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Hotel Nagas Private Limited Versus The Commissioner of Income Tax, Salem

2016 (5) TMI 590 - MADRAS HIGH COURT

Disallowance u/s 40A(3) - genuineness of the cash payments - consideration paid to agriculturists in respect of purchase of agricultural lands - Held that:- All the three authorities have failed to appreciate that when a vast extent of agricultural lands is purchased from several persons, especially in villages, it is not possible to expect the villagers to accept the sale consideration by way of crossed account payee cheque or bank draft. Therefore, so long as the payees are identified and the .....

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r. S. Rajesh, Jr. Standing Counsel for I.T. appearing on behalf of Mr. J. Narayanasamy Sr.Standing Counsel JUDGMENT V.RAMASUBRAMANIAN,J This tax case appeal is by the assessee. It was admitted on 9.7.2008 on the following substantial questions of law : "1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of 20% of total consideration paid to agriculturists in respect of purchase of agricultural lands in the light of Finance .....

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Junior Standing Counsel appearing for Mr.J. Narayanasamy, learned Senior Standing Counsel for the Department. 3. The assessee filed a return of income for the assessment year 1996-97. The return of income was processed under Section 143(1)(a) and was selected for scrutiny. A notice under Section 143(2) was issued. 4. Several issues were raised in the course of scrutiny assessment. But, we are concerned only with one issue in this appeal. This relates to cash payments to the total tune of ₹ .....

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t sale deeds and that in respect of 8 such sales, cash payments had to be made to the total tune of ₹ 29,50,000/-. The assessee claimed that the cash payments were made before the Sub-Registrar and that since the payments were made for the purchase of agricultural lands, Section 40A(3) will not get attracted. But, the Commissioner of Income Tax (Appeals), by an order dated 28.2.2001, upheld the order of the Assessing Officer in so far as it related to Section 40A(3). 6. Therefore, on that .....

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40A or not. But, the same question is split into two for the purpose of focussing on 2 things namely (i) what was purchased was only agricultural lands and (ii) what necessitated the payment in cash was business expediency. Therefore, we may take up both the questions together. 8. Under Section 40A(3), if any payment is made in excess of ₹ 10,000/- otherwise than by way of crossed cheque drawn on a bank or by way of a crossed demand draft towards any expenditure, 20% of such expenditure w .....

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as to what would constitute 'relevant factors' under Section 40A(3). But, Rule 6DD of the Income Tax Rules, 1962 lists out the cases and circumstances, in which, the Proviso to Sub-Section (3) could be invoked. 9. Rule 6DD of the Income Tax Rules, 1962, states that no disallowance under Sub-section (3) of Section 40A shall be made where any payment in a sum exceeding ₹ 10,000/- is made otherwise than by a crossed cheque or by a crossed bank draft in the cases and circumstances spe .....

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Clause (e) relates to the payment made by way of adjustment against the amount of any liability incurred for goods supplied or services rendered. Clause (f) relates to the payment made for the purchase of agricultural produce or produce of animal husbandry, etc. Clause (g) deals with payment made for the purchase of products manufactured or processed without the aid of power in a cottage industry. Clause (h) deals with payments made in a place where there is no banking facility, to a person ordi .....

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exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and the identity of the payee." 11. Therefore, to invoke the benefit of Clause (j) of Rule 6DD, the assessee should sati .....

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practicality and (d) genuine difficulty. 13. A plea that the payment in the manner prescribed by law was not practicable or that it would have caused genuine difficulty, are not sufficient by themselves to attract the benefit of Clause (j), unless such impracticality or genuine difficulty is shown to have arisen out of the nature of the transaction and the necessity for expeditious settlement. 14. All types of cases covered by Clause (j) required further proof to establish the genuineness of the .....

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made for the purchase of agricultural lands. 16. Therefore, the two fundamental requirements, namely (a) the genuineness of the payment, and (b) the identity of the payee, stands satisfied in the case on hand. 17. That leaves us with the question whether the assessee had pleaded and proved either of the other two requirements, namely (a) existence of exceptional or unavoidable circumstances, or (b) impracticality or genuine difficulty arising out of the nature of the transaction and the necessi .....

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ls. Since the assessee claimed that they were purchasing and selling lands and that the same would constitute stock in trade, the Commissioner of Income Tax (Appeals) confined his discussion to this point alone. 19. But, the parameters on which the applicability of the proviso to Sub-section (3) of Section 40A, as enumerated in Rule 6DD(j) are to be tested, were not even considered by the Commissioner of Income Tax (Appeals). 20. Though the Tribunal took note of Rule 6DD(j), the Tribunal held th .....

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f the Tribunal whether the original records were called for and examined. The grounds of appeal filed by the appellant before the Commissioner of Income Tax (Appeals) show that the appellant purchased agricultural land of a total extent of about 31.32 acres for a total amount of ₹ 52,05,138/- from about 46 persons. These 46 persons had actually executed a power of attorney in favour of the Managing Director of the appellant. Out of these 46 persons, the cash transactions were made in favou .....

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appreciate that when a vast extent of agricultural lands is purchased from several persons, especially in villages, it is not possible to expect the villagers to accept the sale consideration by way of crossed account payee cheque or bank draft. Therefore, so long as the payees are identified and the genuineness of the transaction is not questioned and so long as the payments have been made at the time of registration in the presence of the Sub Registrar, the case would fall under the exception .....

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have a bank account; or c. the transactions and payments are made on a bank holiday; or d. 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 e. the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or f. specific discount is given by the seller for payment to be made by way .....

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. The provision does not eliminate considerations of business expediencies. Genuine and bonafide transactions were held by the Supreme Court in Attar Singh Gurmukh Singh to be taken out of the sweep of Section 40A(3). 26. Mr.S.Rajesh, learned Standing Counsel for the Department placed heavy reliance on the decision of the Calcutta High Court in Bagmari Tea Co. Ltd. v. Commission of Income Tax [251 ITR 640] and contended that Section 40A(3) cannot be made redundant by permitting cash transactions .....

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