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TMI Blog2010 (3) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... person. For the sake of convenience, in the receipt the place is mentioned as the town where the document is registered. The AO has not made any effort to examine any of the sellers to verify as to whether the payments were received at the villages or at the town. Considering the entire facts we are inclined to accept the proposition that the payments were made at villages where banking facilities did not exist. In the present case, even if it is assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not have any bank accounts at such town and they did not reside or carry on any business or farming activity at such town. The AO and the learned CIT(A) have observed that the appellant-company could have opened bank accounts at such town in the name of the sellers. In our view, it would be too much to expect that the appellant-company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r. 6DD(h), in our view, the very object of the legislature would be frustrated. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also submitted along with photocopies of receipts in respect of the payments made. The format of the receipt has been reproduced at p. 2 of the assessment order. The AO has mentioned that in most of the receipts the place of payment has been mentioned as Tirunelveli which is a District headquarter in the State of Tamil Nadu. The AO has mentioned that District headquarter is well connected with banking facilities and therefore the assessee was confronted with these facts and asked to explain as to why provisions of s. 40A(3) be not applied. 4. The appellant company filed a reply dt. 11th Feb., 2004 before the AO which has been reproduced at pp. 3 and 4 of the assessment order. In this reply, it was pointed out that the lands purchased by the company were situated in rural areas of Tamil Nadu and a list of the relevant villages was provided. It was also pointed out that the owners of the lands were several as the title existed in the names of more than one person on account of small holdings. The owners of the lands were illiterate and poor farmers with no social background and the villages where the owners resided did not have any banking facilities. In support of the above con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire addition vide his order dt. 22nd Aug., 2007. The learned CIT(A) broadly agreed with the conclusions drawn by the AO and upheld the addition with the following observations at pp. 4 and 5 of his order : "The contention of the Authorised Representative as well as assessment orders was carefully gone through. The AO before rejecting the appellant's contention has given detailed reasons as his assessment order. Rule 6DD(h) gives exemption to the assessee if payment is made in a village or town where no banking facility is available to a person who resides or carry on any business in such village or town. The AO has rejected the claim of insistence by the payee for cash payment exemption is not provided in r. 6DD. He has also observed that most of the case laws cited by the Authorised Representative are not relevant or they are on r. 6DD(j) which was prior to 1st April, 1988 and not applicable presently. The Authorised Representative could not prove any exceptional or unavoidable circumstances as prescribed in r. 6DD(j) though the rule is not applicable in the present case. The appellant company having a wider network spreading all over country and therefore, it could hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee is further required to prove that due to exceptional and unavoidable circumstances payment by cheques was not practicable and hence cash payments were made. In the appellant's case by not establishing any exceptional or unavoidable circumstances it fails to prove in case even as per r. 6DD(j). Thus the entire disallowance of ₹ 1,60,69,350 is hereby confirmed. The grounds of appeal is decided against the appellant." 7. The learned counsel appearing before us on behalf of the appellant-company forcefully submitted that having regard to the correct factual and legal position provisions of s. 40A(3) have been wrongly applied by the lower authorities. Detailed written submissions have also been filed before us wherein reliance has been placed on several judicial pronouncements apart from other cases cited before us during the course of the oral arguments. On behalf of the appellant-company it is submitted that the tax auditors have certified that the cash payments were covered under the exceptions of r. 6DD(h). In response to the queries raised by the AO, complete details were filed before him during the course of the assessment proceedings. The appellant- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant-company filed details of villages where banking facilities are not available as per certificates of Village Administrative Officers before the learned CIT(A), copy of which is at p. 174 of the paper book. Thus, details/certificates/confirmations were filed either before the AO or before the learned CIT(A) in respect of 733 transactions involving total amount of ₹ 7,26,46,491. Besides this, in respect of 3 transactions of ₹ 13,30,840 payments were made by cheques, details of which are at p. 173 of the paper book. It has been submitted before us that the assessee made the cash payment of ₹ 63,69,420 to the sellers of the land who were residing in such villages having banking facilities but the fact remains that the assessee had to make such payment in cash due to business compulsion as the seller were not accepting the cheques. The identity and genuineness of these transactions are also not in doubt. Therefore in view of second proviso to s. 40A(3), these transactions are out of preview of disallowance under s. 40A(3) of IT Act. In view of the above facts and legal position, the provisions of s. 40A(3) are not applicable in respect of the entire payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative placed further reliance on the following decisions : (i) Kanti Lal Purshottam & Co. vs. CIT (1986) 53 CTR (Raj) 19 : (1985) 155 ITR 519 (Raj); (ii) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989) 179 ITR 122 (Cal); (iii) CIT vs. K.K.S.K. Leather Processor (P) Ltd. (2007) 292 ITR 669 (Mad); (iv) CIT vs. Chrome Leather Co. (P) Ltd. (1999) 235 ITR 708 (Mad); (v) CIT vs. P. Pravin & Co. (2005) 193 CTR (Guj) 213 : (2005) 274 ITR 534 (Guj); (vi) Jt. CIT vs. Swarup Vegetable Products Industries Ltd. (2005) 98 TTJ (Del) 420 : (2005) 96 ITD 468 (Del); (vii) Asstt. CIT vs. Gopaldas Vallabhdas (1997) 59 TTJ (Ind) 768; (viii) United Wheels (P) Ltd. vs. IAC (1994) 50 TTJ (Del) 635; (ix) Patel Bros. & Co. Ltd. vs. ITO (1986) 17 ITD 126 (Ahd); (x) Abdul Hameed Khan vs. CIT (1967) 63 ITR 738 (AP); (xi) CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191, 197 (SC); (xii) Esthuri Aswathiah vs. CIT (1967) 66 ITR 478 (SC); (xiii) CIT vs. Manick Sons (1969) 74 ITR 1(SC). 