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Prabir Kumar Mullick Versus Income Tax Officer

Disallowance / addition us 40A(3) - cash expenditure - business expediency - Held that:- From the submission of the assessee we find that the assessee was the only authorized dealer in Asansol for the supply of country liquor and authorized Excise Vendors. The assessee can take the delivery of the goods only after depositing the payment with the company. The assessee was to keep sufficient stock of country liquor as prescribed by the Excise Department and in case stock falls short of the prescri .....

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provisions of section 40A(3) with regard to the business expediency then applicable for the assessment year 2008-09 is met by the assessee.

The primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax a .....

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and has produced the sales bills of the company. The AO has also verified the transactions from the companies by issuing notice under Section 133(6) of the Act. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash.

Thus we are inclined to reverse the order of lower authorities. - Decided in favour of assessee - ITA No. 1603/Kol /2011 - Dated:- 1-6-2016 - Shri Waseem Ahmed, Accountant Member And Shri S. S. Viswanethra Ravi, Judicial Member For th .....

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Commissioner of Income Tax (Appeals) erred in law as well as on facts in confirming disallowance / addition us 40A(3) for purchases made ₹ 2,15,47,820/- from Asansol Bottling & Packaging Co. Pvt. Ltd. and IFB Agro Industries Ltd. 1(B) For that the confirmation by Ld. CIT(A) of disallowance / addition u/s 40A(3) is legally & FACTUALLY wrong, illegal & unjustified. 2. For that the Ld. CIT(A) erred in law & on facts in not properly considering provisions of Sec. 144/145 of th .....

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several judicial decisions upholding the same. However, there is conflict in the decisions of ITAT, Kolkata Bench in the case of Smt.Puspalata Mondal vs. ITO Wd.2(2), Asansol (ITA No.965/Kol/2010, AY 2007-08 dated28.07.2011 and M/s Amrai Pachwai & CS Shop vs. DCIT Cirl.1 Durgapur (ITA No.1251/Kol/2011 AY 2008-09 dated 15.01.2014). Original appeals were heard and orders were passed by Accountant Member, Sri C.D.Rao and Judicial Member Shri B.R.Mittal and Accountant Member, Sri P.K.Bansal and .....

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e were given in favour of revenue whereas, the judgment of Hon ble Punjab & Haryana High Court in the case of CIT vs. Smt. Shelly Passi was given in favour of assessee on the same issue. Since the decisions given by the ITAT, Kolkata Benches and different High Courts are in conflict and the issue involved has huge ramifications in terms of revenue involved as well as it may also be a subject-matter before ITATs at other places, therefore it was requested for the Constitution of Special Bench .....

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d. DR vehemently supported the view taken in the application for constituting the Special Bench. On the other hand, the ld. AR submitted that the facts in which ITAT decided the issue are not similar to the facts / arguments of this case for following reasons:- (a) In Puspalata Mondal case, there was no verification of transactions made wherein in this case verification was made and the party (Payee) confirmed the receipt by way of directly deposits made in their bank account. Furthermore, the H .....

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D(k) was not considered as adjudicated upon by ITAT. (ii) In similar type of case, the Rajasthan High Court in CIT vs. Kalyan Pd. Gupta (reported in 239 CTR-(Raj) 447 was not available before ITAT in Ruspalata s case. (copy at page 19 of last paper book.) (c) The interpretation of Law & effect of comma in Sec. 40A(3) was not a subject-matter of adjudication by the ITAT. (d) (i) The decision of ITAT Bangalore Bench in Sri Renukeswara Rice Mills vs. ITO (93-TTI(Bang) 912 was not property under .....

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decision of Hon ble Kerala High Court in K. Abdu & Co. vs. ITO (2008) 170 taxmann 297, which has been relied upon by Hon ble ITAT, is also not factually applicable, as in Abdu Case, the amounts were IN FACT handed over to TRUCK DRIVERS & not deposited in the bank account of payee directly. The court was not satisfied with the payments made to TRUCK DRIVERS. In this case, the entire amounts were deposited with bank account of payee and who acknowledged the receipt of the amount. Hence the .....

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ad the rigorous provisions of the aforesaid section in the context of the object of the section we find that its object is of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 06.07.1968 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 paym .....

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consequence is not a factor to be taken into account in interpreting a provision Held : If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well accep .....

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quire the reference to the Special Bench. Hence in our considered view this case does not require to be referred to the Special Bench. 6. The inter-connected issues Ld CIT(A) erred in confirming the order of AO by disallowing of the purchases of ₹ 2,15,47,820/- u/s 40(A)(3) of the Act. 7. Brief facts of the case are that assessee is an individual and engaged in the business of country liquor. During the year, assessee has made the purchase from two parties mainly - Asansol Bottling and Pac .....

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early violated the provisions of Section 40(A)(3) of the Act. The AO also observed that the case of assessee does not fall under the exceptions provided in clause 6 DD of income Tax Rules of the IT Rules 1962. Therefore, he has disallowed a sum of ₹2,15,47,820/- and added it to the total income of the assessee. 8. Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of the assessee and having considered the same the Ld CIT(A) confirmed .....

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Rules. The payments were made by way of deposit of cash directly in the bank a/c of wholesaler Agent of West Bengal Government in terms of Calcutta Gazette notification No,188-EX/0/R-4/2000 dt. 23/02/2000, THE ENTIRE PAYMENT IS THEREFORE TO WEST BENGAL GOVERNMENT (through Authorized wholesaler agent) who is 'PRINCIPAL' in this case. The Assessee was required and forced to pay the cost of material (wine) only by way of deposit of money in cash to the Banker of Authorized wholesaler Agent .....

