TMI Blog2013 (9) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... . Disallowance made u/s 40A(3) of the Act Disallowance is made in respect of purchase of rice - The assessing officer noticed that the assessee had purchased rice by paying cash in excess of Rs.20,000/- in violation of provisions of sec.40A(3) of the Act Held that:- The payments of less than Rs.20,000/- made during the course of a day to a single person is not hit by the said provisions. However, as per the amended provisions, the said provisions shall apply only if the aggregate amount of payments made to single party in a day exceeds Rs.20,000/-. For example, if the value of a bill is Rs.1,00,000/- and an assessee makes five payments of Rs.20,000/- each during the course of a day, then the said payments shall not be hit by the provisions of sec. 40A(3) as applicable to the year under consideration. However, under the amended provisions, they would be hit. However, if an assessee makes payment of Rs.20,000/- in a day and he so makes payments in five days, then such splitting up of payments would not be hit even by amended provisions. Retrospective application of amendment in section 40A(3) - Disallowance of 20% as per earlier provision and 100% as per the amended provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n disallowing the claim of interest of Rs. 92,668/- on capital - The same is accordingly confirmed Decided against the Assessee. Addition of actual or notional interest Held that:- Assessee has paid interest of Rs. 59,441/- to a bank - Ld. CIT(A) was justified in confirming the addition to the extent of Rs.59,441/- and not the notional interest calculated at the rate of 12% amounting to Rs. 1,99,264/- - ITA No.534/Coch/2011 - - - Dated:- 22-3-2013 - N R S Ganesan and B R Baskaran, JJ. For the Appellant : Shri T M Sreedharan, Sr. Adv. For the Respondent : Smt Susan George Varghese, Sr. DR ORDER:- Per: B R Baskaran: The appeal of the assessee is directed against the order dated 23-09-2010 passed by Ld CIT(A)-I, Kochi and it relates to the assessment year 2007-08. 2. The appeal is barred by limitation by 198 days. The assessee has moved a petition requesting the bench to condone the delay. In the said petition, it is stated that the assessee, upon receipt of the appellate order of Ld CIT(A) by 26.10.2010, filed a rectification petition before the first appellate authority on 31.12.2010 pointing out mistakes apparent from record in the appellate order. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if the delay is condoned, i.e., according to Ld D.R, the delay should be considered only in respect of one of the issues contested in the appeal and the delay should not be condoned in respect of other issues. In our view, the said contention of Ld D.R may not be legally tenable. The delay has occurred in filing the appeal itself and at this stage, the Tribunal is only considering whether there was sufficient cause for the delay. The question of considering the various grounds urged in the appeal would arise only if the delay is condoned and the appeal is admitted. Hence, in our view, the Tribunal is not obliged to look into the grounds urged in the appeal before admitting the appeal for hearing. Even otherwise, we do not think that the statute permits dissecting of the grounds of appeal in the matter of condoning delay in filing the appeal. 5. In view of the foregoing discussions, we are of the view that there was sufficient cause for the delay. Accordingly, we condone the delay in preferring the present appeal before us and admit the same. 6. The grounds urged by the assessee give rise to the following issues:- (a) Disallowance made u/s 40A(3) in respect of purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the quantum of payments that was hit by the said provision. The aggregate purchases to the tune of Rs.63,73,755/- is liable to be excluded as they have been purchased through bills, which were having value of less than Rs.20,000/- each. The purchases to the tune of Rs.4,97,071/- represent interstate purchases and the payments were made through demand draft and cheques only. (e) The Ld CIT(A) has erred in law in applying the provisions of sec. 40A(3), which was amended from the assessment year 2009-2010 onwards, to the year under consideration. 10. With regard to the claim of the assessee that the rice is an agricultural produce, the Ld D.R submitted that the rice cannot be considered as an agricultural produce and in this regard, she placed reliance on the decision of Hon ble Madhya Pradesh High Court in the case of CIT Vs. Kissan Co-operative rice mills (103 ITR 264). Further she submitted that exception provided in Rule 6DD shall apply only if the agricultural produce is purchased from growers or producer of forest produce. Accordingly she submitted that the purchases agricultural produce by making payment in cash would not be covered by the exception, if it is purchased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whether the rice is an agricultural produce or not. The assessee placed reliance on the decision rendered by Hon ble Jurisdictional High Court in the case of CIT Vs. Interseas (referred supra). However, in our view, the said decision shall not apply to the facts of the instant case. In the case of M/s Interseas (supra), the court was interpreting the term fish products . It is pertinent to mention that the Rule 6DD(e) provides exception in respect of fish or fish products . However, the same Rule provides exception only in respect of agricultural or forest produce and not to agricultural products . 