2016 (9) TMI 1538 - AT - Income Tax

Disallowance u/s 40A(3) - cash payments (in excess of ₹ 20,000 on each occasion) - purchase of its stock-in-trade (country liquor) - HELD THAT - Identical issue with regard to the disallowance u/s 40A(3) of the Act in the case of assessee who are engaged in the business of country spirits who have paid purchases in cash had come up for consideration before this Bench in the case of Ramnagar Pachwai and C.S. (Shop) vs ITO 2016 (11) TMI 1034 - ITAT KOLKATA The payment made by the assessee retail vendor to the Principal, Government of West Bengal through its wholesale agent. The relationship between the assessee (authorized retailer) and Government of West Bengal (the supplier) acting under West Bengal Excise Rules through its Authorised Wholesaler Licensee (Agent), both defacto and dejure , is one of Principal and Agent . We hold that the assessee retail vendor had made payment to the said agent (wholsesale licensee) would fall under the exception provided in Rule 6DD(k) of the Rules. We find that the assessee had made payments only to the customer of State Bank of India and not to State Bank of India. Hence the assessee s case does not fall under the exception provided in Rule 6DD(a) of the Rules. We hold from the aforesaid findings that the assessee s case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Rules. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the disallowance made u/s 40A(3) of the Act in all the years under appeal. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961 due to cash payments exceeding prescribed limits.
2. Applicability of Rule 6DD exemptions to the cash payments made by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The primary issue in this appeal is the disallowance of ?14,31,840/- under Section 40A(3) of the Income Tax Act, 1961, due to cash payments made by the assessee for purchases from IFB Agro Industries Ltd. The Assessing Officer (AO) disallowed the deduction of these expenses, and the CIT(A) upheld this decision. The assessee, a dealer in country spirits, made these payments in cash, which was in violation of Section 40A(3) that mandates payments exceeding ?20,000 to be made through crossed cheque or bank draft to ensure traceability and prevent tax evasion.

2. Applicability of Rule 6DD Exemptions:
The Tribunal examined whether the assessee's cash payments fall under the exceptions provided in Rule 6DD of the Income Tax Rules, which exempts certain cash payments from disallowance under Section 40A(3). The Tribunal referenced a similar case, Ramnagar Pachwai and C.S. (Shop) vs ITO, where it was held that cash payments deposited directly into the bank account of the payee can be exempted under Rule 6DD.

Key Findings and Legal Reasoning:

- Genuineness of Transactions: The Tribunal found that the transactions made by the assessee were genuine, the identity of the receiver was established, and the payments were made directly into the bank account of the seller. This ensured that the payee received the payment and that the transaction was traceable, fulfilling the objective of Section 40A(3).

- Regulatory Compliance: The Tribunal noted that the West Bengal Excise Rules, 2005, mandated that payments for country spirits be made directly into the bank account of the wholesale licensee. This regulation was intended to ensure strict control over the sale and distribution of country spirits, preventing spurious stocks and black marketing.

- Precedents and Judicial Interpretations: The Tribunal cited several judicial precedents, including the Supreme Court decision in Attar Singh Gurmukh Singh vs ITO, which upheld the validity of Section 40A(3) in curbing tax evasion while allowing genuine transactions to be exempted. Other cases, such as CIT vs CPL Tannery and Anupam Tele Services vs ITO, were referenced to support the argument that genuine business exigencies and regulatory requirements can justify cash payments.

- Rule 6DD(b) and Rule 6DD(k) Exemptions: The Tribunal concluded that the payments made by the assessee fell under the exceptions provided in Rule 6DD(b) and Rule 6DD(k). Rule 6DD(b) exempts payments made to the government in legal tender under the rules framed by it, while Rule 6DD(k) exempts payments made to an agent who is required to make payment in cash on behalf of the payer. The Tribunal determined that the wholesale licensee acted as an agent of the State Government, and the payments were made in compliance with government regulations.

Conclusion:
The Tribunal held that the disallowance under Section 40A(3) could not be sustained, as the assessee's cash payments were genuine, traceable, and made in compliance with regulatory requirements. The appeal was allowed, and the disallowance was directed to be deleted. The decision emphasized the importance of considering the legislative intent and practical business exigencies while applying tax provisions.