TMI Blog2020 (2) TMI 775X X X X Extracts X X X X X X X X Extracts X X X X ..... quences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of object for which the provisions have been enacted. Therefore the genuineness of the transaction and it being free from vice of any device of evasion of tax is relevant consideration for which section 40A(3) has been brought on the statute books and which has been satisfied in the instant case - no disallowance is called under section 40A(3) of the Act and the same is directed to be deleted. - Decided in favour of assessee. - ITA. No. 1019/JP/2018 (Assessment Years : 2013-14) - - - Dated:- 5-12-2019 - SHRI VIJAY PAL RAO, JM AND SHRI VIKRAM SINGH YADAV, AM Assessee by: Shri Uma Shankar Sharda (C.A.) Revenue by: Shri Varinder Mehta (CIT) ORDER PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-4, Jaipur dated 01.06.2018 for the Assessment Year 2013-14 wherein the assessee has taken the following grounds of appeal:- 1. Under the facts circumstances of the case CIT(A) has erred by disallowance the amount of cash payment made for purchase of land to farmers situated in ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s paid through cheque and all this transactions are duly reflected in the registered sale deed which is available on record. Similarly, another transaction was entered into with Shri Babu Lal in respect of land situated at village Kanota, Tehshi- Bassi, Jaipur vide registered sale deed dated 30.10.2012 for a total consideration of ₹ 2.74 Crores out of which ₹ 6,00,000/- was paid in cash as initial token money and the balance money was paid through cheque and both these transactions are duly recorded in the registered sale deed. It was submitted that the assessee had purchased the aforesaid pieces of agriculture land and the payment made was to the agriculturist as evidenced from copy of jamabandi which is placed on record. It was submitted that since the farmers did not had any previous dealing with the assessee, therefore, they did not had any trust in the assessee to accept the cheque towards token money and insisted on initial cash payment to agree to the deal. Similarly, the assessee was also of the opinion that the payment through cheque will take time in clearing and was also having fear that even after receiving the cheque, the sellers may not lodge the cheque in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty 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 sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged 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. 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 bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. 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 manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee has held that: The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance. 28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 demand draft or by pay order. It was further held by the Hon'ble High Court that: Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the 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 which has been overlooked by the Tribunal. 31. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the IT Rules, 1962 provides for situations under which disallowance under s. 40A(3) shall not be made and no payment shall be deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, cl. (j) which is relevant, read as under: (j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; 18. It could be appreciated that s. 40A and in particular sub-cl. (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of the Act does not eliminate considerations of business expediencies. (b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow- (i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time; (ii) the assessee was, therefore, required to make cash payments only; (iii) Tata Tele Services Ltd. assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee; (iv) It is not disputed that the Tata Tele S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mt. Harshila Chordia (supra) and the decision of Hon'ble Supreme Court in case of Attar Singh Gurmukh Singh (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 was established, the sale deeds were produced, the genuineness thereof was accepted and the amount paid in respect of each of these agreement was satisfied before the Stamp Registration Authority and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not attracted. The Hon'ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions and it is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market and therefore it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the above referred decisions. The facts of the case are that during the year under consideration, the assessee firm has purchased 26 pieces of plot of land in the month of April and May, 2012 from various persons for a total consideration of ₹ 2,46,28,425/-, out of which payment amounting to ₹ 1,71,67,000/- were made in cash to various persons, payment amounting to ₹ 59,48,920/- were made in cheque to various persons, and ₹ 8,15,700/- and ₹ 6,84,296/- were paid in cash towards stamp duty and court fee respectively. During the course of assessment proceedings, the assessee submitted copies of the sale deed, the particulars of which find mention on page 7 and 8 of the assessment order. On perusal of the said details, it is observed that the said details contains the name of the seller, date of sale deed, plot no., purchase value, stamp duty, Court fee and mode of payment - cash/cheque. Therefore, as far as the identit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,50,00 18,00,000 18,00,000 5,07,00 9-Apr-12 - 9,00,000 9,00,000 27,00,000 9-Apr-12 21,93,000 3,34,000 11-Apr-12 - 2,00,000 2,00,000 29,00,000 11-Apr-12 3,73,000 3,34,000 12-Apr-12 - - - 29,00,000 - - 3,34,000 13-Apr-12 - - - 29,00,000 - - 11,97,100 19-Apr-12 - 30,00,000 30,00,000 59,00,000 23-Apr-12 21,36,900 11,57,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,71,67,000 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 through registered sale deed. The payment has been made out of the explained sources, through the registered document and as a disclosed transaction. 42. We find force in the contentions so raised by the ld AR. The transactions have been executed by the assessee within a span of one and half month and there are transactions where the payment has been made through cheque and there are transactions where the payment has been made through cash. The said contentions are supported by the fact that on the same day, there are cash and cheque payments as evidenced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is called for by invoking the provisions of section 40A(3) of the Act. In the result, the appeal of the assessee is allowed. 7. In the instant case, the undisputed facts are that the land has been purchased by the assessee from the agriculturist through two registered sale deeds and initial token money has been paid in cash and subsequent payments have been made through cheques. Both the cash and cheque transactions are recorded in the registered sale deed and are available on record. Therefore, the identity of the persons from whom the purchases have been made and the genuineness of the transactions of the land purchase have been established. Regarding the business necessity of making the cash payment, it was submitted that since the farmers did not had any previous dealing with the assessee, they insisted on initial cash payment to agree to the deal. Similarly, the assessee was also of the belief that initial cash payment would provide assurance to the sellers and makes them agree to sell their land. Where as part of negotiations, a deal is in-principle agreed upon, it is customary to pay a token amount to block the deal till all legal and other formalities are compl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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