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2016 (11) TMI 1034 - AT - Income TaxDisallowance made under section 40A(3) - cash payments (in excess of ₹ 20,000 on each occasion) - purchase of its stock-in-trade (country liquor) - Held that - The payment made by the assessee retail vendor to the Principal, Government of West Bengal through its wholesale agent. The relationship between the assessee (authorised retailer) and Government of West Bengal (the supplier) acting under West Bengal Excise Rules through its authorised wholesaler licensee (agent), both de facto and de jure, is one of principal and agent . We hold that the assessee retail vendor had made payment to the said agent (wholesale 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. We have no hesitation in deleting the disallowance made under section 40A(3) of the Act in all the years under appeal. - Decided in favour of assessee.
Issues Involved:
1. Justification of disallowance under section 40A(3) of the Income-tax Act. 2. Applicability of exemptions under rule 6DD of the Income-tax Rules. Detailed Analysis: Issue 1: Justification of Disallowance under Section 40A(3) The primary issue in all the appeals was whether the disallowance of cash payments exceeding ?20,000 made by the assessee to M/s. Asansol Bottling and Packaging Co. Pvt. Ltd. for the purchase of stock-in-trade was justified under section 40A(3) of the Income-tax Act. The Assessing Officer disallowed these payments, asserting they violated the provisions of section 40A(3), which mandates that payments exceeding ?20,000 should be made through crossed cheques or bank drafts to ensure traceability and prevent tax evasion. Issue 2: Applicability of Exemptions under Rule 6DD The assessee argued that the disallowance should not apply due to exemptions provided under rule 6DD of the Income-tax Rules. Specifically, the assessee contended: - Rule 6DD(a)(ii): The payments were made to the State Bank of India, which should qualify for exemption. However, the Commissioner of Income-tax (Appeals) rejected this, citing the Kerala High Court decision in K. Abdu and Co. v. ITO, which clarified that the exemption applies only when payments are made directly to the State Bank of India as an institution, not to a party's account maintained by the bank. - Rule 6DD(b): The payments to the wholesale licensee should be treated as payments to the Government. The Commissioner of Income-tax (Appeals) dismissed this argument, noting that the rule requires such payments to be made in legal tender under government-framed rules, which was not the case here. Tribunal's Findings: 1. Genuineness of Transactions: The Tribunal acknowledged that the transactions were genuine, the identity of the receiver was established, and payments were made directly into the supplier's bank account. 2. Legislative Intent: The Tribunal emphasized the intent behind section 40A(3), which is to curb tax evasion and ensure traceability of transactions. Given the genuineness of the transactions and the direct deposit into the supplier's bank account, the Tribunal found that the legislative intent was not violated. 3. Rule 6DD(b) Applicability: The Tribunal noted that the wholesale licensee acted as an agent of the State Government under the West Bengal Excise Rules, 2005. Therefore, payments made to the wholesale licensee could be considered payments to the Government, falling under the exemption provided in rule 6DD(b). 4. Rule 6DD(k) Applicability: The Tribunal also held that the relationship between the retail vendor (assessee) and the wholesale licensee (agent of the State Government) could be construed as a principal-agent relationship. Thus, the payments made by the assessee to the wholesale licensee fell under the exemption provided in rule 6DD(k). 5. Rule 6DD(a) Rejection: The Tribunal rejected the argument that payments made to the State Bank of India qualified for exemption under rule 6DD(a), as the payments were made to the bank account of the supplier, not directly to the State Bank of India. Conclusion: The Tribunal concluded that the disallowance under section 40A(3) was not justified given the applicability of exemptions under rule 6DD(b) and rule 6DD(k). Consequently, the Tribunal allowed the appeals and deleted the disallowance made under section 40A(3) for all the assessment years in question. Order: All the appeals of the assessee were allowed, and the order was pronounced in the open court on August 5, 2016.
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