Income Tax Appellate Tribunal - Kolkata
Pranab Kumar Moulik, Kolkata vs Assessee on 18 February, 2010
आयकर अपीलीय अधीकरण, Ûयायपीठ - " िस" कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
(सम¢)Before ौी महावी
महावीर
वीर िसंह, Ûयायीक सदःय एवं/and ौी,
ौी सी.डȣ.राव लेखा सदःय)
[Before Hon'ble Sri Mahavir Singh, JM & Hon'ble Shri C. D. Rao, AM]
आयकर अपील संÉया / I.T.A No. 847/Kol/2010
िनधॉरण वषॅ/Assessment Year: 2004-05
Pranab Kumar Moulik Vs Income-tax Officer, Wd-41(3), Kolkata
(PAN-AEZPM 7256 B)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
For the Appellant: Shri A. K. Banerjee
For the Respondent: Shri V. A. Raju
आदे श/ORDER
Per Mahavir Singh, JM ( महावीर िसंह, Ûयायीक सदःय)
सदःय This appeal by assessee is arising out of the order of CIT(A)-XXIV, Kolkata in Appeal No.536/CIT(A)-XXIV/41(3)/08-09 dated 18.02.2010. The assessment was framed by ITO, Wd- 41(3), Kolkata u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2004-05 vide his order dated 26.12.2006.
2. The only issue in this appeal of the assessee is against the order of CIT(A) confirming the action of Assessing Officer in upholding the disallowance made u/s. 40A(3) of the Act. For this, the assessee has raised the following 2 grounds:
"1. For that the Learned Commissioner of Income-tax (Appeals) was not justified in confirming the addition of Rs.3,94,958/- to total income made by the Learned Assessing Officer in application of section 40A(3) of the Income-tax Act, 1961 without taking into consideration the arguments placed before him and the facts involved in this case.
2. For that having regard to the facts that the payments of Rs.19,74,789/- made in case to M/s. Bartaman Pvt. Ltd. was not related to the expenditure which would be brought for the purpose of the computation of the income under the head, 'Profits and Gains of Business or Profession', the learned Commissioner of Income-Tax (Appeals) and the learned Assessing Officer were erroneous in holding that such payments were covered by the provisions of section 40A(3) of the said Act."
3. Brief facts leading to the above issue are that the assessee filed his return of income on 29.10.2004 declaring total income at Rs.6,61,400/- for Assessment Year 2004-05. The Assessing Officer during the course of assessment proceedings found that assessee has made payments to M/s. Bartaman Pvt. Ltd. (hereinafter referred to as "BPL") in cash in contravention of the provisions of section 40A(3) of the Act amounting to Rs.19,74,789/-. The Assessing 2 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 Officer has noted the entire payment date wise in his assessment order and the same need not be repeated. It is also admitted by the assessee that these payments are made in cash. Hence, there is no dispute on this fact. Assessing Officer required the assessee by show cause as to why 20% of the cash payments should not be disallowed by invoking the provisions of section 40A(3) of the Act. The assessee before the Assessing Officer vide written petition dated 11.12.2006 stating that "BPL" refused to accept cheque/bank draft from the assessee and further explained that assessee derives 5% extra benefit of discount on cash payments made to "BPL". According to the assessee, these payments were made for business expediency. The assessee also relied on the case law of Hon'ble Apex Court in the case of Attar Singh Gurmukh Singh Vs ITO (1991) 191 ITR 667 (SC) and also Hon'ble Punjab & Haryana High Court in the case of CIT Vs Nikko Auto Ltd (2002) 256 ITR 476 (P&H). The Assessing Officer noted that no doubt the assessee has got benefit of 5% of discount on total transactions of cash payment of Rs.19,74,789/-, and according to him, thus the assessee knowingly made cash payment in violation of section 40A(3) of the Act. The Assessing Officer noted that assessee has made mere submissions but could not produce any evidence regarding refusal of acceptance of cheque/bank draft from the assessee by "BPL". According to Assessing Officer, the certificate issued by "BPL" dated 21.11.2006 revealed that assessee made cash payments to claim discount of 5% on transactions. Accordingly, Assessing Officer noted that assessee has violated the provisions of section 40A(3) of the Act and, therefore, he disallowed 20% of the transaction made in cash by invoking the provisions of section 40A(3) of the Act. Aggrieved, assessee preferred appeal before CIT(A)and he confirmed the action of Assessing Officer. Aggrieved, now assessee is in appeal before us.
