TMI Blog2016 (9) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... skin purchased were accepted as producers. No such issue was raised by the AO in the assessment. - Decided against revenue Bogus sundry creditors - purchases of goods from these parties have been accepted to be genuine - Held that:- revenue had failed to prove that the amounts were credited to the books of account of the assessee in the year under consideration. These amounts were brought forward from earlier years and it is settled law that the addition under section 68 could be made only if the amount was credited in the accounts of the assessee in the relevant financial year. In Shri Vardhman Overseas Ltd. v. Asstt. CIT (2008 (7) TMI 617 - ITAT DELHI) it was held that no new amount had been credited by assessee in its account during the year under consideration. Therefore, applicability of section 68 of the Act is also ruled out and addition could not be made under section 68 of the Act - Decided against revenue - ITA No.2620/Kol/2013 - - - Dated:- 7-9-2016 - Shri Waseem Ahmed, Accountant Member and Shri S.S.Viswanethra Ravi, Judicial Member By Appellant Shri G. Mallikarjuna, CIT-DR By Respondent Shri S.M. Surana, Advocate O R D E R PER Waseem Ahmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , invoked the provisions of Section 40A(3) and made an addition of ₹ 3,23,88,960/-. 4. Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the ld. CIT(A) submitted that all the purchase bills contain the name of sellers as Producers of hide and skin which was also supported with the way bill issued by VAT authorities. Simply the non services of notices issued under section 133(6) do not confirm that the goods were purchased from the non-producer. Accordingly the ld. CIT(A) deleted the addition made by AO by observing as under:- I have gone through the assessment order, submission of the AR, perused the facts of the case and other materials brought on record and I am of the view that for the following reasons ₹ 3,23,88,960/- cannot be disallowed by applying the provision of section 40A(3) of the Act :- i) The appellant has purchased raw hides from the producers of these goods. There is also no dispute that the appellant produced bills of the suppliers of raw hides and skins. When asked for, the appellant produced the said bills before me. The bill shows that the suppliers were producers of hide and skins. The transport company s doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the twin capacities of producer as well as trader thereof. There can be another situation that a person purchases hides and skins produced by others and trades those items then he will be a trader of hides and skins and will not be covered within rule 6DD(f)(ii). From the sale bills itself it cannot be decided whether the sellers are producers or not. vi) Whereas assessee purchased raw hides/skins for purposes of manufacturing leather and leather products from local producers or through their agents, payment made in cash for purchases made by assessee directly from agents, payment made in cash for purchases made by assessee directly from producers would be covered by rule 6DD(f)(ii) [now rule 6DD(e)(ii)]; further payments made by assessee to agents for purchases would be covered by exception provided in rule 6DD(l)[now rule 6DD(k)]-Dy. CIT vs. Allied Leather Finishers (P)Ltd. [2009] 32 SOT 549 (Luck.Trib.). vii) From the facts and the legal propositions, it is amply clear that the case of appellant is fully covered by the circumstances mentioned in sub-clause (2) of clause (f) of Rule 6DD. It is not the case of the Assessing Officer that the purchases are not made from p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns by trucks/lorries to Kolkata for delivery to assessee at Kolkata. The assessee takes the delivery of the hides after counting the pcs for which the purchase rates were duly settled at the time of placing the orders. However, the payment for such goods is made much after that, sometimes even after the goods are manufactured. This is because the purchase is made from producers and not from or through any trader. Needless to mention that the assessee can catch hold or the trader even after the payment is made in case of any problem with the quality but cannot catch hold of a producers of raw, hide and skins every time. These producers frequently come to Kolkata as and when they need money. The assessee does not keep cash money in chest so that payment can be made then and there. Therefore to meet their cash needs the assessee gives them bearer cheque with whom some of the employee of the assessee accompanies and the money is withdrawn for these producers from the bank. In support of the fact of purchase of raw, hide and skins, the appellant filed the copies of the purchase bills wherein the name of the seller as producer of hide and skin was clearly mentioned. The good were carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce u/s. 40A(3) of the Act as the assessee has made payments exceeding ₹ 20,000/- through bearer cheques to suppliers of raw hide in violation of the provisions of section 40A(3) of the Act. He also stated that the assessee could produce no evidence before him to show that payments were made to producers. The AO, therefore, held that the transaction was not falling under any of the exception clause as specified under rule 6DD of Income Tax Rules. On appeal, the Ld. CIT(A) held that the AO disallowed the same under section 40A(3) of the Act on account of non-service of notice under section 133(6) of the Act. Accordingly the AO reached to the conclusion that the supplier of raw hide and skin are not the producers. As per the ld. CIT(A) non-service of notice under section 133(6) of the Act does not attract the provisions of section 40A(3) of the Act. Accordingly the ld. CIT(A) allowed the relief to the assessee. Now the question before us arises so as to whether the assessee in the aforesaid facts circumstances has violated the provisions of section 40A(3) of the Act and its transaction is outside the purview of the provisions of Rule 6DD(e) of Income Tax Rules. At the outset w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of 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 to regulate business transactions and to prevent the use of unaccounted money or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s co-operative bank would not do, since realization took longer time and such payments should be made only in cash in their bank account If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation Assessee, therefore, made cash payment Whether in view of above, no disallowance under section 40A (3) was to be made in respect