TMI Blog2011 (10) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... . 56/JP/2010 & 120/JP/2011 - - - Dated:- 21-10-2011 - SHRI R.K. GUPTA AND SHRI N.L. KALRA For the Appellant: Shri Vijay Goyal For the Respondent: Shri Vinod Johari ORDER PER R.K. GUPTA, J.M. These are two appeals by the assessee against the orders of ld. CIT (A) relating to assessment year 2006-07 and 07-08. 2. Ground No. 1 in appeal for assessment year 2006-07 against confirming the addition made by AO was not pressed at the time of hearing, therefore, the same is dismissed as not pressed. 3. The remaining grounds for assessment year 2006-07 and only ground for assessment year 2007-08 are against confirming disallowance made under section 40A(3) at ₹ 29,57,110/- and ₹ 49,15,376/- respectively. 4. Since issue in both the appeals are identical, therefore, they are disposed off together. 5. The assessee company is a colonizer and developer and its business is to buy agricultural land and get it converted into residential and commercial purpose by obtaining approval from Jaipur Development Authority in accordance with provisions of Rajasthan Land Revenue and JDA. The assessee divided the land in plots of various sizes and carries var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and not as an employee was not established by any documentary proof or evidence in the form of any such agency agreement or any commission paid to the director for executing such an agency on behalf of the company. Accordingly this explanation was rejected. 7.2. Regarding the second submission which is on payment made to persons living in villages where no banking services are available. The AO noted that at some point of time the said seller was paid by account payee cheque and, therefore, it cannot be said that there was no banking service available. It was further mentioned by the AO that there is no evidence filed on record that on bouncing the cheque the farmers have insisted for cash payment otherwise they will cancel their agreement. Therefore, under these circumstances the explanation of the assessee was also rejected. 7.3. The AO has further noted that no supporting evidence has been filed by the assessee that why the payments were made after banking hours. Therefore, this explanation was also rejected by the AO. In view of these facts and circumstances, the AO made an addition @ 20% of such cash payments made by the assessee to the seller farmers under section 40A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of introducing the provisions of Sec. 40A(3) were to curb the black money and for that purpose to discourage the practice of making payments in cash. Rule 6DD provides certain circumstances where payments in cash can be accepted. In the present case by making payments in cash that too in a number of cases in no way fulfill the purpose of introducing the provisions of Sec. 40A(3). The provisions of Sec. 40A(3) are substantial provisions and making payments of ₹ 20,000/- and above by crossed cheque/demand draft is a statutory requirement and not a technical requirement. The provisions are not of deduction but is a charging section and therefore making cash payments cannot be a right of the assessee. The AO by taking 20% of such cash payment has fulfilled statutory obligation. Under the provisions the AO has not much diecretion and bound to disallow 20% of such cash payments. The action of the AO in the present case is therefore approved and addition of ₹ 29,57,110/- made by the AO is hereby confirmed. First ground of appeal is thus decided against the appellant. 9. Similarly, the ld. CIT (A) rejected the contention of the assessee for assessment year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (k) of Rule 6DD In these cases, the company made payment to Shri Gyan Chand Agarwal (Managing Director) of the company who subsequently made payment to the labours etc. on behalf of the seller of the agricultural land therefore covered under clause (k) of rule 6DD. 88,000 Clause (h) now Clause (g) of 6DD villages where the seller Resides/land situated not served by banking facilities. Clause (k) now clause (j) of Rule 6DD Payments have to be made after the banking hours. Clause (f) now Clause (e) of Rule 6DD Payments to cultivators against purchases of agricultural land 1,46,97,550 Total 1,47,85,550 2) Cases covered by saving clause (l) now Clause (k) of Rule 6Dd The assessee explained that the following cash payments are covered by clause (k) of rule 6DD. In these cases, Shri Gyan Chand Agarwal, Managing Director of the company made the payments on behalf of the seller of the land therefore, covered under clause (k) of rule 6DD, a director of a company is not a servant but an agent, inasmuch as, the company cannot act in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Village where the seller resides 1. Tara Chand Swami 03.12.2005 173300.00 Land at Bhankarota The seller of the land is resident of village Narsinghpura. 