4. We have heard rival contentions and gone through facts and circumstances of the case. The assessee before us stated that he is an individual and he has been carrying on the business under the name and style of 'Solar Advertising Enterprise' as an agent in the line of advertising and publicity and was responsible to collect orders from the advertisers and to pay the sums to the publishers of newspapers as against their bills or on requisitions of fund. The mode of payment to the publishers depends upon circumstances, time and obligation imposed on assessee. According to assessee he derived benefit by way of discount from newspapers by making cash payments, since procedure laid down by newspapers for delivery of matters and making mode of payments, the assessee had to follow such procedure in order to give effect to the orders of the principals who sought for advertisement. According to him, most of the orders were received from principals during day time and matters were delivered to the office of newspaper at the fag end of the day or evening when banking services were not available. And 3 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 further, he stated that advertisements of principals would not appear on the following day unless the payments were not made to the newspapers on the earlier day and in case, any cheque is tendered, matters would not be published by the newspaper, unless such cheque is encashed in routine manner and for that at least 3 days are usually required to get the cheque cleared by the bank. Furthermore, the assessee will derive extra benefit of commission at the rate of 5% for payments made in cash to the newspapers. We find from above arguments that payments in cash were made on following consideration:
"(a) The assessee reimbursed the expenditure as an agent on behalf of the principals. In other words, it may be stated that the assessee reimbursed the sum which was received from the principal;
(b) The payments were not made for goods purchases or services;
(c) At the time of payment there were no banking facilities available to the assessee;
(d) Specific discount was given to the assessee by the recipient;
(e) Cash payments were made only under exceptional and unavoidable circumstances.
The recipient refused to accept cheque."
The assessee also contended that the Assessing Officer has not doubted genuineness of payments made to the said newspaper.
5. We find that the CIT(A) has considered submissions of assessee and negated the claim by giving following findings:-
"2.3. From the above submissions of the appellant it is seen that the appellant had claimed that it acted as an agent on behalf of his Principal and so the payments made to Bartaman (P) Ltd., were the payments made not for goods purchased or services. They were duly reimbursed by the Principal. It was also claimed that the payments were made late in the evening or night for insertion in the next day's paper and therefore there was no banking facility available at the time of payment. Appellant also claimed that recipient refused to accept cheques. In support of above claims the appellant filed copies of 2 certificates from M/s Bartaman (P) Ltd. Perusal of the above certificates does not establish that M/s. Bartaman refused to accept cheque/draft as is evident from the contents of the certificates reproduced below:
"Solar Advertising Enterprise, 35 C.R. Avenue, 5th floor, Kolkata -12 had released advertisements of their various clients in our Group of publication during 2003-04 against cash payment for which we had allowed cash discount as per our system."
"This is to certify that we generally receive all payments in advance from Solar advertising Enterprises, Kolkata towards publication of their various clients advertisements in our group of publications and do not allow them to pay any amount after the publication of the advertisement."
The claim of the appellant that the payments were not for purchase of goods/ services, but only payment on behalf of Principal, is also not established as the payments have 4 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 been routed through its P&L account as expenses. Therefore it cannot be said that the appellant merely acted as agent. The claim of the appellant that these were made at the time when there was no banking facility available as payments were made at night for ensuring that insertions appeared in the next day's Newspaper has also not been substantiated by producing any details to show when the matter was submitted before Bartaman and on what date the insertion was required to be made. The claim of business expediency was therefore not established. From the certificate of Bartaman (P) Ltd it is seen that it says that payments were required to be made in advance. Such advance payments could have been very well made by cheques/drafts. The provision of section 40A(3) Rule 6DD have been amended and the amended provisions read as under:
"S 40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent, of such expenditure shall not be allowed as a deduction:
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Assessing Officer may re compute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made:
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty 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 banking facilities available, considerations of business expediency and other relevant factors."
