Income Tax Appellate Tribunal - Bangalore
Smt B K Rajeshwari , Davangere vs The Joint Commissioner Of Income Tax ... on 14 September, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC - A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
ITA No.1638/Bang/2018
Assessment year : 2011-12
Smt. B.K. Rajeshwari, Vs. The Joint Commissioner of
L/H of Late Shri Bellary Kashi Income Tax,
Vishwanatha Setty, Davangere Range,
Prop. M/s. Kashi Trading Co., Davangere.
Station Road,
Davangere - 577 001.
PAN: AKPPS 0021A
APPELLANT RESPONDENT
Appellant by : Shri Narendra Sharma, Advocate
Respondent by : Shri N. Sukumar, Addl.CIT(DR)(ITAT), Bengaluru.
Date of hearing : 29.08.2018
Date of Pronouncement : 14.09.2018
ORDER
This is an appeal by the Assessee against the order dated 05.03.2018 of the CIT(Appeals), Davangere relating to assessment year 2011-12.
2. The only issue that arises for consideration in this appeal by the Assessee is with regard to the correctness of a disallowance of a sum of Rs.32,24,369/- made u/s.40A(3) of the Income Tax Act, 1961.
3. The facts and circumstances under which the aforesaid disallowance was made are that the Assessee who is an individual and ITA No. 1638/Bang/2018 Page 2 of 13 who is a wholesale dealer in sugar, atta, maida, rava etc., under the name and style of Kashi Trading Co., made payments in cash above a sum of Rs.20,000/- for purchase of goods in the course of his wholesale business. The details of such cash purchases were as follows:-
S. Name Amount of
No. cash
1 Gyanobha Sugar & Development Ltd. 13,65,375
2 Mysore Floor Mills 12,26,294
3 Other cash purchases as per purchase
register as detailed below: 6,32,700
(1) Invoice No.1621 to 1615 dated 26.4.2010 1,14,000 (2) Invoice No.4613 to 4620 cash bill dated 1,30,000 22.6.2010 (3) Invoice No.8258 to 8263 cash bill dated 1,08,000 30.8.2010 (4) Invoice No.8718, 8717, 8716 cash bill 53,000 dated 7.9.2010 (5) Invoice No.9197 to 9199 cash bill dated 40,000 17.9.2010 (6) Invoice No.9858 to 9860 cash bill dated 53,600 29.9.2010 (7) Invoice No.10550 to 10555 cash bill dated 81,600 18.10.2010 (8) Invoice No.11362 to 11364 cash bill dated 52,000 25.10.2010 TOTAL 32,24,369 ITA No. 1638/Bang/2018 Page 3 of 13
4. Section 40A(3) of Income Tax Act, 1961 [the Act] provides for disallowance of expenses in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs 20000. Sec.40A(3) was introduced by the Finance Act, 1968 w.e.f 1-4-1968. The provisions were enacted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. Just after introduction of section 40A(3), certain exceptions were allowed to be provided by way of delegated legislations. Accordingly, Rule 6DD was notified in the year 1969 setting out the exceptions.
5. After introduction of Rule 6DD, in the year 1970, vide IT (Fourth Amdt.) Rules, 1970, clause (j) to Rule 6DD was introduced which provided as under:-
"Rule 6DD: (j) in any other case where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft-- a. due to exceptional or unavoidable circumstances; or b. 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,"
6. Thereafter, CBDT issued Circular No. 220 dated 31.05.1977 providing an illustrative list of exceptional cases wherein cash payment could not attract disallowance u/s 40A(3) by virtue of Rule 6DD(j). The above Rule 6DD(j) was omitted w.e.f. 25.07.1995 vide IT(Fourteenth Amdt.) Rules, 1995. Thereafter, Rule 6DD was amended many a times like it was reintroduced as follows:-
"Rule 6DD(j) Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the ITA No. 1638/Bang/2018 Page 4 of 13 Incometax Act, 1961, and when such employee- (A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (B) does not maintain any account un any bank at such place or ship 1.12.1995."
