TMI Blog2019 (5) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... n factually incorrect figures in his remand report. Under these circumstances, we are of the opinion that there is no violation of Section 40A(3). As decided in M/S A DAGA ROYAL ARTS VERSUS ITO, WARD-2 (2) , JAIPUR [ 2018 (6) TMI 1240 - ITAT JAIPUR] he consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) - Decided in favour of assessee. - I.T.A. No. 2015/Kol/2018 - - - Dated:- 26-4-2019 - Sri J. Sudhakar Reddy, Accountant Member And Sri S.S. Godara, Judicial Member For the Assessee : Shri Anikesh Banerjee, Advocate For the Revenue : Shri C.J. Singh, JCIT D/R ORDER PER J. SUDHAKAR REDDY, AM :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. 4. The ld. Counsel for the assessee, Shri Anikesh Banerjee, filed a paper book running into 80 pages and took this Bench through copy of the cash book evidencing cash payments to various parties on various dates to demonstrate that none of the payments in cash to a single party on a single date, exceeds ₹ 20,000/-. Copy of this ledger account is from page 10 to 44 of the paper book. He thereafter referred to the remand report given by the Assessing Officer and specifically to annexure-A, annexure-B and annexure-C, and submitted that the total cash payments to various parties on a single date has been wrongly recorded as violation of Section 40A(3) of the Act. He compared the entries in the ledger account, copy of which is from page 1 to 44 of the paper book and the annexures to the remand report and argued that this finding of the Assessing Officer is perverse and against the facts of case. He submitted that all the traders are registered under VAT and the genuineness of the payments are not disputed by the revenue. He relied on certain case-law for the proposition that when genuineness of the payment is not doubted then the technical disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol/2014, order dt. 05/04/2017, is reproduced as under:- 9. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The fact that assessee was forced to carry on its transportation activity through the assistance of agents is proved beyond doubt. Hence we hold that it does not make any difference whether the said agent through whom the business per se was carried on , was appointed by the assessee or by the truck owners association. The assessee had stated that out of the total consideration of hire charges paid by the assessee, a portion is also attributed towards the agency commission which is being recovered by the truck owners. Hence it could be concluded that the assessee indeed had paid commission to the agents and the same has been routed through payment made to truck owners towards truck hire charges. 9.1. We find that the similar issue had cropped up before the co-ordinate bench of Ahmedabad Tribunal in the case of Chartered Logistics Ltd vs ACIT in IT(SS) A No. 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rucks are engaged. Reliance was placed at page no.12, para 6 of the learned CIT(A)‟s order. It was further submitted that ultimate recipient of the payment viz. the drivers/owners of the truck have insisted for cash payments as they have to travel huge distance and cash was required for meeting with the expenditure and exigencies during the trips. For this, reliance was placed para 2.2. of the assessment order. It was further submitted that as per clause- k‟ of Rule 6DD of the IT Rules, no disallowance u/s.40A(3) can be made where cash payment was to be made to an agent who in turn was required to make cash payment on behalf of the assessee. It was submitted that as per Black‟s Law Dictionary, broker‟ means an agent who acts as on intermediary or negotiator, especially between prospective buyers and sellers. Therefore, it was submitted that it is established beyond doubt that the concerned payments were made by the assessee to its agents/brokers. When the payments were made to brokers and the fact that the ultimate recipient of the payment viz. the drivers/ owners of the trucks have demanded cash payments is not disputed, exception carved out as per Rule 6D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 94,85,912/-. On appeal, the learned CIT(A) has confirmed the action of the AO, on the ground that the entire freight charges from customers have been included in the books of accounts of the assessee, as the turnover and freight payments have been made to the drivers are part of the business expenses, and therefore, the provisions of section 40A(3) are applicable to the assessee. The learned CIT(A) has also observed that the arguments of the assessee that the payments were made to truck drivers, who insisted for payment in cash was not exceptional case, because the assessee has not made payments to individual truck owners but to various brokers through whom the trucks were engaged, and therefore, the case of the assessee was not covered by the exceptions mentioned in Rule 6DD. The alternative arguments of the assessee that if the disallowance is made under section 40A(3), the GP will go abnormally high, was also not accepted by the learned CIT(A) on the ground that the disallowance under section 40A(3) of the Act was a technical disallowance for violation of specific provisions of Income Tax Act. Before us, the learned AR of the assessee has relied on the