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2016 (9) TMI 813 - ITAT KOLKATA

2016 (9) TMI 813 - ITAT KOLKATA - TMI - Disallowance made u/s 40A(3) - nature of payment - Held that:- The payment made by the assessee retail vendor to the Principal, Government of West Bengal through its wholesale agent. The relationship between the assessee (authorized retailer) and Government of West Bengal (the supplier) acting under West Bengal Excise Rules through its Authorised Wholesaler Licensee (Agent), both de facto and dejure , is one of ‘Principal’ and ‘Agent’. We hold that the ass .....

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not fall under the exception provided in Rule 6DD(a) of the Rules. - We hold from the aforesaid findings that the assessee’s case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Rules. In view of the aforesaid facts and circumstances we have no hesitation in deleting the disallowance made u/s 40A(3) - Decided in favour of assessee. - I.T.A Nos. 165 & 166/Kol/2014 - Dated:- 10-8-2016 - Shri M. Balaganesh, AM & Shri K. Narasimha Chary, JM For The Appellant: Shri U .....

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1.2011. Since issues are identical and facts are common, we dispose of both these appeals by this common order for the sake of convenience. 2. The first issue to be decided in these appeals is as to whether the ld CITA is justified in upholding the disallowance made u/s 40A(3) of the Act in the facts and circumstances of the case. 2.1. The brief facts of this issue is that the assessee is a partnership firm engaged in the business of retail trading of liquor under the name and style of M/s Bolku .....

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eplied that the payment for purchase of country spirit had to be made prior to delivery of the bottles of country spirit by M/s ABPL. The pay in slip of SBI , Asansol was filled by the assessee corresponding to the amount of country spirit purchased , the rate of which is fixed by the State Government and is known to both assessee and ABPL and the amount is deposited in the bank account of ABPL by the assessee. The signature in the pay in slip is that of partner of the assessee firm and deposit .....

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by the ld CITA on first appeal. Aggrieved, the assessee is in appeal before us. 2.2. The ld AR took us to the relevant clauses of the Notification dated 29.08.2005 issued by the Excise Department, Government of West Bengal according to which, he argued that the wholesale licencee is an agent of the State Government and is a link between retail vendor (assessee herein) and the State Government. He argued that Rule 6(2) of the said notification mandates the retail vendor (i.e the assessee herein) .....

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IT Rules. He argued that the payment is made to State Bank of India by the assessee at the instance of the Government and accordingly would fall under the exception provided in Rule 6DD(a)(ii) of the Rules. He placed reliance on the decision of Co-ordinate Bench of Bangalore Tribunal in the case of Sri Renukeswara Rice Mills vs ITO reported in 93 ITD 263 (Bang Trib.) wherein it was held that the cash payment in the accounts of the payee in a Bank is sufficient to get exemption in terms of Rule .....

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t ABPL (wholesale licensee) is the collecting agent of the Government and the payment made to them should be treated as payments made to Government and therefore covered by Rule 6DD(b) of the Rules. He argued that the genuineness of transactions was not disputed by the revenue. The payment is made to wholesale licensee and payment has gone into the coffers of the West Bengal Government. He further argued that if the entire purchases made in cash is disallowed, then effectively the ld AO would be .....

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Rule 6DD of the Rules. Accordingly, he argued that no interference is called for in the order of the ld CITA. 3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of various orders of this tribunal and copy of Notification No. 1208-Ex dated 29.08.2005 issued by the Excise Department, Government of West Bengal. We have also gone through the provisions of The West Bengal Excise Rules 2005 and The Bengal Excis .....

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lished with this Department Notification No. 122-EX/O/1R-1/2000 dated 23.2.2000, as subsequently amended, the Governor is pleased hereby to make the following rules regulating the issue and removal of country spirit on payment of duty in labelled and capsuled bottles from country spirit bottling plants and in bulk from warehouses by the licensed wholesale vendors of the same for the purpose of selling country spirit by wholesale:- Rules 1. Short Title and commencement.-(1) These rules may be cal .....

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ding license in the prescribed form for retail vending of country spirit, granted by the Collector; 189; (iv) State Government means the Government of West Bengal; (v) the Act means the Bengal Excise Act, 1909 (Ben. Act V of 1909); (vi) transport pass means the transport pass issued in Form III appended to these rules; (vii) warehouse means the warehouse for supply of country spirit to retail vendors, established at convenient places by the Commissioner at the expense of the State Government, or .....

