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2016 (4) TMI 856 - ITAT DELHI

2016 (4) TMI 856 - ITAT DELHI - TMI - Addition on account of disallowance of claim of purchases u/s 40A(3) - CIT(A) deleted the addition - Held that:- Terms of Section 40A(3) of the Act are not absolute and that the genuine and bonafide transactions are not taken out of the sweep of the Section 40A(3) of the Act and it is open to the assessee to furnish to the satisfaction of the AO, the circumstances under which the payment in the manner prescribed u/s 40A(3) of the Act was not practicable or w .....

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/s R.A. Traders, Moradabad in cash. In the instant case, the cash payments were made by the assessee to the agent Sh. S.K. Tiwari who in turn made the purchases in cash for the assessee and charged the commission for the said transaction which has been accepted as genuine and allowed to be set off against the income in the profits and loss accounts, by the AO. Therefore, the transaction relating to the purchases of potatoes was clearly covered by the exception laid down in Rule 6DD(k) of the I.T .....

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1962 wherein cash payments made for purchase of agricultural produce is kept outside the purview of Section 40A(3) of the act. Therefore, we do not see any infirmity in the order of the ld. CIT(A) on this issue. - Decided against revenue - ITA No. 4087/Del/2013 - Dated:- 26-2-2016 - Sh. N. K. Saini, AM And Smt. Beena Pillai, JM For The Assessee : Sh. Salil Kapoor, Adv. For The Revenue : Sh. Ved Prakash Mishra, Sr. DR ORDER Per N. K. Saini, AM: This is an appeal by the department against the ord .....

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been confirmed and signed by one of the partners of the M/s Pranay Towers, the assessee. This cash memo evidences that the payment was received from M/s Pranay Towers to M/s R A Traders, and if agent was there as claimed by the assessee, he might be facilitating the assessee for paperwork and evidently not part of transaction. 2. Ld. CIT(A) has erred in ignoring the fact that there was no requirement for the assessee or its agent to make payment in cash. The order of Ld. CIT(Appeals) tells that .....

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e agents. 4. The Ld. CIT (A) has grossly misunderstood the provision and the order of the Ld. CIT (A) is in the nature of creating a bypass in special circumstances, which has never been intention of the law. Ld. C1T(A) has not tried to find those special circumstances. 5. The Ld. CIT has grossly misunderstood the law that exception cannot be made available on the payment in cash for the purchase of potatoes from a person, who is not proved to be the producer of potatoes and is only a trader, br .....

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t be said to be within norms if the same is done between the agent of the assessee and third party, notwithstanding with the facts in this case that agent was not at all involved in the process of transaction as the invoice has been signed between purchaser and seller. 7. Any other ground that may be urged at the time of hearing. 3. From the above grounds it is gathered that only grievance of the department in this appeal relates to the deletion of addition of ₹ 1,20,00,000/- made by the A .....

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f potatoes in cash from sundry parties. The AO requisitioned the information u/s 133(6) of the Act from M/s R.A. Traders, C-87, Avantika, Moradabad which revealed that the assessee was involved in purchase of 12,200 bags of potatoes @ 960/- per bag in cash for ₹ 1,17,12,000/-. The AO also requisitioned the copy of ledger and cash book on the dates of transactions from M/s R.A. Traders and thereafter asked the assessee to furnish the reason as to why the payments could not be considered as .....

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nute detail of the case, the Court cases cited by the assessee and have gone through each fact of both the parties, who are involved in transaction. As per section 40(A)(3), no deduction is to be allowed, if aggregate payment to a person in a day exceeding ₹ 20,000 otherwise than by an a/c payee bank cheque or a/c payee bank draft, barring cases covered in rule 6DD which provides for exemption in certain cases or circumstances. Here in this case, the assessee, M/s Pranay Towers has made pu .....

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ture as contained in section 40A(3) of l.T.Act,1961 as per Attar Singh Grumukh Singh etc. Vs ITO (SC)191 lTR667(pp.673). • Both the transacting parties have bank accounts and there was no reason to pay in cash as there did not exist any circumstances warranting cash payment. • Delivery of goods was made much after transaction, so no exigency, could be established to make cash payment. • In his application u/s 144A, the assessee has claimed that as the payment was through agent, th .....

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ead purchases may be allowed. Directions to ITO, Budaun In view of the above observations, I am of the view that the assessee has contravened the provisions contained in section 40A(3) of I.T.Act1961 read with 6DD of Income Tax Rules. Rule 6DD basically allows cash payments for considerations of business expediency and other relevant factors. Here in this case the assessee has purchased potatoes in cash and has incurred heavy losses. Had the assessee firm earned heavy profits on such cash purcha .....

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payments in cash and in view of my above finding, ITO, Budaun is hereby directed to complete his assessment disallowing such claim of purchases. ITO, Budaun is further directed to send the copy of assessment order within 7 days of passing the assessment order. Case records are also being returned herewith. Encl: as above Sd/- (AMIT NIGAM) Addl. Commissioner of Income Tax, Range-II Moradabad 6. After receiving the copy of directions u/s 144A of the Act, the AO observed that there was no requirem .....