2. Shyoram 12.05.2005 1000000.00 Land at Sukhiya The seller of the land is resident of village Sukhiya 3. Shyoram 11.06.2005 900000.00 Land at Sukhiya The seller of the land is resident of village Sukhiya 4. Shyoram 11.05.2005 900000.00 Land at Sukhiya The seller of the land is resident of village Sukhiya 5. Shyoram 11.06.2005 900000.00 Land at Sukhiya The seller of the land is resident of village Sukhiya 6. Shyoram 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Harinarayan 01.06.2005 410875.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 18. Budha 01.06.2005 713000.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 19. Gopal 02.06.2005 1649500.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 20. Bhoriya 02.06.2005 849500.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 21. Radheyshyam 02.06.2005 849500.00 Land at Jetpura The seller of the land is resident of village Jaitpura (Hajyawala) 22. Govindnarayan 02.06.2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the words village which is not served by any bank. Village served by bank means that the villages should have banking facility either by way of branch of any bank/mobile bank, ATM facility or banking outlet etc. The village has not been defined under Income Tax Act, therefore, its dictionary meaning should be taken. The village has been defined as a group of houses and associated buildings, larger than a hamlet and smaller than a town, situated in a rural area : (Oxford Dictionary) Therefore, the banks situated at district head quarters or nearby towns should not been taken as situated in village. If the interpretation taken by the ld. AO is considered correct than it means that all the villages have banking facilities and if so, the very purpose of this clause would be defeated. The object of provisions of section 40A is to curb flow of black money and not to put an impediment over the trade and business. It is correct to say that it would be very difficult for banking companies to open outlet/branch in each and every village. The legislature after considering this practical difficulty has introduced the saving clause (h) (now clause (g) of rule 6DD to save ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his order (S.No. 4 to 14). In all these cases, the payments were by Post Dated Cheques and all these cheques were cleared much after the date of cash payments. (c) As regard payment to Shyram (S.No. 3), we submit that the Seller had bank account in nearby town, and assessee convinced him to accept the payment by cheques. The assessee made the payments by cheque upto 8.12.2004. The cheque no. 232413 to 232416 were issued post dated and on that date, the cheques were dishonored because of insufficient funds in bank. The first cheque No. 232413 dated 15.04.2005 dishonored, the next cheque dated 25.04.2005 also dishonored and the next two cheques dated 9.05.2005 also dishonored. The agriculturist lost trust over the assessee. So the agriculturist refused to take the further payment by cheques and threaten to cancel the agreement of sale. In such compelling circumstances, the assessee had to make the payment in cash on 12.05.2005 and onwards. Your honour would see that no payment was made in cash till the date of dishonor of cheque. In such circumstances no disallowance u/s 40A(3) should be made for the payments made to Shyoram (S.No. 3, page 3 of Astt. Order.). Reliance is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment in cash otherwise the purchases of the land was not possible from these farmers. 11) Legislature intended not to make the provision of s. 40A(3)d very strict and absolutely mandatory. Jurisdictional High Court in the case of Kanti Lal Purshottam Co. vs. Commissioner of Income Tax, 155 ITR 519 (Raj.) held that Income-tax is a tax on the real income and the purpose of introducing s. 40A(3) was to block the loopholes of making cash payment and claim as deductions with a view to frustrate investigation as to the identity of the recipients and the genuineness of the claim. Proviso to s. 40A(3) shows that the Legislature intended not to make the provision of s. 40A(3) very strict and absolutely mandatory. The rigour of the whole restriction was loosened by the proviso and by making r. 6DD. Therefore the proviso and rule 6sDD both should be considering for giving relaxation from the rigour of section 40A(3). The Second Proviso to section 40A(3) is as under :- 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 crossed cheque drawn on a bank or by cross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. K.K. S.K. Leather Processor P. (292 ITR 669) (Relates to AY 2001-02 after the amendment of law). Exceptional or unavoidable circumstances- Tribunal found that cash payments were made to small time vendors who come from surrounding villages to sell skin to the assessee, a leather producer, and that cash payments were indispensable Disallowance rightly deleted CIT vs. Chrome Leather Company (P) Ltd.