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t. 3. Issue only on payment of duty.-No country spirit in labelled and capsuled bottles shall be issued without payment of duty from a country spirit bottling plant. No country spirit in bulk shall be issued without payment of duty from a country spirit warehouse. 4. Personal Ledger Account to be maintained by the wholesale licensee.-The wholesale licensee shall maintain a Personal Ledger Account in accordance with the direction issued by the Commissioner from time to time for the purpose of mai .....

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or warehouse may be debited from the said account, leaving sufficient balance as may be determined by him. 6. Procedure of issue of country spirit.-(1) The retail vendor or his authorized representative shall submit to the representative of the wholesale licensee, through Excise Officer-in-Charge of the warehouse, a demand for issue of country spirit in Form I appended to these rules in duplicate. The duplicate copy shall be kept in the custody of the Excise Officer-in-Charge for his official r .....

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and bottling charge, if there be any, at the prescribed rate and such other imposition, as may be prescribed by law, from the retail vendor to whom country spirit is to be issued from the concerned warehouse. The authorized representative as above shall then submit requisition in duplicate in Form II appended to these rules to the Excise Officer-in-Charge of the warehouse separately for each of the retail vendors to whom country spirit is to be issued on the day. (4) On receipt of the requisitio .....

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text, the wholesale suppliers of country spirit in labelled and capsuled bottles shall allow a rebate of five paise per bottle irrespective of measure from the bottling charge to the retail country spirit licensees whose licensed premises are located at a distance of 50 kilometres or more by the shortest route from the issuing warehouse on the basis of a certificate to be issued by the Collector in respect of distance. At the end of the month, the wholesaler shall submit a bill in duplicate to t .....

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shall refund the amount recommended to the wholesaler through adjustment in the Personal Ledger Account maintained for privilege fee. 3.1. We find that the reliance placed on the decision of Co-ordinate Bench of Bangalore Tribunal in the case of Sri Renukeswara Rice Mills vs ITO reported in 93 ITD 263 (Bang Trib.) is well founded , wherein, it was held that the cash payment in the bank account of the payee is sufficient to get exemption in terms of Rule 6DD in as much it is ensured that the pay .....

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that since the genuinity of the payments made to the M/s Asansol Bottling & Packaging Co. Pvt Ltd (wholesale licensee) is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case. It is observed that the assessee had taken enough precautions from its side to ensure that the payee also don t escape from the ambit of taxation on these receipts by directly depositing the cash in the bank account of the payee. Moreover, the regul .....

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n 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. 3.4. In this regard, it is pertinent to get into the following decisions on the impugned subject:- Attar Singh Gurmukh Singh vs ITO reported in .....

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t 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 draft. The payment by crossed-cheque or crossed bankdraft 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 .....

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son 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 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 .....

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sessee that payments are made to M/s IFB Agro Industries Ltd for purchase of country spirit 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 - Jurisdictional High Court .....

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ods 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 Id. 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 the purchases .....

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o, 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 the .....

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discounts - 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 sect .....

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o-fold, 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 and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness .....

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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 noncompliance with such technical provisions required held that in the consequence to follow there must be nexus between the consequence that befall for non-compliance with such provisions intended for preventing the tax evasion with the object of provision before the consequence can be inflicted upon the d .....

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see 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 assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the Circular of the CBDT that whether the failure on the part .....

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ssee had directly deposited cash in the bank account of the supplier M/s Asansol Bottling & Packaging Co. Pvt Ltd which fact is also accepted by the ld AO and mandated by the Notification dated 29.8.2005 issued by the Excise Department , Government of West Bengal. It is also pertinent to note that the Hon ble Rajasthan High Court in the case of Smt.Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Raj) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhau .....

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#39;ble Kerala High Court in the case of K.Abdu & Co. referred to supra wherein the issue was in relation to Rule 6DD(a) of IT Rules. The issue in the asessec's case is in respect of the payments made under the rules framed by the Government and such payment was required to be made in legal tender. A perusal of the Government Notification issued by the Govt. of West Bengal clearly shows that the dealers are agents of the Government and the payments made are to the Government. It also mak .....