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nt would have been allowed even if such payment was covered within Rule 6DD of the I.T. Rules if the assessee had made it. The AO also observed that the Rule 6DD(k) of the I.T. Rules was to facilitate the assessee that if the transaction between the assessee and the other party was within Rule 6DD(k) of I.T. Rules, same would hold true and in norms between the agent of the assessee and the other party too but, if any, transaction between the assessee and the third party was in contravention of t .....

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h its agent Sh. S.K. Tiwari in the month of April 2009 and the payments were made through the said agent who was assigned this work of dealing with the said firm for procuring the potatoes but the seller firm M/s R.A. Traders was not comfortable with the market credibility of the assessee and had demanded advance payment in cash. It was further stated that the assessee could not find storage space in cold storage for storing the purchased stock and as potatoes began to rot, those were sold at lo .....

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Singh Gurmukh Sing Vs ITO 191 ITR 667 relied by the AO, held that the payment by crossed cheque was insisted to enable the Assessing Authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources and that the considerations of business expediency and other relevant factors were not excluded and that the genuine & bonafide transaction were not taken out of the sweep of this section 40A(3) of the Act. Therefore, the judgment of the Hon ble Apex .....

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t of requirement of only cash payment by M/s R.A. Traders had been proved beyond doubt before the AO and it was the business needs of the assessee who had clearly stated the fact before the AO that the purchases were made through agents and the cash payment was made as it was a condition laid down by the seller. It was accordingly submitted that the assessee s case was squarely covered under the exceptions laid down in Rule 6DD(k) of the Income Tax Rules. As regards to the purchases of ₹ 2 .....

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he assessee had made purchases of ₹ 1,20,00,000/-, out of which purchases of ₹ 1,17,12,000/- had been made from M/s R.A. Traders and the balance amounting to ₹ 2,88,000 had been made from other small parties. He further observed that in the case of provisions of Section 40A(3) of the Act, there is Rule 6DD which lays down certain exceptional circumstances under which purchases in cash exceeding a specified limit are allowed to be made. The ld. CIT(A) pointed out that in the ass .....

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firmatory letter before the AO that he had acted as an agent and had earned brokerage in this deal, which had been debited by the assessee in the audited profit and loss account which had also been accepted by the AO. As regards to the decision of the Hon ble Supreme Court in the case of Attar Singh Gurmukh Singh (supra) relied by the Joint Commissioner of Income Tax, Moradabad, the ld. CIT(A) pointed out that in the said case it has been held that genuine transactions are kept outside the purvi .....

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een made out of undisclosed sources and this was also not the claim of the AO that the purchases and payment had not been made by the assessee firm through the agents. He further observed that a mere confirmation on the bill of M/s R.A. Traders by the partner of the assessee firm did not help the case of the AO. According to the ld. CIT(A), it was the decision of the assessee and his prerogative as to how he had to conduct the business and that as to whether the purchases should have been made d .....

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the credibility of the assessee. The ld. CIT(A) further observed that Sh. S.K. Tiwari had confirmed the fact that he had acted as an agent of the entire transaction of purchases and payments were done through him. The ld. CIT(A) opined that this was a case of a genuine transaction where the purchases were made through Sh. S.K. Tiwari in cash as was required by the seller, therefore, it was squarely covered by the exception laid down in Rule 6DD(k) of the I.T. Rules and thus the assessee was not .....

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rdingly, the addition of ₹ 2,88,000/- was also deleted. 9. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observations made in the assessment order dated 26.03.2013. He further submitted that the assessee made the purchases in cash from M/s R.A. Traders and the partner of the assessee firm signed the cash vouchers which clearly established that the purchases were made in cash exceeding ₹ 20,000/-, so it was hit by the provisions .....

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department. Therefore, no disallowance could have been made u/s 40A(3) of the Act as the transaction was covered under the exception laid down in Rule 6DD(k) of the I.T. Rules, 1962. 11. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee made the purchases of potatoes valuing ₹ 1,17,12,000/- from M/s R.A. Traders, Moradabad through the agent Sh. S.K. Tiwari. Th .....

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aking the payment in cash and the transaction is not hit by the provisions contained in Section 40A(3) of the Act. The sub-clause (k) of the said Rule 6DD provides as under: Where the payment is made by any person to his agent who is required to make the payment in cash for goods or services on behalf of such person. 12. In the present case, it is an admitted fact that Sh. S.K. Tiwari acted as an agent and procured the potatoes from M/s R.A. Traders, Moradabad who doubted the credibility of the .....

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ion laid down in clause (k) of Rule 6DD of the I.T. Rules, 1962. In that view of the matter, we are of the view that the ld. CIT(A) was fully justified in deleting the addition made by the AO. As regards to the judgment of the Hon ble Apex Court relied by the AO in the case of Attar Singh Gurmukh Singh Vs ITO, Ludhiana 191 ITR 667 (supra) relied by the AO is concerned in the said case, it has been held as under: Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in exces .....

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) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by 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 .....

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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 changes to use black money for business transactions. 13. From the ratio laid down in the aforesaid case, it is crystal clear that the terms of Section 40A(3) of the Act are not absolute and that the genuine and bonafide transactions are not taken .....

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