2016 (9) TMI 1537 - AT - Income Tax

Addition u/s 40A (3) - cash deposits in excess of Rs. 20, 000/- on each occasion made into the Bank account of M/s. IFB Agro Industries Limited maintained in the State Bank of India - Commercial expediency - Earlier the retail dealers like the assessee were depositing the cost price excise duty bottling charges etc. in the Treasury for getting supplies from the wholesale licensee but the Excise Department by a Notification dated 29.08.2005 changed such procedure whereby prescribing that for lifting Country Spirit the retail vendors have to make payment consisting of cost of the stock-in-trade excise duty and bottling charges etc. only to the wholesale licensee appointed by the State Government. Pursuant to the said procedure the assessee made payments in the Bank account of M/s. IFB Agro Industries Limited Durgapur Burdwan HELD THAT - By virtue of payment through cash dated 04.09.2006 the wholesale licensee with exclusive privilege for bottling and/or sale by wholesale country spirit in sealed or capsule bottles and for manufacture and wholesale supply of country spirit in bulk litter enjoyed now by the holders of license in terms of section 22 of the Bengal Excise Act 1909 and IFB Agro Industries Limited Durgapur has become an arm of State Government. On this aspect for all practical purposes the relationship between the Government and wholesale licensee in so far as dealing with the country made liquor is concerned i.e. the principal and agent subject to the territorial limitation prescribed in such Notification. Payments made to M/s. IFB Agro industries Limited Durgapur for all practical purposes are the payments to be reached to the State Government and once this is so the said wholesale licensee shall be construed as an agent of the State Government. We therefore can safely conclude that once such payments are made to the credit of IFB Agro Industries Limited Durgapur the source and destination of such funds cannot be doubted. Therefore the provision of section 40A(3) is not frustrated by the assessee making payments into the account of M/s. IFB Agro Industries Limited Durgapur maintained in the State Bank. Assessee has commercial expediency under Rule 6(2) of the West Bengal Rules referred to above to make payments to the credit of M/s. IFB Agro Industries Limited and M/s. IFB Agro Industries Limited Durgapur who is deemed to be an agent of the State Government as such in terms of Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules they are exempted and the disallowance made under section 40A(3) of the Act cannot be sustained - Decided in favour of the assessee

Summary

Issues:
Appeal challenging order by Commissioner of Income Tax for assessment year 2008-09; Disallowance of cash deposits under section 40A(3) of Income Tax Act; Application of Rule 6DD(b) of Income Tax Rules; Commercial expediency in relation to section 40A(3).

Analysis:
The appeal involved challenging the order by the Commissioner of Income Tax for the assessment year 2008-09. The issue at hand was the disallowance of cash deposits exceeding Rs. 20,000 on each occasion made by the assessee into the bank account of a wholesale licensee under section 40A(3) of the Income Tax Act. The assessee contended that the payments were made in compliance with the rules framed by the State Government and fell under the exemption provided under Rule 6DD(b) of the Income Tax Rules. The argument was that the wholesale licensee acted as an agent of the State Government, and therefore, the disallowance was not justified.

The Tribunal considered the genuineness of the transactions and the identity of the receiver of the funds, which were not in dispute. The payments were made into the bank account of the wholesale licensee appointed by the State Government. The key issue was whether these payments were in violation of section 40A(3) of the Act. The Tribunal analyzed Rule 6(2) of the Income Tax Rules framed by the State Government, which regulated the payment of duty by retail vendors of country spirit. The Tribunal also referred to CBDT Circular No. 6P dated 06.07.1968, which outlined the purpose of section 40A(3) to prevent tax evasion through cash expenditures.

The Tribunal concluded that the payments made by the assessee to the wholesale licensee were not in violation of section 40A(3) as the wholesale licensee was deemed to be an agent of the State Government. The Tribunal cited various court cases recognizing commercial expediency in relation to section 40A(3) and referred to a specific case with similar facts where the payments were protected by an exemption in the Income Tax Rules. Therefore, the Tribunal held in favor of the assessee, stating that the disallowance under section 40A(3) could not be sustained due to commercial expediency and the exemption provided under the Income Tax Rules.

In conclusion, the Tribunal allowed the appeal of the assessee, ruling that the disallowance under section 40A(3) was not justified in this case. The order was pronounced in the open court on September 16, 2016.