(1999) 235 ITR 708 (Mad) followed. (iii) Madras High Court decision in the case of CIT v. Chrome Leather Co. Pvt. Ltd., 235 ITR 708 : held that payment by crossed cheque was not practicable and that identity of payee and genuineness of payment were established amount paid in cash could not be disallowed u/s 40A(3). (iv) Gujarat High Court decision in the case of CIT v. P. Pravin And Co. 274 ITR 534 : held that the requirement under rule 6DD of the Income-tax Rules 1962, regarding practicability of payment otherwise than in cash and consideration of business expediency has to be judged from the point of view of the businessman and not of the revenue authorities. (v) In the case of Joint Commissioner of Income Tax vs. Swarup Vegetable Products Industries Ltd. (200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 identity 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 s. 40A(3) and r. 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. (See Mudiam Oil Co. vs. ITO (1973) 92 ITR 519 (AP) : TC18R.450). 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that the payment has been made by the Managing Director Shri Gyan Chand Agarwal, however, no evidence whatsoever has been filed that Shri Gyan Chand Agarwal was appointed as agent for making purchases on behalf of the company. Therefore, the explanation of the assessee, in our view, was rightly rejected by AO and ld. CIT (A). 14.3. Sub clause (g) is about the payment made in a village or in a town which on the date of such payment is not served by any bank and 14.4. Sub clause (j) is in respect to the payment made on a day on which the bank was closed either on account of holiday or strike. 14.5. These two clauses may be helpful to the assessee as the case of the assessee is that the purchases were made from the persons who resides in the villages where on the date of payment the village was not served by any banking facility and in some cases the payments have been made after banking hours to the villagers and in support of this contention it was submitted that the time of payment has been mentioned on the payment voucher itself. The AO and ld. CIT (A) has rejected the contention of the assessee that they have not filed any supporting evidence. In our view, the observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Rule 6DD of IT Rules. 14.8. It is also noted that the payments to some villagers have been made after banking hours and in cash voucher itself the time of payment has been mentioned. Some of the examples have been given somewhere above in this order where time of payment has been noted. Therefore, in our view the AO and ld. CIT (A) were not correct in observing that no supporting evidence was filed that the payments were made after banking hours. Neither any person was called nor enquiry was made that the payments were made after banking hours or they resided in the villages. 14.9. The provisions of section 40A(3) are very stringent and, therefore, it was the duty of the AO that before attracting stringent provision he should have made enquiry about the persons whether they live in the villages or not and whether payments have been made after banking hours or not. There is no dispute that payments have been made from disclosed sources as all the payments have been accounted for. The provisions of section 40A(3) was brought on Statute initially to curb the practice of introducing black money. However, the provisions of section 40A(3) says that if the cash payment excee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned sub clause (h) whereas the correct clause is 6DD(g). The ld. Counsel of the assessee has made statement at Bar that there is no bank branch in village Ballupura at the time of purchase of the land from various sellers. It was also submitted by ld. A/R that normally the villagers paid in cash at the time of entering into agreement and sale deed is completed at a later stage wherein they have agreed to receive the amount from the assessee either in cash or cheque as the case may be. This contention of the ld. Counsel of the assessee remained uncontroverted, therefore, we see no reason to interfere with the finding of ld. CIT (A) and held that ld. CIT (A) was right in deleting the disallowance made by AO under section 40A(3). 15. Facts in the present case for both the years are similar. Therefore, in view of the above facts and circumstances and in view of the consistency as on similar facts the Tribunal has deleted the additions made under section 40A(3), we hold that ld. CIT (A) was not justified in confirming the action of the AO in making addition under section 40A(3) for both the years. Accordingly the entire additions for both the years are deleted. 16. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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