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TMI Blog2012 (8) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... South Western Railway) towards purchase. ♦ The purchase of scrap is totally accounted in the books of account and is cross verifiable from the records of South Western Railway. ♦ The scrap dealers make payments in cash to the Government as a general practice once their bid is approved in the auction." 3. From the above grounds, it is gathered that the only grievance of the assessee relates to the confirmation of disallowance of Rs. 73,91,380/- made by the AO by invoking the provision of sec. 40A(3) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act', in short). 4. The facts of the case in brief are that the assessee was trading in purchase and sale of scrap materials and filed the return of income on 7.10.2008 declaring an income of Rs. 2,66,270/-, which was processed u/s 143(1) on 16.7.2009. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had purchased railway scrap materials to the extent of Rs. 73,91,380/- by making cash payment exceeding Rs. 20,000/-. The AO asked the assessee to give reasons for payments in cash exceeding Rs. 20,000/- fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the conditions of Auction/bid, the payment made by us to Railway authorities are covered under rule 6DD and they cannot be disallowed u/s 40A(3) of the Income-tax Act 1961." 5. The AO after considering the submissions of the assessee observed that the copy of the general conditions of sales issued by the railways which was furnished by the assessee revealed that the condition No.9 mentioned that the payment of balance sale value and delivery of lots should be paid in cash only. According to the AO, the Rule 6DD(b) covers cases where the payment is made to the Government under the Rules framed by it and such payments were required to be made in 'legal tender'. The AO pointed out that the assessee had paid auction amount in cash to the Government, in this case to the railways, it could be done only in cases relevant to 'legal tenders', such as direct taxes, customs, excise, railway freight, sales tax etc. According to him, the payments made by the assessee on account of auction for the purchase of scrap material from railways could not be a 'legal tender' and hence Rule 6DD(b) was not applicable. He also pointed out that SWR in its website (www.south western railway.in) has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lford Transport (Eastern India) Ltd. v. CIT [1999] 240 ITR 902/[2002] 124 Taxman 538 (Gau.) 2. Attar Singh Gurmukh Singh v. ITO [1982] 136 ITR 589/[1980] 3 Taxman 273 (Punj. & Har.) 3. Janambhumi v. CIT [1997] 225 ITR 517/[1998] 99 Taxman 451 (Gau.). 8. Now the assessee is in appeal. 9. The learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee has made the payment to the railways, which is part of the Government Department, therefore, the payment was outside the purview of the sec. 40A(3) of the Act, since it was covered under the exceptions laid down in Rule 6DD(b) of the Income-tax Rules 1962. It was contended that the Railway Department insisted for cash payment and it was an allowable expenses. Reliance was placed on the judgment of the Hon'ble Jurisdictional High Court in the case of CIT v. Rhydburg Pharmaceuticals Ltd.[2004] 269 ITR 561/136 Taxman 630 (Delhi). It was further submitted that the AO as well as the learned CIT(A) wrongly interpreted the meaning of 'legal tender' while making the additions. It was contented that the intention of legislature while introducing the provisions of sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceptions laid down in Rule 6DD(b) of the Income-tax Rules 1962. The provision contained in sec. 40A(3) of the Income-tax Act reads as under : "Where the assessee incurs any expenditure in respect of which a payment or aggregate of payment made to a person in a day, otherwise than by an account payee cheques drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure." 12. From the above provisions, it is clear that the deductions for the expenditure incurred in cash exceeding Rs. 20,000/- could not be allowed against the income under the head 'profit and gains of business or profession'. However, certain exceptions are laid down in Rule 6DD of the Income-tax Rules 1962, which provides the cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheques drawn on a bank or account payee bank draft. 13. The exception laid down in clause (b) of Rule 6DD of the Income-tax Rules 1962 relates to the payment made to the Government and reads as under:- "where the payment is made to Government and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sale value and delivery of lots should be paid in cash only. This fact has also been accepted by the AO as has been mentioned at page No.3 of the assessment order dated 27.12.2010. On a similar issue, the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh (supra) held as under : "Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs. 2,500 (Rs. 10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheques or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with Rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict 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 upon to enable the assessing authority to ascertain whether the payment was genuine or wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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