11. Similarly, the learned CIT-Departmental Representative has also strongly contended before us that the case of the assessee is not covered under any of the exceptions of r. 6DD. She has also filed writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable, considerations of business expediency and other relevant factors." Rule 6DD, insofar it is relevant to the issue is as under : "6DD. No disallowance under cl. (a) of sub-s. (3) of s. 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under cl. (b) of sub-s. (3) or s. 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft in the cases and circumstances specified hereunder, namely : ................. (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees; .................. (k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (l) where the payment is made by an authorised dealer or a money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view and not Revenue's. We fail to understand as to how this case supports the view of the Department. For better understanding, the relevant part of the ratio of this case is reproduced below from the headnote : "Held, that s. 40A(3) was intended to serve the objective of checking tax evasion and ensure that payments exceeding ₹ 2,500 are made by crossed cheque or bank draft so that it will be easier to ascertain when deduction is claimed; whether the payment was genuine and whether it was made out of income from disclosed sources. The section is mandatory and there is no discretion left with the taxing authority under this sub-section to allow expenditure which does not comply with it. The rigour of the rule contained in this sub-section is, however, relaxed to some extent by the second proviso to the said sub-section which provides that no disallowance under this sub-section shall be made where any such payment is made otherwise than by a crossed cheque or a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court observed as under (from the headnote) : "The object of s. 40A(3) is to check evasion of tax and not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the AO has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the CBDT (No. 220, dt. 31st May, 1977) is illustrative and not exhaustive and the AO has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. Where the Tribunal had found that the assessee's business was new and the transactions were genuine but there was a time lag between the dates of the bills and the dates of the payments : Held, that the disallowance of the payments in terms of s. 40A(3) of the IT Act, 1961, was not justified." 23. In the case of Patel Bros. & Co. Ltd. vs. ITO (supra), the Ahmedabad Bench of the Tribunal held as under : "The provisions of s. 40A(3) are not the provisions for generating reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her found that the genuineness of the payment was not exposed to any doubt. Payments in cash were duly signed by the payees and the insistence on making the cash payments is founded on the fulcrum that the payees did not have any bank account and that, being illiterates, required the payment in cash. The Tribunal was thus satisfied that no disallowance ought to be made in view of the facts and features fully covered by the proviso to the aforesaid section. It is in the area of legislative ambiguities, yet not receding, that Courts have to fill gaps, clear doubts and mitigate hardships. From the words of Judge, learned Hand, spoken in Cabell vs. Markhan (1945) 148 F 2d 737, 739, we get enough light to locate the correct path. 'It is one of surest indexes of a mature and developed jurisprudence ... to remember that statutes always have some purpose or object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning.' There is no doubt about the purpose or object of the relevant provision. To accomplish it, we cannot ignore the second proviso engrafted to fill gaps and mitigate hardships. The Tribunal on appreciation of facts applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the requirements of r. 6DD(j). Held, on the facts, that the Tribunal found that the assessee did not have any bank account at the place where the purchases were made. A similar finding was recorded with respect to the seller. One of the conditions of the circular dt. 31st May, 1977, thus, stood complied with to enable the assessee to claim deduction of the expenditure, Further, the contention of the assessee that the actual amount for which purchases of liquor under the permits granted by the Excise and Taxation Department were to be made, would be known only at the time of actual purchase was accepted. Thus, it was not possible to obtain bank drafts in advance to make the purchases. Furthermore, the identity of the payee had been successfully established, i.e., the liquor to be purchased by the assessee a liquor contractor from the distillery could only be made on issuing of permits identifying the distillery. The Tribunal was, therefore, justified in deleting the disallowance made under s. 40A(3). No question of law arose from its order." 27. In the case of Venkata Satyanarayana Timber Depot vs. CIT (1987) 60 CTR (AP) 157: (1987) 165 ITR 253(AP), the Hon'ble Andhra P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the appellant-company that all payments were made at the villages prior to registration of the sale. In our view this submission cannot be outrightly rejected. Normally, illiterate poor farmers would insist on cash payments, especially when such payments involve huge amounts, at the place of their residence for the simple reason that they would like to avoid the risk of receiving cash at the town where the sale is to be registered and which may be far away from the village and such cash has to be carried back by them to the village. It is common knowledge that the seller has to confirm before the Sub-Registrar that full payment has been received by him. At the same time the Sub-Registrar satisfies himself about the identity of the seller to ensure that the payment has been made to the right person. For the sake of convenience, in the receipt the place is mentioned as the town where the document is registered. The AO has not made any effort to examine any of the sellers to verify as to whether the payments were received at the villages or at the town. Considering the entire facts we are inclined to accept the proposition that the payments were made at villages where banking f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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