The cases and circumstances where an exception has to be made by virtue of the second proviso to the said section have been enumerated in rule 6DD and the case of the appellant is not covered by any of the cases and circumstances enumerated therein. The appellant has made a reference to the fact that it only acted as an agent and made the payments on behalf of his principals however the rule 6DD does not cover the case of the appellant as in rule 6DD it has been stated as under:
"6DD (k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;"
The appellant has not filed any evidences to show that it received cash from his principals which was then paid to M/s Bartaman Pvt. Ltd. The above contention of the appellant is therefore not acceptable.
The appellant has placed reliance on the judgments as noted below wherein the findings of the courts have also been reproduced.
5 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05
1. Girdharilal Goenka vs. CIT 179 ITR 122 (Cal) On the facts of this case, where the assessee has satisfied the Assessing Officer as to the genuineness of the payment and the identity of the payee, the circumstance that there was a delay in making payment of the bills by itself would not take the case out of the ambit of exceptional or unavoidable circumstances referred to in rule 6DD(j) and deduction of the expenditure which is otherwise allowable to him cannot be denied. For the reasons aforesaid, we answer this question in the negative and in favour of the assessee.
2. CIT vs. Suresh Kr. Agarwal 249 ITR 113 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 section 40A(3) are not absolute. Consideration 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 t o regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions." In view of the said decision, we do not find that any substantial question of law arises in this appeal. The appeal is accordingly dismissed.
3. CIT v. Chrome Leather Co. Ltd. Pvt. Ltd. 235 ITR 708 (Mad) The issue before the court was- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that there was no case for any disallowance under section 40A(3) of the Income-tax Act, 1961, for the assessment year 1974-75?
And the court held as under:
The finding recorded by the Appellate Tribunal is a finding arrived at on the facts of the case. The Tribunal has accepted the materials produced before it in support of its finding that only at the time of purchase, the actual amount would be known and the identity of the party was successfully established and the decision of the Tribunal is based entirely on the facts of the case.
4. ITO vs. Petidar Ginning & Bearing Co. 51 ITD 7 (Ahd.) CIT (Appeals) has rightly come to the conclusion that the provisions of section 40A(3) do not apply to payments made to these two parties. Even otherwise the identity of these two parties is not in dispute. The genuineness of the transaction has also been well proved and the confirmation letters of these two parties clearly prove that cash payments were made to them pursuant to insistence for cash payments and both the parties have also confirmed that they refused to accept payments on the respective dates by crossed cheques/drafts. The matter would even otherwise be covered by the exceptions in rule 6DD(j) read with Board Circular dated 31- 5-1977. We, therefore, do not find any justification in Interfering with the order of the learned CIT (Appeals).
5. CIT vs. Mrinalini V. Sarabhai 265 ITR 64 (Guj) "The assessee had adopted a peculiar method of maintaining her books of account and having her business transactions, and according to her method, the entire work with regard to payment and collection of money was entrusted to the firm. If in such a set of circumstances, the firm makes payment on behalf of the assessee by account payee cheques, by no stretch of imagination it can be said that there was any cash transaction or there was any possibility of having "chances and opportunities to use or create black money." When the assessee found it practicable and expedient to entrust all her business transactions to the firm as her agent, and 6 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 as the firm had made payments by account payee cheques to the concerned persons, and when identity of all persons to whom payments were made was revealed from the books of account." It may be noted that all the above cases are given in the light the provisions of section 40A(3) and rule 6DD(j) as they stood prior the amendment. Earlier Rule 6DD(j) read as under:
"i) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft (1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof and also furnishes evidence to the satisfaction of the Income-
tax Officer as to the genuineness of the payment and the identity of the payee."
The Board, therefore, issued a circular on May 31, 1977, being Circular No. 220, clarifying the provisions of section 40A(3) as well as rule 6DD(j). It has been provided as follows:
"4. All the circumstances in which the conditions laid down in rule 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are: (1) The purchaser is new to the seller; or (ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iii) The transactions and payments are made on a bank holiday; or (iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non availability of goods otherwise than from this particular seller; or (v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the good; or (vi) Specific discount is given by the seller for payment to be made by way of cash.