12. The next contention of the assessee was that the purchases were effected through agents. The assessee has placed reliance in this regard to the following clause of Rule 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 However, we notice that the assessing officer has recorded a finding that the purchases were effected by the assessee from registered traders/commission agents, meaning thereby those dealers are independent businessmen acting in their own capacity and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BDT as under:- 13.1 Clause (a) of sub-section (3) of section 40A of the Income tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction. Clause (b) of sub-section (3) of section 40A also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque or by an account payee bank draft. However, the provisions of this section are subject to exceptions as provided in rule 6DD of the Income tax Rules, 1962. 13.2 Sub-section (3) of section 40A is an anti tax evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction. Thereby the risk of evasion is substantially mitigated. Field formations have reported thst assessees tend to circumvent the provisions of sub-section (3) of section 40A by splitting a particular high value pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es payments in five days, then such splitting up of payments would not be hit even by amended provisions. (b) The rate of disallowance was 20% as per the provisions applicable to the year under consideration and the rate of disallowance is 100% as per the amended provisions. The question that arises is whether the amendment brought out by Finance Act, 2008 w.e.f. 1.4.2009 can be considered as clarificatory in nature so that it shall have retrospective operation? As discussed earlier, the amendment only debars making several payments of less than or equal to Rs.20,000/- in a day to a single person, but does not debar making several payments of less than or equal to Rs.20,000/- on different dates to a single person, meaning thereby, the splitting up of payments during the course of a day to a single person is only debarred. Further, as stated earlier, there is significant variance in the quantum of disallowance to be made for violation of sec. 40A(3) of the Act. We notice that the Ld CIT(A), though held that the amendment is retrospective in operation, however, has restricted to disallowance only to 20% of the expenditure as per the old provisions., i.e., the Ld CIT(A) has app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amendment brought out by Finance Act, 2008 cannot be applied to the year under consideration. In view of the above, the whole issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine the issue afresh in the light of the discussions made above and take appropriate decision after affording necessary opportunity of being heard to the assessee. 19. The next issue relates to the disallowance of freight charges under section 40A(3) and u/s. 40(a)(ia) of the Act. It is pertinent to note that the Ld CIT(A) has granted partial relief on this issue and since the department has not challenged the relief granted by Ld CIT(A), the order of first appellate authority in respect of the said relief attains finality. 20. With regard to the disallowance made u/s. 40A(3) of the Act, the discussions made in the preceding paragraphs on various principles relating to that section shall apply to the payment of freight charges also. With regard to the disallowance u/s. 40(a)(ia) of the Act, the Ld. Counsel submitted that the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave taken the view that the assessee is liable to deduct tax at source on lorry freight payments without examining the terms of agreement between the assessee and the suppliers. The assessee has also failed to produce any evidence to show that the responsibility to make delivery of goods to the doorsteps of the assessee lies upon the suppliers. Under these circumstances, in our view, the liability to deduct tax at source on freight payments has to be considered afresh at the end of the assessing officer by duly considering the terms of agreement available between the supplier and the assessee. We have already stated that the applicability of the provisions of section 40A(3) also needs to be examined afresh in the light of the discussions made in the preceding paragraphs. Accordingly, we modify the order passed by the Ld. CIT(A) on this issue and restore the same to the file of the Assessing Officer with a direction to examine the issue afresh in the light of the discussions made supra. Since the Ld CIT(A) has already directed to examine the claim of the assessee in respect of freight payments of less than Rs.20,000/-, we do not incline to repeat the said direction here. We may also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in the aggregate capital account of the partners, the Assessing Officer proceeded to compute interest at the rate of 12% on the net debit balance in the capital account of the partners on notional basis and assessed the same. The assessing officer computed notional interest at Rs.1,99,264/-. The Ld. CIT(A) took the view that the law does not provide for taxing interest income on notional basis. However, since the assessee had paid interest to bank to the extent of Rs.59,441/-, the Ld CIT(A) restricted the addition to the extent of interest paid to the bank and deleted the balance amount. The observations made by the Ld. CIT(A) in this regard are extracted below: 22.1 With regard to addition of Rs. 1,99,264 by working out notional interest on debit balance of partners, I find merit in the claim of the appellant that law does not provide for taxing any interest income on notional basis. I however, find that interest paid to banks of Rs. 59,441/- was attributable to huge debit balance in the accounts of partners and therefore could not be allowed as business expenditure. The expenditure made by the Assessing Officer is therefore confirmed to the extent of Rs. 59,441/- being ..... X X X X Extracts X X X X X X X X Extracts X X X X
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