TMI Blog2010 (3) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... person. For the sake of convenience, in the receipt the place is mentioned as the town where the document is registered. The AO has not made any effort to examine any of the sellers to verify as to whether the payments were received at the villages or at the town. Considering the entire facts we are inclined to accept the proposition that the payments were made at villages where banking facilities did not exist. In the present case, even if it is assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not have any bank accounts at such town and they did not reside or carry on any business or farming activity at such town. The AO and the learned CIT(A) have observed that the appellant-company could have opened bank accounts at such town in the name of the sellers. In our view, it would be too much to expect that the appellant-company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r. 6DD(h), in our view, the very object of the legislature would be frustrated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le agreement and agreement for purchase of land was also submitted along with photocopies of receipts in respect of the payments made. The format of the receipt has been reproduced at p. 2 of the assessment order. The AO has mentioned that in most of the receipts the place of payment has been mentioned as Tirunelveli which is a District headquarter in the State of Tamil Nadu. The AO has mentioned that District headquarter is well connected with banking facilities and therefore the assessee was confronted with these facts and asked to explain as to why provisions of s. 40A(3) be not applied. 4. The appellant company filed a reply dt. 11th Feb., 2004 before the AO which has been reproduced at pp. 3 and 4 of the assessment order. In this reply, it was pointed out that the lands purchased by the company were situated in rural areas of Tamil Nadu and a list of the relevant villages was provided. It was also pointed out that the owners of the lands were several as the title existed in the names of more than one person on account of small holdings. The owners of the lands were illiterate and poor farmers with no social background and the villages where the owners resided did not have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried before the CIT(A) who confirmed the entire addition vide his order dt. 22nd Aug., 2007. The learned CIT(A) broadly agreed with the conclusions drawn by the AO and upheld the addition with the following observations at pp. 4 and 5 of his order : The contention of the Authorised Representative as well as assessment orders was carefully gone through. The AO before rejecting the appellant's contention has given detailed reasons as his assessment order. Rule 6DD(h) gives exemption to the assessee if payment is made in a village or town where no banking facility is available to a person who resides or carry on any business in such village or town. The AO has rejected the claim of insistence by the payee for cash payment exemption is not provided in r. 6DD. He has also observed that most of the case laws cited by the Authorised Representative are not relevant or they are on r. 6DD(j) which was prior to 1st April, 1988 and not applicable presently. The Authorised Representative could not prove any exceptional or unavoidable circumstances as prescribed in r. 6DD(j) though the rule is not applicable in the present case. The appellant company having a wider network spreading all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... genuine and the payees were identifiable. The assessee is further required to prove that due to exceptional and unavoidable circumstances payment by cheques was not practicable and hence cash payments were made. In the appellant's case by not establishing any exceptional or unavoidable circumstances it fails to prove in case even as per r. 6DD(j). Thus the entire disallowance of ₹ 1,60,69,350 is hereby confirmed. The grounds of appeal is decided against the appellant. 7. The learned counsel appearing before us on behalf of the appellant-company forcefully submitted that having regard to the correct factual and legal position provisions of s. 40A(3) have been wrongly applied by the lower authorities. Detailed written submissions have also been filed before us wherein reliance has been placed on several judicial pronouncements apart from other cases cited before us during the course of the oral arguments. On behalf of the appellant-company it is submitted that the tax auditors have certified that the cash payments were covered under the exceptions of r. 6DD(h). In response to the queries raised by the AO, complete details were filed before him during the course of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree transactions payments have actually been made through cheques for ₹ 13,30,840. The remaining amount of ₹ 3,36,36,938 is in respect of 161 transactions in respect of which the assessee had submitted before the AO vide letter dt. 3rd March, 2004 (paper book p. 176) that it would be able to submit certificates within a few days. Before the learned CIT(A) further certificates/confirmations involving 116 transactions were filed, copies of which are placed at pp. 218 to 240 of the paper book. The learned CIT(A) was requested to admit this additional evidence under r. 46A as the appellant-company was not provided sufficient opportunity. The appellant-company filed details of villages where banking facilities are not available as per certificates of Village Administrative Officers before the learned CIT(A), copy of which is at p. 174 of the paper book. Thus, details/certificates/confirmations were filed either before the AO or before the learned CIT(A) in respect of 733 transactions involving total amount of ₹ 7,26,46,491. Besides this, in respect of 3 transactions of ₹ 13,30,840 payments were made by cheques, details of which are at p. 173 of the paper book. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments were made in the office of the Sub-Registrar, no disallowance can be made under s. 40A(3) in view of the fact that all the sellers reside or carry farming activities in such villages where banking facilities are not available. It is submitted that r. 6DD(h) has to be interpreted in the light of the provisions of s. 40A(3), especially the second proviso which emphasizes having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors . The learned Authorised Representative distinguished the cases relied upon by the lower authorities. The learned Authorised Representative placed further reliance on the following decisions : (i) Kanti Lal Purshottam Co. vs. CIT (1986) 53 CTR (Raj) 19 : (1985) 155 ITR 519 (Raj); (ii) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989) 179 ITR 122 (Cal); (iii) CIT vs. K.K.S.K. Leather Processor (P) Ltd. (2007) 292 ITR 669 (Mad); (iv) CIT vs. Chrome Leather Co. (P) Ltd. (1999) 235 ITR 708 (Mad); (v) CIT vs. P. Pravin Co. (2005) 193 CTR (Guj) 213 : (2005) 274 ITR 534 (Guj); (vi) Jt. CIT vs. Swarup Vegetable Products Industries Ltd. (2005) 98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by **an account payee cheque drawn on a bank or account payee bank draft, twenty per cent of such expenditure shall not be allowed as a deduction : ................. 