TMI Blog2019 (9) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 359 - ITAT KOLKATA] holds that impugned disallowance provision does not apply in case of overwhelming genuine payments coupled with business exigencies which may go beyond the prescribed rule 6DD of the Income Tax Rules, 1962.- Decided in favour of assessee. - I.T.A No. 14/Kol/2018 - - - Dated:- 13-9-2019 - Shri J. Sudhakar Reddy., AM And Shri S.S. Godara, JM For the Appellant : Shri G.Banerjee, Adovate, ld.AR For the Respondent : Shri Sankar Halder, JCIT, ld.Sr.DR ORDER SHRI S.S. GODARA, JM: 1. This Assessee s appeal for assessment year 2013-14 arises against the CIT(A), 6, Kolkata s order dated 03-11-2017 passed in case no. CIT(A), Kolkata-6/10107/16-17 involving proceedings u/s 143(3) of the Income-tax Act, 1961 ( in short Act ). Heard both the parties. Case file perused. 2. The assessee s three folded substantive grounds raised in the instant appeal seeks to reverse both the lower authorities action disallowing his cash payments of ₹ 49,43,544/- made to Royal Calcutta Turf Club ( in short RCTC ) u/s. 40A(3) of the Act. The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h an aggregate will include the cash deposited by both the entities of the proprietorship business of the appellant. The A.O. also stated that the audited accounts of the appellant also reflected the aggregate amounts of transactions made by the two entities. During the course of assessment proceedings, the appellant cited certain case laws but the A.O. did not take cognizance of such case laws as they pertained to section 40A(3) prior to the amendment made to this section by the Finance Act, 2008 w.e.f.01.04.2009. At Para 4.9 of his order, the A.O. further states that this case does not fall under any of the exception laid down in Rule 6DD of the I.T. Rules, 1962 nor has the appellant made any such claim. Accordingly, the A.O. made the addition of ₹ 49, 43,544/-- for violation of section 40A(3) of the Act. 4.2 In the Statement of Facts, the appellant has argued as below:- In this context it is submitted in course of assessment proceedings u/s 143(3) that H.D. Som Co. (A) and H.D. Som Co.(B) are completely separate entity. Both the concerns have separate business activity with separate license and agreement with RCTC. Both the concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.4 During the working hours of a day, the assessee being a book maker, remains busy in selling tickets to customers, paying prize money and retaining the balance. After end of race which generally ends at around 4.30 - 5.00 p.m. depending on location, the public activities of the assessee ends. Thereafter the assessee prepares his accounts, tallies his cash sales and payments and arranges the closing cash in hand. Out of this cash balance, the deposits the processing fees to RCTC on a daily basis. By the time the cash is ready for delivery to RCTC, the banks close their operation. This happens on all normal working days, including Saturdays. On Sundays and holidays the bank no not open and thus the assessee can exigency , terms and condition requires the assessee to make payment of operational charges by cash to RCTC. The Rule 6DD(j) specifically provides that payment shall not be treated as disallowed u/ s 40A(3), in case such payments are made on a day on which banking operation is not available. The payments made by the assessee are made at a time and on a day, when banking services are not available. Thus, the assessee is fully entitled to the benefits of the rule and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned, the A.O. stated that all the issues raised by the appellant have been duly considered in the course of assessment and he thereby endorsed the addition made by the A.O. u/ s 40A(3). A copy of the remand report was provided to the appellant through a notice dt.04.08.2017. In response, the Ld. A/R repeated his argument as made in his written submission earlier. He further filed a certification from RCTC which in nut shell states that during the F.Y. 2012-13 the Club had been accepting Operation Charges from Book Maker in cash. This certificate is as below:' This is to certify that as per the general practice the Bookmakers who were associated with us during the Financial Year 2012-13 deposited operational charges payable to us by cash and the payment had to be made within one hour before the commencement of the next race day. In absence of the payment of the operational charges of the preceding race day, the Bookmakers will not be allowed to operate their business on that particular race day. All the Bookmakers including M/ s H.D. Some Co. (A B) deposited operational charges by cash only. This practice has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act which is legislated by the Parliament of India. In the case of Narayan Bijoy Kumar v. CIT(Patna) 163 ITR 895, the Hon'ble Patna High Court considered the certificate given to the assessee by another party insisting for cash payments. The hon'ble High Court considered this certificate and did not find it sufficient cause necessitating cash payment. Accordingly, I do not find certificate issued by RCTC to the appellant as a sufficient cause which necessitated the appellant to make cash payment. In view of my discussion and case laws relied upon, I uphold the addition of ₹ 49,43,544/- made by the A.O. u/s 40A(3) and dismiss Ground Nos. 2,3 4 of the appellant. 3. The assessee s case as per his grounds raised in the instant appeal is that Assessing Officer as well as CIT(A) both have erred in invoking/adding the impugned disallowance of cash payment u/s. 40A(3) of the Act. He has filed a detailed paper book comprising of written submissions filed before the CIT(A), Book makers agreement dt. 07-08-2013, Notice to Bookmakers dt. 16-05-2011, Assessing Officer s remand report dt. 01-08-2017, donation receipts dt. 18-12-2012 22-12-2012, renewal of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sim cards under the name and style of 'Shibani Hutch Communication', a proprietary concern. The assessee had also shown interest income on fixed deposits and Kisan Vikas Patras. The books of account were not produced by the assessee before the Learned AO inspite of several opportunities provided to him. The asssessee had entered into an Associated Distributor Agreement with Shri.Amit Dutta who is the distributor of Hutch sim cards had appointed assessee as the Associate Distributor. Pursuant to this agreement, the assesee would purchase sim cards from Shri.Amit Dutta and sell the same to customers and assesee would derive distributor commission at an agreed rate. The Learned AO during the course of assessment proceedings found that there is a violation of section 40A(3) of the Act in respect of payments made by the assessee to the main distributor of Hutch Sim Cards Mr.Amit Dutta. The Learned AO obtained information u/s 133(6) of the Act from Mr.Amit Dutta and obtained the ledger account of the assessee as appearing in the books of Mr.Amit Dutta. The Learned AO observed that the assessee had made total purchases from Mr.Amit Dutta to the tune of ₹ 1,51,94,459/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies in cash. Hence the genuinity of payments made by the assessee stands clearly established beyond doubt. Even for the amounts enhanced by Learned CITA in the sum of ₹ 54,01,473/-, the genuineness of the payments and the necessity to incur the said expenditure for the purpose of business of the assessee was never disputed by the Shri Manorajan Raha Learned CITA. We hold that since the genuinity of the payments made to the parties 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 will 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 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. 4.4. In this regard, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of his business, was also not disputed by the AO. The genuinity of transactions, rate of gross profit or the fact that the bonafide 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 - Jurisdictional High Court decision It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding ₹ 20,000/- since it is not made by crossed cheque or bank draft but by hearer cheques and has computed the payments falling under provisions to Section 40A(3) for ₹ 78,45,580/- and disallowed @20% thereon ₹ 15,69,116/-. It is also made clear that without the payment being made by bearer cheque these goods could not have been procured and it would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case the court upheld the view of the tribunal in not applying section 40A(3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee. 4.5. It is pertinent to note that the primary object of enacting section 40A(3) was two 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 Shri Manorajan Raha 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 of the transactions it being free from vice of any device of evasion of tax is relevant consideration. 4.6. The Hon'ble Apex Court in the case of CTO vs Swastik Roadways reported in (2004) 3 SCC 640 had held that the consequences of noncompliance of Madhyapradesh Sales Tax Act , which were intended to check the evasion and avoidance of sales tax were significantly ..... 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