decision of the Ahmedab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) person acting for another in business etc. ii) person or thing producing effect iii) broker, delegate, envoy, executor, functionary, go-between, intermediary, mediator, middleman, negotiator, proxy, representative, surrogate, trustee. Therefore, a broker is akin to an agent. Thus, the facts of the case are identical to the facts, which were in the case of Vijay kumar P. Desai (supra), and therefore, the decision in that case is squarely applicable to the facts of the assessee‟s case. Hence, respectfully following the above-cited decision of the Tribunal, we set aside the orders of the lower authorities, and delete the disallowance under section 40A(3) of the Act, and this ground of the appeal of the assessee is allowed. 9.2. We find that the Hon‟ble Jurisdictional High Court in the case of Goenka Agencies vs CIT reported in (2003) 263 ITR 145 (Cal) wherein the head notes are reproduced as below:- Business expenditure-Disallowance under s. 40A(3)-Exceptional and unavoidable circumstances-Assessee has to establish only one of the requirements as provided in r. 6DD(j)(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so find that the Hon‟ble Gauhati High Court in the case of Walford Transport (Eastern India) Ltd vs CIT reported in (1999) 240 ITR 902 (Gau) wherein the head notes are reproduced as below:- Business expenditure-Disallowances under s. 40A(3)-Exceptional and unavoidable circumstances-Assessee explained that its financial positions was very bad at the relevant time and it had to resort to cash transaction in order to avoid the risk of bouncing of cheques- Explanation accepted by AO in majority of transaction-Same however not accepted in some transactions only on the basis that the names of payees were not indicated in the vouchers-On appeal, CIT(A)- Where the transaction is found to be genuine and the identity of payee is established a liberal view of compelling and mitigation circumstances should be taken-The Tribunal, erred in drawing the inference that in no circumstances deferred payment would be covered by r. 6DD(j)- CIT(A) was justified in allowing deduction of cash payments. In the said judgement it was also held as under:- 13. Learned Counsel appearing for the Revenue has submitted that the payments have not been genuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lidity of section 40A(3) and applicability of the said provisions to payment made for acquiring stock-in- trade came up for consideration before the Hon'ble Supreme Court. 21. The Hon'ble Supreme Court referring to the provisions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant point in time, has held as under:- 6. As to the validity of section 40A(3), it was urged that if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary. 7. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as expenditure for the purposes of section 40A(3) of the Act. 23. The Hon'ble Supreme Court has therefore upheld the constitutional validity of section 40A(3) of the Act and has held that the provisions are not intended to restrict the business activities and restraint so provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. The Hon'ble Supreme Court has thus laid great emphasis on the intention behind introduction of these provisions and it would therefore be relevant to examine whether in the present case, there is any violation of such intention and if ultimately, it is determined that such intention has been violated, then certainly, the assessee deserves the disallowance of the expenditure so claimed. 24. The Hon'ble Supreme Court referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 40A(3) provides for disallowance of 100% of the expenditure unless the matter falls under exception as provided in Rule 6DD(j) Later on, section 40A(3) has been amended to provide for disallowance of 20% of the expenditure incurred in cash and Rule 6DD(j) was omitted. Thereafter, by virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of lastest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike. 27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon'ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal reason which weighed with the Tribunal in discarding the explanation furnished by the assessee was that the case of the assessee did not fall in any of the clauses enumerated in the circular issued by the CBDT about the explanatory note appended to clause (j) was to operate as it was existing at the relevant time and enumerated circumstances in the circular was exhaustive of exceptional circumstances. The Hon'ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the provisions of clause (j) under rule 6DD would operate to be exhaustive of such circumstances and had not been properly understood its implication. It was further observed by the Hon'ble High Court that primary object of enacting section 40A(3) in its original incarnation was two-fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community. The consequence which was provided was to disallow of deduction of such payments/expenses which were not through bank either by crossed cheques or by dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egal proposition that arises from the above decision of the Hon'ble Rajasthan High Court is that the consequences, which were