TMI Blog2023 (7) TMI 1322X X X X Extracts X X X X X X X X Extracts X X X X ..... business expediency and rules out any scope or intention of tax evasion on the part of the assessee or other parties as the entire transaction was made part of the court order and decree. Therefore, the genuineness of the transactions and payment as well as identification of the payee were beyond the doubt. As decided in case of Anupam Tele Services [ 2014 (2) TMI 30 - GUJARAT HIGH COURT] if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. Therefore, if the assessee has brought on record to establish genuineness of the transactions and payment as well as identity of the payee to the satisfaction of the AO then the benefit of Rule 6DD is available. As section 40A(3) was intended to penalize the tax evader and not honest transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of owning agricultural income and revenue record showing the cultivation of the land and crop production then the claim of the assessee cannot be denied in toto. The AO has not disputed the claim of agricultural income of Rs. 21,52,089/-for A.Y. 2014-15. Accordingly in the facts and circumstances of the case when the AO has not disputed the claim of agricultural income for assessment year 2014-15 then the disallowance made for the year under consideration is not justified the same is deleted. Disallowance of salary/remuneration paid to the directors - HELD THAT:- Assessee has explained the qualification and work experience as well as business knowledge of the directors who are responsible for overall business affairs of the assessee company. we further note that the AO has made disallowance of 40% of enhancement without doing any exercise to determine what should be the fair salary to the directors having regard to the services they have render to the assessee company. It is matter of record that two of the directors are paying income tax at the maximum marginal rate and therefore, there is no revenue loss on this account. Accordingly we are of the considered view that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and therefore not permissible under the law. 2.1 That the Id. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has erred in holding that the provisions of Section 40A(3) are applicable w.r.t. the payment of Rs. 17.50 lakhs 2.2 That the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has failed to consider that the Court Order dated 18.07.2009 which confirms the payment of Rs. 17.50 lakhs made by the assessee. 3.1 That the appellant craves leave to add/modify/change any ground of leave before the final disposal of the appeal. 3. Ground No. 1 is regarding validity of reopening of the assessment. At the time of hearing the Ld. AR of the assessee has not advanced any arguments in respect of the issue of validity of reopening. Even this issue was also not pressed before the Ld. CIT(A) as evident from the impugned order wherein the Ld. CIT(A) has stated that no specific pleading has been made on the issue of reopening except a general reference in the statement of fact. Therefore, indeed the assessee has not pressed ground No. 1 challenging the validity of the reopening of the assessment. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in question. The Ld. AR has thus contended that the transactions of payment of cash is not in dispute and the same is genuine. The identity of the payee is also not in dispute as entire record have been filed before the AO and therefore, the provisions of section 40A(3) are not attracted in this case when the payment of cash in question is genuine transaction and there was no scope of any tax avoidance. In support of his contention he has relied upon the judgment of Hon ble Gujarat High Court in the case of Anupam Tele Services vs. ITO 366 ITR 122 and submitted that the Hon ble High Court has observed that paramount consideration of s.40A(3) is to curb and reduce the possibilities of black money transactions when neither the genuineness of the payment nor the identity of the payee were in dispute and the payments were made in the compelling circumstances and on account of peculiar situation then disallowance under section 40A(3) is not sustainable. He has then relied upon the judgment of Hon ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO 298 ITR 349 and submitted that the Hon ble High Court has observed that the assessee has proved the payment are made to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee from the owners. During the pendency of the said suit the assessee and plaintiff Shri Esam Singh Morya arrived to a settlement under which the assessee has paid sum of Rs. 17,50,000/- in cash on 8th July 2009 and also agree to make the payment of purchase consideration of the land to the land owner as per the schedule of payment agreed upon between the parties. The parties moved an application under order 23 Rules 3 of CPC before Additional District Judge, Bhopal with the prayer that the parties in the suit have arrived to settlement to their full satisfaction and free will and accordingly prayed that the court may accept the settlement and passed decree pursuant to the settlement. The Additional District Judge has consequently passed an order dated 18.07.2009 as well as decree of the suit being settled between the parties. Therefore, the payment of Rs. 17,50,000/- made by the assessee in cash to settled the dispute pending in the court was inhabitable to purchase the land in question. Thus, the payment was made for business expediency and specific circumstances to avoid abnormal delay of transactions of purchase of land which could have adversely affected the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was genuine or whether it was out of the income from undisclosed sources. The terms of s. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in s. 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 s. 40A(3) and r. 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. 21. 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 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not exhaustive and that the said rule must be interpreted liberally. 