of payment made to principal - Held, yes [Paras 21 to 23] [in favour of the assessee] Sri Laxmi Satyanarayana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhra Pradesh High Court) Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Incometax Rules, 1962 Business disallowance Cash payment exceeding prescribed limit (Rule 6DD) Assessee made certain payment of purchase of ground nut in cash exceeding prescribed limit Assessee submitted that her made payment in cash because seller insisted on that and also gave incentives and discounts Further, seller also issued certificate in support of this Whether since assessee had placed proof of payment of consideration for its transaction to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the course of assessment proceeding sent the notice at the addresses given by assessee u/s. 133(6) of the Act but all of them returned unserved. On question by the AO the assessee submitted that the sundry creditors relates to the purchases which is genuine, therefore, the creditors without rejecting the purchases cannot be treated as income of the assessee. However, the AO disregarded the claim of assessee by observing that the onus lies upon the assessee to prove identity, genuinety and creditworthiness. Accordingly, AO disallowed the creditor for ₹ 4,29,02,130/- on account of non-existent and added to the total income of assessee. 11. Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:- 5.3.5 I have gone through the assessment order, submission of the AR, peruse the fact of the case and other materials brought on record and I am of the view that for the following reasons ₹ 4,29,02,130/- cannot be added to the income of the appellant either by applying the provisions of section 41(1) or 68 of the Act.:- (i) That the purchase of the hides from the sundry creditors is evident from the purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l IT Appeal No. 325 of 2008 dated 22/7/2009, dealing with section 68 of the IT Act in a similar case, the Hon'ble Delhi High Court observed .Proceeding on this basis, the ITAT observed that the sales, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer. 4. Once this is accepted, we are of the opinion that the approach of the ITAT was correct inasmuch as the Assessing Officer did not consider this aspect while making additions of the sundry creditors under section 68 of the Income Tax Act. As there was no case for disallowance for responding purchases, no addition could be made under section 68 inasmuch as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the Assessing Officer. viii) As regards applicability of provisions of section 41(1), the facts clearly show that the appellant did not write back the sundry creditors to its profit and loss account. In CIT v. Vardhman Overseas Ltd. in ITA No. 774//2009 decided on 23.12.2011, (2012) 343 ITR 408 (Del), the Delhi High Court, referring to its judgment in the case of Jay Engineering Works Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year itself and purchases from all of them have been accepted to be genuine, found recorded in the books of accounts such purchase of raw materials was also found to consumed, the disallowance for purchase was made only by applying section 40A(3) wherever the payment were in excess of ₹ 20,000/. Therefore sundry creditors cannot be said to be bogus and no addition can be made as bogus creditors. It is further submitted that even if it is presumed that there were unconfirmed creditors, then whether the provision of section 68 or section 41(1) can be invoked and whether such creditors can be treated as bogus warranting addition in the income of the assessee. It is again submitted that there is no dispute that the goods have been purchased and the genuinity of the purchase have not been disputed and it was because that the provisions of section 40A(3) have been applied. Moreover, the assessee maintained day-to-day stock register wherein the raw material purchased were entered into and the finished goods produced have been accepted. Therefore, in so far as the purchase during the year and the corresponding outstanding balance as creditors which relates the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cessation of liabilities and on the mere fact that the amounts were outstanding for more than 3 years, the provisions of section 41 (1) could not be applied. In the case of Dhawan (M.R.) v. CIT 149 ITR 160 (Del), it was observed that the remission of the liability arises when the creditor voluntarily gives up the claim. The cessation of such liability arises only when it ceases to exist in the eyes of law for all intents and purposes. In the case of UOI v.J. K.. Synthetics Ltd. (1993) 199 ITR 14 (SC), the Hon ble Court held that cessation of liability for the purpose of section 41(1) means irrevocable cessation so that there is no possibility of the liability being revived in future. If there is such a possibility, then the cessation is not complete and section 41 (1) is not attracted. In the case of Shri Vardhman Overseas Ltd. vs. Asstt. CIT 24 SOT 393 (Del H -Trib), the facts of the case were that the AO asked the assessee to prove the genuineness of some sundry creditors. The assessee did not file confirmations of said sundry creditors, except one. Therefore, AO after giving various opportunities treated the balance amount as income of assessee on account of unexplained cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... howing the liability. It has been held in the case of Bhavesh Prints reported in 142 TTJ page 128 that simply because some of the creditors were not traceable it cannot be held that the liability is not payable. In the case of Taminadu Ware Housing Corporation reported in 292 ITR 310, it was held that so long the assessee had shown the liability in the balance sheet it cannot be said that the liability has ceased to exist. In the case of Willson and Co. Ltd reported in 121 TTJ 258 (Chennai Tribunal), it was held that unless it was shown by the Department that the liability ceased to exist during the assessment year in question it cannot partake the character of income during the assessment year in question. Similarly in the case of Dy. CIT v. Amod Petrochem (P) Ltd. (2008) 23 (I) ITCL 145 (Guj-HC) : (2008) 217 CTR (Guj) 401, it was held that as per section 68, there should be cash credits of previous year. The section provides for a deeming fiction of treating the sum found credited in the books of an assessee maintained for any previous year, being charged to income-tax as the income of the assessee of that previous year, provided (i) the assessee offers no explanation as to th ..... 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