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 about the genuineness of the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of rule 6DD(j).
6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule 6DD(j)." (emphasis supplied) However rule 6DD(j) has been amended and reads as under:
"i) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;"
Section 40A(3) was amended by the Finance Act, 1995 the scope and effect of the above amendment have been elaborated in following portion of the departmental circular No: 117, dated 14th August, 1995, as under -
"Amendment of section 40A(3) of the Income tax Act, to provide for disallowance of 20 per cent of cash expenditure 27.1 Section 40A(3) provides for disallowance of an expenditure, incurred for business or profession, in respect of which payment exceeding Rs. 10,000/- is made otherwise than by a crossed cheque or a crossed bank draft. Certain cash payments have, however, been excluded under rule 6DD from the prohibition contained in this section. Sub-rule (i) of rule 6DD prescribes the mitigating circumstances with a view to relax the rigors of section 40A(3) in genuine and bona fide cases. Sub-rule (i) was introduced at a time when banking facilities had yet to take roots in rural areas. Now that banks have established themselves in rural areas and a vast branch network is available, it is felt that sub-rule (i) has outlived its utility.
7 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 27.2 These provisions hove also given rise to substantial litigation arising out of the interpretation and scope of section 40A(3) read with rule 6DD(j).
27.3 Section 40A(3) has been amended to provide that in case any payment is made in contravention of section 40A(3), then 20 per cent of such expenditure would be disallowed and taken into account for computation of income. Necessary amendments in the Income-tax Rules will consequently be made so as to delete clause (i) of rule 6DD."
In view of the above the contention that payments were on a/c of business expediency is no more a relevant factor. The phrase "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." used in the second proviso to section 40A(3), is used to qualify the phrase "in such cases and under such circumstances as may be prescribed," immediately preceding it, to indicate that the cases and circumstances which are prescribed have been prescribed taking into consideration the nature and extent of banking facilities available, considerations of business expediency and other relevant factors and no other exceptions are envisaged other than those already prescribed. The case laws cited are therefore distinguishable.
In this context reference may also be made to the decision of the Hon'ble Kolkata High Court in the case of Bagman Tea Co. Ltd vs CIT 251 ITR 640. In this case, the Hon'ble Court held as under:
"With respect we are of the view that when the payment is made in contravention of section 40A(3) though the payment is genuine that cannot be allowed, because the genuineness of payment is required in all cases but payment by account payee cheque or demand draft is additional requirement under section 40A(3). If we follow the view that the payment is genuine, then that should not be disallowed. In that case the provision of section 40A(3) will become redundant. Therefore, unless there are unavoidable circumstances for payment in cash that payment will be hit by the provision of section 40A(3)."
As has been discussed above appellant has not brought any material on record to show that the payments were made in cash due to unavoidable circumstances. The certificates from M/s Bartaman Pvt. Ltd and the affidavit filed by the appellant do not show that there was any insistence for cash payment. They only asked for advance payments. These documents also do not establish that payments were made after banking hours or that the payments were to be made immediately to fulfill business obligation. In view of the above discussion the disallowance is confirmed in appeal. Ground Nos. 1& 2 of the appellant are therefore dismissed."