9. The Hon ble High Court has observed that if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. The Hon ble High Court further observed that provision of section 40A(3) and Rule 6DD are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the changes to use black money for business transactions. A similar view has been taken by Hon ble Rajasthan High Court in case of Smt. Harsila Chordia vs. ITO (supra) in para 13 to 20 as under: 13. Clause (j) of Rule 6DD of the Income-tax Rules, 1962, provides that no disallowance under Section 40A(3) of the Income-tax Act, 1961, shall be made where the assessee satisfies the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished, the requirement of Rule 6DD(j) must be deemed to have been satisfied. Paragraph 5 of the Circular reads as under [1977] 108 ITR (St.) 8, 9: 5. It can be said that it would, generally, satisfy the requirements of Rule 6DD(j), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of Rule 6DD(j). 18. It appears that fulfilment of the conditions of paragraph 5 of the circular has clearly escaped the attention of the Tribunal. The circular clearly indicates that ordinarily where the Income-tax Officer is satisfied about the genuineness of the transaction and payment and identification of the cash payment is established, the Income-tax Officer shall record his satisfaction about the fulfilment of the conditions for allowing the benefit of Rule 6DD(j). Apparently, Section 40A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... og (India) v. CIT (1982) 135 IIR.991 (MP) it was found that no disallowance was permissible. Why should every exercise begin with mistrust or no trust? In 1979, Ireland abolished wealth-tax, Germany, substantially lowered it. The U.S.A. cut capital gains tax and the UK reduced its maximum rate of personal tax from 83 to 60 per cent. In 1982, Sweden reduced its marginal rate of personal income-tax from 85 to 50 per cent. In this country, the Government parsons to simplify the income-tax law but pursues the course, may be due to compulsions, in the opposite direction. The provision on hand is intended to destroy intentions of dealing with unaccounted moneys, the purpose behind insistence on cross-cheque or cross-draft is to assure and ensure genuiner of dealing and proper assessment of taxable income Even this provision has a per miso to mitigate the hardships. We notice from the appellate order that the appellate authority found that all the purchases were duly entered in the register through inwards and the production has been accepted. It farther found that the genuineness of the payment was not exposed to any doubt Payments in cash were duly signed by the paynes and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of purchase and sale of land and civil construction business. It purchased land from Smt. Anar Bai for a total consideration of Rs. 36,00,000/-. Out of the total purchase consideration of Rs. 36,00,000/- assessee paid cash of Rs. 6,20,000/- (verifiable from the Essarjee Constructions Pvt. Ltd ITA No. 900/Ind/2016 Registered sale deed as well as affidavit placed in the paper book). Out of the cash payment of Rs. 6,20,000/- Ld. A.O has disputed only sum of Rs. 5,40,000/- which in view of Ld. A.O was payment for expenditure in cash exceeding Rs. 20,000/-. The total transaction of purchase of land for Rs. 36,00,000/- is not disputed and the complete details of consideration paid in cash and cheque are mentioned in the registry sale deed which has been executed before the Registering Authority and therefore the genuineness of the transaction cannot be doubted. 9. It is pleaded before us that the seller Smt. Anar Bai was not having a bank account on the date of receiving cash and subsequently when the account was opened the consideration was paid in various instalments by account payee cheques. This fact that Smt. Anar Bai was not having the bank account at the initial date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the appeal. 13. This appeal is arising from the rectification order passed u/s 154 of the Act. The assessee has challenge the jurisdiction of the AO 154 for levying interest u/s 220(2) of the Act. 14. We have heard the Ld. AR as well as Ld. DR and carefully perused the orders of the authorities below. The AO has passed order u/s 154 on 08.02.2018 for rectification of the mistake as under: The return of income for A.Y. 2010-11 was files on 30.09.2010 declaring total income of R. 7965390/- order u/s 147/143(3) was passed on 04.11.2015 assessing income of at Rs. 10255390/-. Surcharge and education cess was levied incorrectly in the order u/s 147/143(3). Further, interest u/s 234A, u/s 234B and u/s 220(2) were levied incorrectly. Revised income and tax calculation is as under. Assessed income for A.Y. 2010-11 Rs. 1,02,55,390/- Tax@30% Rs. 30,76,617/- Surcharge@10% Rs. 3,07,662/- EC SHEC@3% Rs. 1,01,528/- Rs. 34,85,807/- Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest free advances, without considering that the money lent was out of own sources. 1.2 That the Id. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has failed to follow the law laid down by Hon'ble Supreme Court in the case of South Indian Bank Limited v. Commissioner of Income Tax [2021] 283 Taxman 178 (SC) that where interest free own funds available with the assessee exceeds their investments, investments would be presumed to be out of own funds. 1.3 That the ld. CIT(A) has erred in not considering the Audited Financial Statements which clearly reveal that the own funds were in excess of the amount lent. 2.1 That the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has erred in considering agricultural income as income from other sources. 2.2 That the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi has erred in not considering the income from agricultural activities 1,79,089 as agricultural income in spite of holding in Para 7.1 that It also gets reflected from the assessment orders of earlier years that the assessee has been showing purchase of agricultu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court has upheld the judgment of Hon ble Bombay High court on this issue where the disallowance made by the AO was deleted on the ground that interest free fund available with the assessee were sufficient to meet its investment. 18. On the other hand, Ld. DR has submitted that the assessee has not brought on record to show that the assessee was having enough cash from the interest free fund available to give this loan to the related party. He has relied upon the orders of the authorities below. 