to befall on account of non-observation of subsection (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration and which should be examined before invoking the rigours of section 40A(3) of the Act. 33. In case of Anupam Tele Services v. Income Tax Officer, the matter which came up for consideration before the Hon'ble Gujarat High Court, the facts of the case were that the assessee who is involved in the business of distribution mobile and recharge vouchers of Tata Tele Services Ltd had made payment of ₹ 33,10,194/- to Tata Tele Services Ltd., by cash on different dates. The assessee had made such payment through account payee cheques till 22nd Aug, 2005, when a circular was issued by Tata Tele Services Ltd., requiring the appellant to deposit cash at the company's office at Surat. In that factual background , the Hon'ble High Court held as under:- 17. Rule 6DD of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions: 20. It was because of these considerations that this Court in case of Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the payment and the identify of the payee are the first and foremost requirements to invoke the exceptions carved out in r. 6DD(j) of the IT Rules,1962. 21. In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the CIT(A). The Tribunal also did not disturb such facts but relied solely on r. 6dd(j) of the rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of r. 6DD, consequences envisaged in s. 40A(3) of the Act must follow. 22. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons: (a) The paramount consideration of section 40A(3) is to curb and reduce the possibilities of black money t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 40A(3) is deleted. 35. In case of Gurdas Garg vs. CIT(A), Bathinda (supra), the matter which came up for consideration before the Hon'ble Punjab Haryana High Court, the facts of the case are pari materia to the instant case and the ratio of the said decision clearly applies in the instant case. In that case, the facts of the case were that the assessee was engaged in trading in properties and during the course of assessment proceedings, the AO observed that there are transactions where the payments have been made in excess of ₹ 20,000/- in cash which were disallowed u/s 40A(3) of the Act. The Hon'ble High Court held that rule 6DD(j) is not exhaustive of the circumstances in which the proviso to section 40A(3) is applicable and it only illustrative. The Hon'ble High Court refers to the decision of the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia v. ITO (Supra) and the decision of Hon'ble Supreme Court in case of Attar Singh Gurmukh Singh v. ITO (Supra). The High Court further observed that the ld. CIT(A) has given a finding that the identity of the payee i.e. vendors in respect of land purchase by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in case of Gurdas Garg (supra) has held that the genuineness of the payment has not been doubted as the Assessing Officer himself has held that sale deeds of properties were registered with the Revenue department of the Government. Therefore, following the decision of Hon'ble Punjab and Haryana High Court, the payment for purchase of land was allowed. 38. We further note that in case of M/s ACE India Abodes limited (DB Appeal No. 45/2012 dated 11.09.2017), a similar issue has come up before the Hon'ble Rajasthan High Court regarding payment for purchase of land from various agriculturist for which the assessee has paid consideration in cash and shown the land as its stock-in-trade. The Hon'ble Rajasthan High Court referring to the intent behind introduction of section 40A(3) and catena of decisions right from Attar Singh Gurmukh Singh, Smt. Harshila Chordia, Gurdas Garg, Anupam Tele Services referred supra has decided the issue in favour of the assessee and against the department. 39. The issue which is being disputed before us has to be considered and decided in light of facts on record and the legal position which emerges from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew to the assessee and refused to accept the cash. It was submitted that the delay in making the cash payment, it could have lost the land deals. In this regard, the ld AR submitted before us that the assessee had purchased the lands both through cash and cheques. Based on the requirement of the seller, assessee had selected the mode of payment. For the sellers, who had insisted the payments in cash, assessee had withdrawn the cash from bank on the same date of registry and made the payments to seller accordingly. The withdrawals from bank and payments to seller have been tabulated below as per dates below:- 41. It was submitted by the ld AR that in order to secure the deal, assessee had no other option but to make the payment in cash. Cash payments were made from the disclosed sources being the amount withdrawn from bank. It was for sheer insistence of the seller that the payments were made in cash. Had the assessee denied the cash payment looking to the provisions of sections 40A(3), the deal could not have been finalized. In such circumstances, in the business interest and to complete the deal, the assessee had chosen to make the payments in cash fortified throu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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