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SRI MANORANJAN RAHA Versus INCOME TAX OFFICER, WARD-4, NADIA

2016 (1) TMI 359 - ITAT KOLKATA

Disallowance u/s 40A(3) - Held that:- We find that the payments made by cash in violation of section 40A(3) of the Act have been duly acknowledged by the recipient Shri.Amit Dutta who had deposed before the learned AO and confirmed the fact of receipt of monies in cash. Hence the genuinity of payments made by the assessee stands clearly established beyond doubt. Even for the amounts enhanced by Learned CITA in the sum of ₹ 54,01,473/-, the genuineness of the payments and the necessity to i .....

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th the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 6.7.1968 reiterates this view that “this provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the department as to the identity of the payee and reasonableness of the payment.” - Decided in favour of assessee - I.T.A No. 1448/Kol/2011 A.Y 2008-09 - Dated:- 18-11-2015 - Shri M. Bal .....

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1961 (hereinafter referred to as the Act ). 2. Shri Siddhartha Pratim Datta, Advocate, learned AR argued on behalf of the assessee and Md.GhyasUddin,JCIT,learnedSr.DR argued on behalf of the revenue. 3. The only issue to be decided in this appeal is as to whether the disallowance u/s 40A(3) of the Act could be made in the facts and circumstances of the case amounting to ₹ 1,14,52,363/- (60,50,890 + 54,01,473). 4. The brief facts of this case is that the assessee is a distributor of Hutch .....

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utor Agreement with Shri.Amit Dutta who is the distributor of Hutch sim cards had appointed assessee as the Associate Distributor. Pursuant to this agreement, the assesee would purchase sim cards from Shri.Amit Dutta and sell the same to customers and assesee would derive distributor commission at an agreed rate. The Learned AO during the course of assessment proceedings found that there is a violation of section 40A(3) of the Act in respect of payments made by the assessee to the main distribut .....

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A show cause notice dated 20.8.2010 was issued by the Learned AO to the assessee in this regard. Detailed submissions were made before the Learned AO by the assessee on 19.10.2010 explaining the facts and the legal stand taken by the assessee on the impugned issue. Sri Amit Dutta had also deposed before the Learned AO u/s 131 of the Act confirming the receipt of monies in cash from the assessee and further stated that he had persuaded the assessee to pay only in account payee cheques to get away .....

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t by ₹ 54,01,473/- Aggrieved, the assessee is in appeal before us by raising the several grounds. Though the assessee had raised several grounds in his appeal, the central ground revolves only around disallowance u/s 40A(3) of the Act. Hence all the grounds are taken up together for the purpose of adjudication herein. 4.2. The Learned AR reiterated the facts stated before the lower authorities. He argued that the genuineness of the cash payments made by the assessee is not disputed by the .....

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e been duly acknowledged by the recipient Shri.Amit Dutta who had deposed before the learned AO and confirmed the fact of receipt of monies in cash. Hence the genuinity of payments made by the assessee stands clearly established beyond doubt. Even for the amounts enhanced by Learned CITA in the sum of ₹ 54,01,473/-, the genuineness of the payments and the necessity to incur the said expenditure for the purpose of business of the assessee was never disputed by the Learned CITA. We hold that .....

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s this view that this provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the department as to the identity of the payee and reasonableness of the payment. 4.4. In this regard, it is pertinent to get into the following decisions on the impugned subject:- Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC) Section 40A(3) of the Income-tax Act, 1961, which provides t .....

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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 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 .....

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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 reduce the chances to use black money for business transactions. CIT vs CPL Tannery reported in (2009) 318 ITR 179 (Cal) The second contention of the assessee that owing to business expediency, obligation and exigen .....

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efore, delete the addition of ₹ 17,90,571/- and ground no.1 is decided in favour of the assessee. CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.7.2008 - Jurisdictional High Court decision It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding ₹ 20,000/- since it is not made by crossed cheque or bank draft but by hearer cheques and has computed the paymen .....

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ribunal. It further appears from the assessment order that neither the Assessing Officer nor the CIT(Appeal) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine. Anupam Tele Services vs ITO in (2014) 43 taxmann.com 199 (Guj) Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limits (Rule 6DD(j)-Assessment year 2006-07 - Assessee was working as .....

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fore, 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 assesse] Sri Laxmi Satyanarayana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhrapradesh High Court) Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limit (Rule 6DD) - Assessee made certai .....

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Para 23] [In favour of the assessee] CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) In this case the court upheld the view of the tribunal in not applying section 40A(3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee. 4.5. It is pertinent to note that the primary object of enacting section 40A(3) was two fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of .....

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ex Court in the case of CTO vs Swastik Roadways reported in (2004) 3 SCC 640 had held that the consequences of non-compliance of Madhyapradesh Sales Tax Act , which were intended to check the evasion and avoidance of sales tax were significantly harsh. The court while upholding the constitutional validity negated the existence of a mens rea as a condition necessary for levy of penalty for non-compliance with such technical provisions required held that in the consequence to follow there must be .....

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finding to this effect before levying penalty u/s. 57(2). Though in the instant case, the issue involved is not with regard to the levy of penalty, but the requirement of law to be followed by the assessee was of as technical nature as was in the case of Swastik Roadways (3 SCC 640) and the consequence to fall for failure to observe such norms in the present case are much higher than which were prescribed under the Madhya Pradesh Sales Tax Act. Apparently, it is a relevant consideration for the .....

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k transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions. Admittedly, this is not the case in the facts of the assessee herein. The payments made in cash to Shri. Amit Dutta had been duly acknowledged by him in an independent deposition given by him before the Learned AO which was admittedly taken behind the back of the assessee. It is also pertinent to note that the Hon ble Rajasthan High Court in the case of Smt.Harshila Chordia .....

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acknowledgement of the payments made by the assessee by the payee is proved beyond doubt. The assessee had also stated that the payee had duly included these payments as his receipts in his returns. 4.8. We are unable to buy the argument of the Learned AR that the assessee had made payment to his agent Mr.Amit Dutta for purchase of sim cards and others and hence would fall under the exception provided in Rule 6DD(k) of the IT Rules. For the sake of convenience , Rule 6DD(k) is reproduced herein .....

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