19. We have considered the rival submission as well as relevant material on record. As it is evident from the balance sheet as on 31.03.2012 that the assessee was having more this Rs. 5.72 cr. its own interest free fund in the shape of share capital reserves surplus. It is settled proposition of law that even if the interest bearing fund and interest free funds are put in common pool, the investment or loan given by the assessee would be deemed to have been given from assessee s own interest free fund. The assessees own fund is more than sufficient to advance this amount of Rs. 33,70,000/- to the related party. The Hon ble Supreme Court in case of CIT vs. Reliance in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted the claim. 23. On the other hand ld. DR has relied upon the orders of the authorities below. 24. We have considered the rival submission as well as relevant material on record. At the outset we note that the assessee has shown agricultural income in its return of income for this year as well as for the A.Y. 2014-15 and this fact has not been disputed by the Ld DR. Further when the assessee has produced evidence of owning agricultural income and revenue record showing the cultivation of the land and crop production then the claim of the assessee cannot be denied in toto. The AO has not disputed the claim of agricultural income of Rs. 21,52,089/-for A.Y. 2014-15. Accordingly in the facts and circumstances of the case when the AO has not disputed the claim of agricultural income for assessment year 2014-15 then the disallowance made for the year under consideration is not justified the same is deleted. 25. Ground No. 3 is regarding disallowance made by the AO on account of salary/remuneration paid to the directors. AO noted during the year under consideration the assessee paid salary to the directors of Rs. 53,86,500/- in comparison to Rs. 30,24,000/- in the preceding ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairs of the assessee company. we further note that the AO has made disallowance of 40% of enhancement without doing any exercise to determine what should be the fair salary to the directors having regard to the services they have render to the assessee company. The Chennai Benches of the Tribunal in case of Carmel Softech Pvt. Ltd. vs. ITO (supra) has considered an identical issue in para 6 as under: 6. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the Tribunal in the case of The Bombay Samachar Pvt. Ltd., supra, has considered the issue of applicability of provisions of section 40A(2)(b) of the Act to the directors remuneration and held that this provision will not apply to the directors payment for holding that the payment is excessive or unreasonable in the absence of any material brought on record to demonstrate that the payment is actually excessive or unreasonable having regard to market rate for the goods, services or facilities availed or the business need of the assessee or commensurate with the benefit derived by the assessee. In the present case before us also the AO has not carried out any exercise for holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low. 33. We have considered the rival submission as well as relevant material on record. Since it is only the provision for the auditor fees and assessee did not deduct tax at source on the said provisions therefore, in the facts and circumstances of the case we find it appropriate that the claim of auditors fees be allowed by the AO in the subsequent year when the assessee has actually deducted and paid TDS on this amount. Ld. AO is directed accordingly. 34. Ground No. 5 is regarding ad hoc disallowance of Rs. 1,00,000/- in respect of telephone, traveling and fuel expenses on the ground of personal use. The AO noted that the assessee has debited expenditure under the head of telephone, traveling and fuel expenses in the profit and loss account. The assessee has maintained luxury vehicle. The AO observed that person use of the said expenses by the directors cannot be ruled out and accordingly made a lump sum disallowance of Rs. 1 lac and added to the income of the assessee. The Ld. CIT(A) has confirmed the disallowance made by the AO. 35. Before us the Ld. AR of the assessee has submitted that the disallowance made by the AO is highly arbitrary and unjustified without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermits and provides that remuneration shall include (a) any expenditure incurred in providing any rent-free accommodation, etc., (b) any expenditure incurred in providing any other benefit or amenity free of charge or at a concessional rate, (c) any expenditure which would have been incurred by the director but for such expenditure having been incurred by the company, (d) any expenditure incurred by the company for the purpose of any insurance on the life, etc. Therefore, it is clear that the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of remuneration as defined in the Explanation to Section 198 of the Companies Act, and once such remuneration is fixed as provided in Section 309 of the Companies Act, it is not possible to state that the assessee-company incurred an expenditure for the personal use of the directors, i.e., even if there was any personal use by the directors, the same was as per the terms and conditions of service and in so far as the assessee-company was concerned it was a business expenditure and not disallowable as such. Thus, in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the ld. AO has disallowed 30 per cent of the total of directors' salary which is ad hoc in nature and is not in accordance with the facts of the case and the provisions of law. 2.1 That the ld. Commissioner of Income Tax (Appeals),National Faceless Appeal Centre, Delhi has erred in confirming the disallowance of Rs. 1,00,000/- which is on ad hoc basis and without rejecting the Audited Financial Statements which is contrary to the settled law. 3.1 That the appellant craves leave to add/modify/change any ground of leave before the final disposal of the appeal. 42. Ground No. 1 is regarding disallowance of salary paid to the directors. 43. We have heard the Ld. AR as well as Ld. AR and considered the relevant material on record. This issue is common and identical to the issue in ground No. 3 of the appeal for A.Y. 2012-13. In view of our finding on this issue for A.Y. 2012-13 disallowance made by AO is deleted. 44. Ground No. 2 is regarding ad hoc disallowance of Rs. 1,00,000/- in respect of telephone, traveling and fuel expenses on the ground of personal use. 45. We have heard the Ld. AR as well as Ld. AR and considered the relevant material on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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