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 an account payee cheque drawn on a bank or account payee bank draft, in such cases and under such circumstances as may be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Rule 6DD, insofar it is relevant to the issue is as under : 6DD. No disallowance under cl. (a) of sub-s. (3) of s. 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under cl. (b) of sub-s. (3) or s. 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft in the cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance and the Tribunal sustained it. The Hon'ble Madhya Pradesh High Court held that no question of law arises. This case has no relevance to the issue. In the case of Smt. Ch. Mangayamma (supra), the Hon'ble Andhra Pradesh High Court upheld the validity of the provisions of s. 40A(3). This case also does not help the Department in any way as the validity is not being disputed. The last case relied upon by the Department is the Hon'ble Gujarat High Court decision in the case of Hasanand Pinjomal (supra). In this case, in the context of r. 6DD(j), the Hon'ble High Court observed that practicability of cash payment must be considered from businessman's point of view and not Revenue's. We fail to understand as to how this case supports the view of the Department. For better understanding, the relevant part of the ratio of this case is reproduced below from the headnote : Held, that s. 40A(3) was intended to serve the objective of checking tax evasion and ensure that payments exceeding ₹ 2,500 are made by crossed cheque or bank draft so that it will be easier to ascertain when deduction is claimed; whether the payment was genuine and whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee had produced necessary grounds for making cash payment. The Tribunal noted that these payments were made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power. The Tribunal also noted from the order of the CIT, that considering the fact that the purchases were made from the unorganised sector, cash payments were indispensable. The order of the Tribunal with regard to the cash payments was justified.'CIT vs. Chrome Leather Co. (P) Ltd. (1999) 235 ITR 708(Mad). 22. In the case of Girdharilal Goenka vs. CIT (supra), while interpreting s. 40A(3) the Hon'ble Calcutta High Court observed as under (from the headnote) : The object of s. 40A(3) is to check evasion of tax and not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the AO has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the CBDT (No. 220, dt. 31st May, 1977) is illustrative and not exhaustive and the AO has to take into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. (1996) 130 CTR (MP) 22: (1996) 218 ITR 46(MP) the Hon'ble Madhya Pradesh High Court observed as under at pp. 48 and 49 of the report : ............ The provision on hand is intended to destroy intentions of dealing with unaccounted moneys. The purpose behind insistence on cross-cheque or cross-draft is to assure and ensure 'genuineness' of dealing and proper assessment of taxable income. Even this provision has a proviso to mitigate the hardships. We notice from the appellate order that the appellate authority found that all the purchases were duly entered in the register through inwards and the production has been accepted. It further found that the genuineness of the payment was not exposed to any doubt. Payments in cash were duly signed by the payees and the insistence on making the cash payments is founded on the fulcrum that the payees did not have any bank account and that, being illiterates, required the payment in cash. The Tribunal was thus satisfied that no disallowance ought to be made in view of the facts and features fully covered by the proviso to the aforesaid section. It is in the area of legislative ambiguities, yet not receding, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on a bank holiday; or (iv) the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller; or (v) the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or (vi) specific discount is given by the seller for payment to be made by way of cash. In para 6, it was further observed that the above circumstances were not exhaustive but were illustrative and there could be cases other than those falling within the above categories, which would also meet the requirements of r. 6DD(j). Held, on the facts, that the Tribunal found that the assessee did not have any bank account at the place where the purchases were made. A similar finding was recorded with respect to the seller. One of the conditions of the circular dt. 31st May, 1977, thus, stood complied with to enable the assessee to claim deduction of the expenditure, Further, the contention of the assessee that the actual amount for which purchases of liquor under the permits granted by the Excise and Taxation Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny business in such village or town. In the present case, while the appellant-company avers that payments were made at villages which did not have banking facilities, the Depanment insists that payments were made at a town where the office of the Sub-Registrar was located and such town had banking facilities. This inference is on the basis of the format of the receipt. There is no dispute that the sellers of the land are villagers engaged in farming activities and are residing at places and are carrying on farming activities at places which are not served by any bank and such sellers have no bank accounts anywhere. It has been emphatically argued on behalf of the appellant-company that all payments were made at the villages prior to registration of the sale. In our view this submission cannot be outrightly rejected. Normally, illiterate poor farmers would insist on cash payments, especially when such payments involve huge amounts, at the place of their residence for the simple reason that they would like to avoid the risk of receiving cash at the town where the sale is to be registered and which may be far away from the village and such cash has to be carried back by them to the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... genuineness of the land transactions in respect of which payments have been made. It is notable that r. 6DD(k) provides an exception in respect of cash payment which is made on a day on which the banks were closed. This proves that the object of the legislature is to provide exception in respect of such payment which is required to be made in cash for absence of banking facilities. Rule 6DD(h) must be interpreted keeping in view this object and purpose. 31. It is further seen that cash payments to the extent of ₹ 20,19,208 in respect of 187 transactions are less than ₹ 20,000 per transaction and therefore such payments would be outside of the purview of s. 40A(3). After carefully considering the entire facts and circumstances and the legal position we are of the view that the cash payments are covered under second proviso to s. 40A(3) of IT Act and r. 6DD(h) of IT Rules. In this regard we find strength from the decisions referred above. Therefore, we while setting aside adverse findings of the lower authorities in this regard, direct the AO to delete the addition of ₹ 1,60,69,350 sustained by learned CIT(A). 32. In the result, ground Nos. 1 to. 5 of the app ..... 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