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mained BLANK (see copies Paper Book Page 14 to 196. The ITO has verified the entire purchase from the wholesaler Agent and the supplier has confirmed the total sales made by them to the Assessee, IFB Agro Industries Ltd. Having PAN. AAACI6487L Bank A/e. No. 10306876975, SBI, City Centre Durgapur and Axis Bank, Durgapur A/e. No. 21301020001645 Excise No. 19200052155, CST No. 19200052252, Vat No. 19200052058, TAN No. CALl01584C. and Asansol Bottling & Packaging Pvt. Ltd having PAN. AAECA2535R .....

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No: of the party CALl0l584G / 59(2)) and CALA05758E/59(2) the WHOLESALER AGENT OF W.B. GOVT. is clear from TCS Certificate issued. The provision of Section 40A(3) was introduced in the act by Finance Act, 1968. As per the explanatory note para-73 the provision is designed to counter evasion of 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 the reasonableness of the payme .....

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nt thereof and also furnishes evidence to the satisfaction of the income tax officer as to the genuineness of the payment and the identity of the payee" 2. The law amended and following provisions were introduced by the Finance Act 2007 w.e.f. 1.4.2008 and explanatory NOTES there under provides "provided that no disallowances shall be made and no payment shall be deemed to be the profits and gains of business or profession under this sub-section where any payment in a sum exceeding 200 .....

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d introductory clause or phase from a main clause. 9. Use a comma to separate, words, phrases and clauses in the series. 10. Used a comma to set off absolute and parenthetical elements in the sentence. 12. Use a comma or commas to set off non-restrictive pharases or clauses from the rest of sentence. 16. Use a comma after terms that introduce a series or an example. FIRSTLY 3. After reading the original enactment and subsequent amendment and after reading the finance Minister's explanatory n .....

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ct 2007 by using the word considerations of business expendiency and other relevant factors . (a) Circumstances as prescribed in the rule. (b) Extent of banking facility available. (c) Consideration of business expediency and other relevant factors. The intention of the Act is very clear by the fact that the Act has not used the word" AND" which denotes that cumulative conditions are Not required to be full filled. The absence of the word "AND" implies that the Act has GIVEN& .....

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of the payee wholesaler AGENT of WB. Govt. having IFB Agro Industries Ltd having PAN No: AAACI6487L Bank A/e. No: 10306876975 with SBI, City Centre, Durgapur, Excise Regn. No: 19200052155, VAT No: 19200052058, CST No: 19200052252, TAN No: CALl01584C and Asansol Bottling & Packaging Pvt Ltd. PAN No. AAECA2535R Bank A/c. with SBI, Asansol, VAT No. BA/13650, CST No. 6940 (BA)C, TAN no. CALA0578E and also reasonableness of the payment. (B) As price is determined by the West Bengal Govt. and is .....

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d also the fact of bank deposit through its bill. THIRDLY 5A. The payments by way of deposit of cash directly in the Bank A/c of the wholesaler Agent of West Bengal Government in terms of Calcutta Gazette notification No. 188-EX/0/R-4/2000 dt. 23/02/2000. The payments made is therefore, otherwise covered under Rule 6DD(b) of the I. T. Rules to which provisions of Sec. 40A(3) are inapplicable. 5. In this connection, attention is drawn to Calcutta Gazette as under: "5(1) - The retail vender o .....

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t of duty for the issue from the personal Ledger Account ………. The authorized representative shall then submit requisition …… To the excise Officer in charge of a warehouse…………. 5B Rule 6DD(b) OF I. T. Rules Where the payment is made to the Government and under the Rules framed by it" such payment is required to be made in legal tender. 5D. The ENTIRE PAYMENT, is therefore, to PRINCIPAL, WEST BENGAL GOVERNMENT through its wholesa .....

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e of Gazette Notification. The question of no separate payment being made by the payee - principal (WB, Government) to the payer - Retailers i.e. towards remuneration or commission, etc, arises. Provisions of Sec. 40A(3), therefore, are not applicable to this case under rule 6DD(b) also. 10. On the other hand the ld. DR vehemently supported the order of the lower authorities. 11. We have heard rival submissions and perused the materials available on record. After examining on the facts of the ca .....

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arious courts. The provisions of the Section 40A(3) of the Act then applicable for the assessment year 2008-09 reads as under : 40A.(1)… (2)…. (3)(a) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure; (3)(b)Where an allowance has been made in the assessment for any ye .....

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y thousand rupees: Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under this sub-section 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 .....

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the payment with the company. The assessee was to keep sufficient stock of country liquor as prescribed by the Excise Department and in case stock falls short of the prescribed limit otherwise the Department used to impose penalty. Therefore the assessee avoided the process of depositing the cash in his bank account and thereafter getting the demand draft in the name of the company in order to keep the stock within the prescribed limit at all the times. It is also important to note that the comp .....

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be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provision was inserted by Finance Act 1968 with the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 06.07.1968 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 .....

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ases) 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 dra .....

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er the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the 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 the .....

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rofit or the fact that the bona fide of the assessee that payments are made to producers of hides and skin are also neither doubted nor disputed by the AO. On the basis of these facts it is not justified on the part of the AO to disallow 20% of the payments made u/s 40A(3) in the process of assessment. We, therefore, 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 - Jurisdicti .....

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cheque these goods could not have been procured and it would have hampered the supply of goods within the stipulated time. Therefore, the genuineness of the purchase has been accepted by the ld. CIT(Appeal) which has also not been disputed by the department as it appears from the order so passed by the learned Tribunal. 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 .....

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ot do, since realization took longer time and such payments should be made only in cash in their bank account - If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation - Assessee, therefore, 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 .....

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ounts - Further, seller also issued certificate in support of this - Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3) - Held, yes [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) .....

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