6. We find from the claim of the assessee that the payments were not made for goods purchases or services. In this connection, we are of the view that no doubt the payments are not for purchases of goods but these are for services and payment on behalf of principal but the payments are covered u/s. 40A(3) of the Act as these have been routed from P&L Account and claimed as expenses. Therefore, we are of the view that though the assessee acted as an agent but claimed this payment as expenses and these payments are surely covered u/s. 40A(3) of the Act, as expenses claimed by the assessee. The claim of the assessee that there were no banking facilities available, as payments were made at midnight, this claim is not at all supported by any evidence and even though the assessee cannot make cash payments in contravention of provisions of section 40A(3) of the Act. Further, the claim of the assessee, as is evident from the 8 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 certificate of BPL clearly establishes that in case the payment is made in cash and in advance, the discount is allowed as per their policy. Here the discount will be available in case the payment is made in advance. There is no mention that the payment is to be made in cash and there is no denial that BPL will not receive cheque payments. It is also a fact that the assessee as well as BPL is fully covered by banking facilities and during the course of hearing this fact has not been denied by the assessee despite a query raised by the Bench. As claimed by the assessee, there was non exceptional or unavoidable circumstance for making cash payment and even now before us, assessee could not show any exceptional and unavoidable circumstances or the exception as provided under Rule 6DD of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules"). We are of the view that the assessee himself in his written submission before CIT(A) clearly narrated that the genuine and bonafide transactions are not taken out of the sweep of section 40A(3)of the Act. We are in full agreement with this argument that these are genuine and bonafide payments but the genuine and bonafide payments cannot be taken out of the purview of section 40A(3) of the Act because after amendment of the Rules by the Finance Act, 1995, which was clarified vide Board Circular No. 117 dated 14.8.1995. The assessee is unable to show that these payments were made in cash at the insistence of BPL, there is no exception provided in the Rules, that in case the payments are made even during evening hours that will take this payment out of the purview of section 40A(3) of the Act on regularly basis i.e. on daily basis. As a result of amendment w.e.f. 1.4.1996 of section 40A(3)of the Act, by the Finance Act, 1995, for and from assessment year 1996-97, only 20% of the vulnerable expenditure i.e. and expenditure involving cash payment in excess of Rs.20,000/-, in the relevant assessment year in the present case, not falling within any of the mitigating circumstances or the exceptions as provided in the Rules will be disallowed while computing business or professional income. Here, the claim of the assessee that these payments are reimbursement, the answer is that the word 'expenditure' in section 40A(3) of the Act cannot be restricted only to expenditure, which is allowed as deduction u/s. 30 to 38 of the Act, being overhead expenses such as rent, taxes, repairs, insurance, salary, etc., deductible from gross profit in order to arrive at a net profit liable to tax. The word 'expenditure' in section 40A(3) of the Act is of wide import and includes expenses which are taken into account while determining the gross profit. Even the case laws referred by Ld. Counsel for the assessee of Hon'ble Calcutta High Court in the case of Giridharilal Goenkia Vs CIT (1989) 179 ITR 122 at page 127, Hon'ble High Court has clearly held that the mitigating circumstances referred to in the second proviso to section 40A(3) of the Act are detailed in the Rules. The object of the Rules is to relax the rigours of section 40A(3) of the Act in genuine and bonafide cases to avoid hardship and harassment. In the present case, the assessee could not bring his case under any of the 9 ITA 847/K/2010 Pranab Kr. Moulik. A.Y. 04-05 clauses or residuary clause of the Rules. In view of these facts and circumstances and the case laws as distinguished by CIT(A), we are of the view that the assessee's case does not fall in any of the exceptions as provided under the Rules. Admittedly, here, assessee's case squarely falls u/s. 40A(3) of the Act and he could not bring any exception as provided under the Rules. Hence, we are of the considered view that the claim of the assessee is not allowable. Accordingly, we confirm the orders of the lower authorities and the appeal of the assessee fails.
7. In the result, the appeal of the assessee is dismissed.
8. Order is pronounced in the open court on 31.3.2011 Sd/- Sd/-
सी.डȣ
सी डȣ.राव
डȣ राव लेखा सदःय महावीर िसंह, Ûयायीक सदःय
(C. D. Rao) (Mahavir Singh)
Accountant Member Judicial Member
तारȣख)
तारȣख) Dated 31st day of March, 2011
(तारȣख
वǐरƵ िनǔज सिचव Jd.(Sr.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ/APPELLANT - ITO, Ward-7(1), Kolkata.
2 ू×यथȸ/ Respondent - Shri Pranab Kumar Moulik, 35/D, Gupta Lane,
Kolkata-50.
3. आयकर किमशनर (अपील)/ The CIT(A), Kolkata
4. आयकर किमशनर/ CIT Kolkata
5. ǒवभािगय ूितनीधी / DR, Kolkata Benches, Kolkata
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
सहायक पंजीकार/Asstt. Registrar.