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ading of country spirit and country liquor. Copy of Form of Licence issued by Durgapur Municipal Corporation and copy of Form III issued by Department of Excise, Govt. of W.B. were also found at pages 177 and 179 of the assessee's paper book. In any case the validity of licence of the assessee to trade in country spirit and country liquor is not the issue before us. The issue is whether the payments made by the assessee for the purchase of country spirit from the territorial licensee bottlin .....

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house has been identified to mean the warehouse for supply of country spirit to the retail vendors, established at convenient places by the Commissioner at the expense of the State Government, or at the expense of a person to whom the exclusive privilege of supplying or selling country spirit by wholesale has been granted u/s 22 of the Act of a licensed wholesale vendor of country spirit. Further, it has been specifically identified that the authorised representative of the wholesale licensee sh .....

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erned which clearly shows that the warehouse is for the supply of the country liquor, specifically, the warehouse is under the direct control and custody of the State Govt. The State Government has closed its doors in so far as the local treasury is concerned and the payment for the purchase of country spirit or country liquor has to be made to the warehouse, run by the government. This shows that any payment made to the warehouse, which is under the direct control of the state government, is a .....

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nder specified by the notification. In the circumstances, we are of the view that the payment made by the assessee for the purchase of country liquor and country spirit from the territorial licensee bottling plant, IFB Agro Industries Ltd., City Centre, Durgapur is protected by the exemption in terms of Rule 6DD(b) of the 1.T.Rules 1962. In the circumstances, the addition as made by the AO and as confirmed by the Id. CIT(A) by invoking the provisions of section 40A(3) of the I. T.Act 1961 stands .....

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Bench decision in the case of M/s Amrai Pachwai & C.S.Shop in ITA No. 1251/Kol/2011 dated 15.1.2014 and the held portion is reproduced hereinabove. 3.7.1. We find that M/s Asansol Bottling & Packaging Co. Pvt Ltd is a bottling plant cum warehouse under Rule 2(vii) of The West Bengal Excise Rules 2005 with privilege granted u/s 22 of The Bengal Excise Act, 1909. At this juncture, it would be relevant to go into the definition of warehouse as provided under the State Excise Rules 2005 as .....

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ferred to under the State Excise Rules is under the direct control and authority of the Commissioner of State Excise because it is established by the Commissioner of State Excise and as such is a State Government establishment. It is also pertinent to note that the expenditure in relation to such warehouse is borne by the State Government or by the licensee to whom the exclusive privilege is granted u/s 22 of the Bengal Excise Act, 1909. Hence there could be no doubt that the warehouse is establ .....

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2(viii) - Wholesale licensee menas the wholesale vendor of country spirit to whom licence has been granted in West Bengal Excise Form No. 26. It would be pertinent to look into Section 22 of The Bengal Excise Act, 1909 at this juncture as below:- Section 22 - Grant of exclusive privilege of manufacture and sale of country liquor or intoxicating drugs (1) The State Government may grant to any person, on such conditions and for such period as it may think fit, the exclusive privilege - (a) of manu .....

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ithin the area affected shall be considered before an exclusive privilege is granted. (2) No grantee of any privilege under sub-section (1) shall exercise the same unless or until he has received a license in that behalf from the Collector or the Excise Commissioner. Hence it could be safely concluded that M/s Asansol Bottling & Packaging Co. Pvt Ltd (Bottling Plant) is a warehouse within the meaning of Rule 2(vii) of the Excise Rules 2005 and said warehouse is a State Government establishme .....

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construed as payment made to the State Government authority and accordingly falls under the exception provided in Rule 6DD(b) of the IT Rules. 3.8. It is not in dispute that M/s Asansol Bottling & Packaging Co. Pvt Ltd have been granted licence to act as a wholesaler for supply of country liquor to the retail vendor as per the regulations of the Excise Department , Government of West Bengal. At the cost of repetition, we would like to state that the said regulation mandated the payments to b .....

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venience, the relevant rule is reproduced hereunder:- Rule 6DD(k) - where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person. The payment made by the assessee retail vendor to the Principal, Government of West Bengal through its wholesale agent. The relationship between the assessee (authorized retailer) and Government of West Bengal (the supplier) acting under West Bengal Excise Rules through its Authorised Whole .....

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to the customer of State Bank of India and not to State Bank of India. Hence the assessee s case does not fall under the exception provided in Rule 6DD(a) of the Rules. 3.10. We hold from the aforesaid findings that the assessee s case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Rules. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the disallowance made u/ .....

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