AO question the justification and reasonableness of such huge amount paid two directors in view of the provisions of section 40A(2)(b) of the Act and asked the assessee to furnish the specific details supporting documentary evidences. The AO has finally made disallowance of 30% of the total salary paid to these two directors amounting to Rs. 28,94,400/-. On appeal the Ld. CIT(A) has confirmed the disallowance made by the AO. 17. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. An identical issue has been considered by this Tribunal in assessee's own case for A.Y. 2012-13 vide order dated 31st July 2023 in ITANo.8/Ind/2023 in para 28 to 30 as under: "28. We have considered the rival submission as well as relevant material on record. The details of qualification & experience of the directors and payments of the salary to them are given at page 84 to 86 as under: 29. Thus, the assessee has explained the qualification and work experience as well as business knowledge of the....
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.... the fair remuneration of the salary payment to the directors is not justified. Accordingly the disallowance made by the AO is deleted. 18. For the year under consideration both directors are paying maximum marginal rate of tax and therefore, there is no revenue loss on this account. Accordingly following the earlier order of this Tribunal in assessee's own case adhoc disallowance made by the AO without determining the fair remuneration/salary paid to the directors having regard to their services rendered to the assessee company is not justified and the same is deleted. 19. In the result, appeal of assessee is allowed. Order pronounced in the open court on 03.08.2023. ============= Document 1 84 84 1. Name of the Director 1.1. Date of birth Justification for Salary 1.2. Age during FY 2013-14 1.3. Educational Qualification: : 1.4. Employed with company since: 1.5. Nature of responsibilities: Engineer (B.E. Civil). He is the SUNIL KUMAR GUPTA 19/07/1967 47 Years B.E. (Civil) passed out in May 1988 1996 Shri Sunil Gupta is a qualified Managing Director of the Company and has the overall responsibilities regarding c....