7. By Substitution of Rule 6DD(j) by Notification dated 10.10.2008 it was laid down that where payment was required to be made on a day on which the banks were closed either on account of holiday or strike.
8. In the present case the plea of the Assessee for not applying the provisions of Sec.40A(3) of the Act was as follows:-
1. Payments made to M/s. Gyanba Sugars & Development Ltd.
The Assessee explained that in the case of M/s. Gyanba Sugars & Development Ltd., Doddabati the first payment of Rs.5,11,000/- was made on 09/12/2010. They were new supplier There was a demand for sugar in Davangere and they insisted for cash payment.
2. The second payment of Rs.5,00,000/- was made on 25/12/2010 which date was a Bank Holiday.
3. The Third payment of Rs.5,00,000/- was made on 23/01/2011 which date also was a Bank Holiday.
4. The party Gyanba Sugars and Developments Ltd., was running in to losses after acquiring a co-operative sugar Factory situated in a village near Doddabathi, Davangere, which is a village near Davangere. The place was also not served by Banks. The Bank account of the said company were made in-operative by attachments. Therefore, the company management demanded cash payments only. A report from the Hindu dated 2/06/2013 on the above aspect was filed before the AO.
The Assessee relied on Rule 6DD (h) & (k) which provided that no disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a ITA No. 1638/Bang/2018 Page 5 of 13 bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely :-
"(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any basis, profession or vocation, in any such village or town;
(k) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;"
The Assessee submitted that from the above prevailing conditions and due to insistence from the company management the payments were effected by cash and hence no disallowance should be made u/s.40A(3) of the Act.
2. Payments made to Mysore Flour Mills.
As far as payments made to Mysore Flour Mills are concerned, the Assessee pointed out that payments were made directly into the Bank account of the party as per their instructions. The party having dire payment obligations had requested to make payment direct into the bank account. The Assessee enclosed We are Bank Pay in slips made to SBM Davangere.
The Assessee relied on the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Sing Vs. ITO 191 ITR 667 (SC) wherein the Hon'ble Supreme Court upheld constitutional validity of Sec.40A(3) of the Act and observed that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. That the provisions were meant to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of black money for business transactions. In the present case it is seen that the assessee for purchase of rice, paid the amount directly to the bank account of the payee. The effect of issue of crossed cheque/dd is that the payee named therein receives the payment through banking channels. The purpose is dual. In the first instance it is to see that the payee and payee ITA No. 1638/Bang/2018 Page 6 of 13 alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transaction. Instead of issuing cheque/DD if the assessee prepared a challan and along with the cash the challan was presented to the bank of payee for the credit of the same in the account of payee. As a result it has been ensured that the payee alone receives the payment and the origin and conclusion of transaction is traceable. Thus, payment of sum directly in the bank account of payee fulfils the criteria for ensuring the object of introduction of sec 40A(3). This is not a direct payment to the payee but only to the credit of this bank account without the payee actually receiving the cash. Therefore the Supreme Court held that such payment is not in violation of provisions of section 40A(3) and hence no disallowance was called for.
9. The stand taken by the Assessee as above did not find favour with the AO. With regard to circumstances explained for making payment in cash to Gyanba Sugars, the AO held that the aforesaid company was at Doddabathi Village which was less than 5 KMS. from Davanagere city which had banking services. He was of the view that the genuineness and bonafide of the transaction are not relevant criteria not to apply the provisions of Sec.40A(3) of the Act. On appeal by the Assessee the CIT(A) upheld the order of the AO as he found that none of the circumstances set out in Rule 6DD of the Income Tax Rules, 1962 (Rules) were applicable to the case of the Assessee. It is relevant to point out that the plea of the Assessee was based on the provisions of Rule 6DD(j) as it existed prior to its omission w.e.f. 25.07.1995 vide IT(Fourteenth Amdt.) Rules, 1995 viz., payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft --
a. due to exceptional or unavoidable circumstances; or b. because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the ITA No. 1638/Bang/2018 Page 7 of 13 payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof.
10. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. I have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). In particular he pointed out that there are no exceptional circumstances pointed out in respect of cash payments to the tune of Rs.6,32,700/- which is payments in cash for purchases i.e., payments made to persons other than Gyanobha sugar and Mysore Flour Mills. The learned counsel for the Assessee primarily placed reliance on the decision of the ITAT Jaipur Bench in the case of M/s A Daga Royal Arts, Jaipur Vs ITO, Jaipur, ITA No. 1065/JP/2016 order dated 15.5.2018.
11. I have given a very careful consideration to the rival submissions. In case of Attar Singh Gurmukh Singh v. ITO 59 taxman.com 11, the constitutional validity of Section 40A(3) of the Act came up for consideration before the Hon'ble Supreme Court. At the relevant point of time Rule 6DD(j) as inserted in 1970 vide IT (Fourth Amdt.) Rules, 1970, existed. 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. The Hon'ble Supreme Court referring to the provisions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant point in time, has held as under:-
ITA No. 1638/Bang/2018 Page 8 of 13"6. As to the validity of section 40A(3), it was urged that if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary.
7. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 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. Section 40A(3) only empowers the Assessing Officer 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 disclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use blackmoney 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 ITA No. 1638/Bang/2018 Page 9 of 13 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."
12. The Hon'ble Supreme Court upheld the constitutional validity of section 40A(3) of the Act and 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 the same should not be regarded as curtailing the freedom of trade or business. The Hon'ble Supreme Court referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee held that:-
"The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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."
13. There has been no change in the provisions of section 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 ITA No. 1638/Bang/2018 Page 10 of 13 Hon'ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impugned 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. The Hon'ble ITAT Jaipur Bench posed the following question in the light of the decision of Hon'ble Supreme Court and the subsequent change in Rule 6DD(j) of the Rules. 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. The ITAT Jaipur Bench in the case of M/s. A. Daga Arts (supra) after noticing the law with regard to Sec.40A(3) of the Act and Rule 6DD of the Rules, observed as follows:-
"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 exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of latest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike.ITA No. 1638/Bang/2018 Page 11 of 13
27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance.
28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues 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....."
14. The ITAT finally concluded as follows:
"43. 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 referred supra, we are of the view that the identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee's bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case.ITA No. 1638/Bang/2018 Page 12 of 13
Further, as held by the Hon'ble Rajasthan High Court in case of 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. The intent and the purpose for which http://itatonline.org ITA No. 1065/JP/2016 M/s A Daga Royal Arts, Jaipur Vs ITO, Jaipur 39 section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act."
15. I am of the view that the ratio laid down in the aforesaid case will apply to the facts of the present case. In the present case, the Assessee has filed confirmation letter from Gyanba Sugars, that they insisted on payment being made in cash because they did not know the Assessee and for the reason that they had financial constraints and hence required payment in cash. So also in the case of Mysore Flour Mills, cash was paid directly into their bank account by the Assessee. It was the plea of the Assessee that this party insisted payment in cash into their bank account directly due to their urgent requirement of funds. This plea has not been disbelieved by the AO. In the given circumstances, I am of the view that the transactions with the aforesaid parties are genuine, free from vice of any device of evasion of tax. The circumstances in which cash payment were made to the aforesaid two parties are owing to business expediency and there is no reason why such payment should be disallowed u/s.40A(3) of the Act. The addition made of Rs.13,65,375/- being cash payments made to Gyanobha Sugars and Rs.12,26,294/- being cash payments made to Mysore Flour Mills u/s.40A(3) of the Act are therefore liable to be deleted. I hold and direct accordingly. With regard to the remaining sum of Rs.6,32,700/- which are payments made in cash in excess of Rs.20,000/- no specific circumstances and business exigency was pointed out by the Assessee. The addition to this extent is therefore confirmed.
ITA No. 1638/Bang/2018 Page 13 of 1316. In the result, the appeal is partly allowed.
Pronounced in the open court on this 14th day of September, 2018.
Sd/= ( N.V. VASUDEVAN ) Judicial Member Bangalore, Dated, the 14th September, 2018.
/ Desai Smurthy / Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore. 6. Guard file By order Senior Private Secretary ITAT, Bangalore.