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TMI Blog2011 (3) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... without taking into consideration the arguments placed before him and the facts involved in this case. 2. For that having regard to the facts that the payments of Rs. 19,74,789 made in case to M/s. Bartaman Pvt. Ltd. was not related to the expenditure which would be brought for the purpose of the computation of the income under the head, 'Profits and Gains of Business or Profession', the learned Commissioner of Income-Tax (Appeals) and the learned Assessing Officer were erroneous in holding that such payments were covered by the provisions of section 40A(3) of the said Act." 3. Brief facts leading to the above issue are that the assessee filed his return of income on 29-10-2004 declaring total income at Rs. 6,61,400 for assessment year 2004-05. The Assessing Officer during the course of assessment proceedings found that assessee has made payments to M/s. Bartaman Pvt. Ltd. (hereinafter referred to as "BPL") in cash in contravention of the provisions of section 40A(3) of the Act amounting to Rs. 19,74,789. The Assessing Officer has noted the entire payment date wise in his assessment order and the same need not be repeated. It is also admitted by the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and obligation imposed on assessee. According to assessee he derived benefit by way of discount from newspapers by making cash payments, since procedure laid down by newspapers for delivery of matters and making mode of payments, the assessee had to follow such procedure in order to give effect to the orders of the principals who sought for advertisement. According to him, most of the orders were received from principals during day time and matters were delivered to the office of newspaper at the fag end of the day or evening when banking services were not available. And further, he stated that advertisements of principals would not appear on the following day unless the payments were not made to the newspapers on the earlier day and in case, any cheque is tendered, matters would not be published by the newspaper, unless such cheque is encashed in routine manner and for that at least 3 days are usually required to get the cheque cleared by the bank. Furthermore, the assessee will derive extra benefit of commission at the rate of 5 per cent for payments made in cash to the newspapers. We find from above arguments that payments in cash were made on following consideration: "(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as expenses. Therefore it cannot be said that the appellant merely acted as agent. The claim of the appellant that these were made at the time when there was no banking facility available as payments were made at night for ensuring that insertions appeared in the next day's Newspaper has also not been substantiated by producing any details to show when the matter was submitted before Bartaman and on what date the insertion was required to be made. The claim of business expediency was therefore not established. From the certificate of Bartaman (P.) Ltd. it is seen that it says that payments were required to be made in advance. Such advance payments could have been very well made by cheques/drafts. The provision of section 40A(3) Rule 6DD have been amended and the amended provisions read as under: 40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irdharilal Goenka v. CIT 179 ITR 122 (Cal.) On the facts of this case, where the assessee has satisfied the Assessing Officer as to the genuineness of the payment and the identity of the payee, the circumstance that there was a delay in making payment of the bills by itself would not take the case out of the ambit of exceptional or unavoidable circumstances referred to in rule 6DD(j) and deduction of the expenditure which is otherwise allowable to him cannot be denied. For the reasons aforesaid, we answer this question in the negative and in favour of the assessee. 2. CIT v. Suresh Kr. Agarwal 249 ITR 113 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 undisclosed sources. The terms of section 40A(3) are not absolute. Consideration 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 Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of account and having her business transactions, and according to her method, the entire work with regard to payment and collection of money was entrusted to the firm. If in such a set of circumstances, the firm makes payment on behalf of the assessee by account payee cheques, by no stretch of imagination it can be said that there was any cash transaction or there was any possibility of having "chances and opportunities to use or create black money." When the assessee found it practicable and expedient to entrust all her business transactions to the firm as her agent, and as the firm had made payments by account payee cheques to the concerned persons, and when identity of all persons to whom payments were made was revealed from the books of account. It may be noted that all the above cases are given in the light the provisions of section 40A(3) and rule 6DD(j) as they stood prior the amendment. Earlier Rule 6DD(j) read as under: (i) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft (1) due to exceptional or unavoidable circumstances, or (2) because payment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d effect of the above amendment have been elaborated in following portion of the departmental circular No. 117, dated 14th August, 1995, as under - Amendment of section 40A(3) of the Income-tax Act, to provide for disallowance of 20 per cent of cash expenditure 27.1 Section 40A(3) provides for disallowance of an expenditure, incurred for business or profession, in respect of which payment exceeding Rs. 10,000 is made otherwise than by a crossed cheque or a crossed bank draft. Certain cash payments have, however, been excluded under rule 6DD from the prohibition contained in this section. Sub-rule (i) of rule 6DD prescribes the mitigating circumstances with a view to relax the rigors of section 40A(3) in genuine and bona fide cases. Sub-rule (i) was introduced at a time when banking facilities had yet to take roots in rural areas. Now that banks have established themselves in rural areas and a vast branch network is available, it is felt that sub-rule (i) has outlived its utility. 27.2 These provisions have also given rise to substantial litigation arising out of the interpretation and scope of section 40A(3) read with rule 6DD(j). 27.3 Section 40A(3) has been amended to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussion the disallowance is confirmed in appeal. Ground Nos. 1& 2 of the appellant are therefore dismissed." 6. We find from the claim of the assessee that the payments were not made for goods purchases or services. In this connection, we are of the view that no doubt the payments are not for purchases of goods but these are for services and payment on behalf of principal but the payments are covered under section 40A(3) of the Act as these have been routed from P&L Account and claimed as expenses. Therefore, we are of the view that though the assessee acted as an agent but claimed this payment as expenses and these payments are surely covered under section 40A(3) of the Act, as expenses claimed by the assessee. The claim of the assessee that there were no banking facilities available, as payments were made at midnight, this claim is not at all supported by any evidence and even though the assessee cannot make cash payments in contravention of provisions of section 40A(3) of the Act. Further, the claim of the assessee, as is evident from the certificate of BPL clearly establishes that in case the payment is made in cash and in advance, the discount is allowed as per their poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in order to arrive at a net profit liable to tax. The word 'expenditure' in section 40A(3) of the Act is of wide import and includes expenses which are taken into account while determining the gross profit. Even the case laws referred by ld. Counsel for the assessee of Hon'ble Calcutta High Court in the case of Giridharilal Goenka v. CIT [1986] 179 ITR 122 at page 127, Hon'ble High Court has clearly held that the mitigating circumstances referred to in the second proviso to section 40A(3) of the Act are detailed in the Rules. The object of the Rules is to relax the rigours of section 40A(3) of the Act in genuine and bona fide cases to avoid hardship and harassment. In the present case, the assessee could not bring his case under any of the clauses or residuary clause of the Rules. In view of these facts and circumstances and the case laws as distinguished by CIT(A), we are of the view that the assessee's case does not fall in any of the exceptions as provided under the Rules. Admittedly, here, assessee's case squarely falls under section. 40A(3) of the Act and he could not bring any exception as provided under the Rules. Hence, we are of the considered view that the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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