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TMI Blog2012 (3) TMI 550X X X X Extracts X X X X X X X X Extracts X X X X ..... f provides that the exceptions will have to be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Taking all these factors, considering the nature of activity of the Assessee and the necessity for them to pay cash to the winners immediately, we are of the opinion that the condition under Rule 6DD for exemption viz., transactions should have taken place on Bank Holidays should be read down in the case of the Assessee. In this case if the transaction took place beyond the normal Banking Hours on working days and transaction which took place on Sundays and Holidays, it would not attract the provisions of sec 40A(3) and no disallowance can be made in respect of payment made to winning punters beyond the normal banking hours or on Bank Holidays u/s 40A(3). As there will be different banking hours for different banks and branches, the banking hours of the Main Branch of SBI in Hyderabad shall be taken for this purpose. This issue is remitted back to the files of the AO and AO is directed to re-compute the disallowance u/s 40A(3) as per the above disallowance and the Assessee shall furnish th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No.1946/Hyd/2011 - - - Dated:- 7-3-2012 - Chandra Poojari, Accountant Member And Smt. Asha Vijayaraghavan, Judicial Member Appellant by : S/Sh. K.C. Devadas and K.A. Subbaraoji. Respondent by : Shri V. Srinivas ORDER PER ASHA VIJAYARAGHAVAN, JM . These are cross appeals preferred by the Assessee as well as the Revenue are directed against different orders passed by the CIT(A) III, Hyderabad and are pertaining to the assessment years 2004-05, 2005-06, 2006-07 and 2007-08. Since issues involved in these appeals are common in nature, they are , heard and disposed off together for the sake of convenience. ITA No 1425/ H/11: AY 2007-08 Assessee's Appeal: 2. The first issue is against the disallowance of ₹ 36,47,05.035/- being 15% of the total winning payments made to punters. The CIT(A) on appeal restricted the disallowance to 10% observing as under: 3. The expenditure incurred by way of cash is genuine or not. The cash payments consists payments of ₹ 2500/- and below ₹ 2500/-. In respect of cash payments above ₹ 2500/- In respect of cash payments above ₹ 2500/- the assessee has maintained proper record of rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. Vs. CIT 187 ITR 515 (all) where in it was held that where the assessee failed to adduce proof with regard to the genuineness of purchase transactions, although it has been given ample opportunity to do so, the addition on that count was held justified, for the assessment year 2006-07 also, similar disallowance amounting to ₹ 27,61,88,893/- has been made on account of unverifiable expenditure. 6. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) observed that even during the appeal before him, the assessee has not been able to furnish further information/clarification with reference to such observations made by the AO. The CIT(A) held that even though the accounts of the accounts pf the assessee are computerized, in the absence of any explanation/clarification furnished with reference to such adverse findings given by the AO in the assessment order. The CIT(A) further observed that the entire claim of such cash payments made at ₹ 243,13,66,899/- cannot be allowed deduction. In the facts and circumstances of the case, the CIT(A) observed that some disallowance out of such cash payments claimed as expenditure, is called for in this case. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture not fulfilled the above conditions. It is no doubt true that the onus is on the assessee to prove that it fulfils the above conditions, more importantly, the last one i.e. that it has been incurred wholly and exclusively for the purposes of the business or profession. For this purpose, assessee has to produce necessary evidence, in the form of bills and vouchers to the satisfaction of the Assessing Officer. Admittedly, the assessee is maintaining the entire activity is computerized environment. The entire computerized activity relating is to issue of computerized tickets, computerized winning tickets and the computerised financial entries is explained in the page 37 to 39 of the paper book furnished by the AR for the assessee before us. As soon as a punter purchases a racing ticket window terminal printout, the ticket and ticket details are transmitted to the betting server. At the end of the day, after winning amounts are paid, the entire data gets copied into a floppy, for uploading the same into the accounting server. From the accounting server, the main cash book is generated. At the end of each race day, cash register report is certified by the independent Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils of the payees are not entered for tickets sales. Since, having regard to the nature of the transactions and the manner in which they regard to the nature of the transactions and the manner in which they had been effected, there was no necessity to have maintained -. The failure to maintain the same cannot be regarded as a circumstances giving rise to a suspicion with regard to the genuineness of the transactions. Therefore it cannot be said that by not maintaining the names of the payee, etc. the assessee has violated the provisions of the IT, since it was practically impossible on his part to do so. While the assessee has compared its business with the businesses of a cinema theatre and restaurant, which also deal with multitudes of the members of the public who are their customers, the department has distinguished the business of the assessee from the business of cinema theatre and restaurant, observing that in those businesses no payments are made by the assessee s in those businesses to their customers. The distinguishing feature brought out by the department rather comes to the aid of the assessee in as much as the assessee not only receives innumerable amounts from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced by the assessee. Hence ad hoc disallowance made by the ao was deleted by the Tribunal. In the instant case, the assessee having satisfied all the four conditions laid down u/s 37(1) of the Act, by establishing the fool proof nature of the accounting procedure followed by it for recording its receipts and payments, the ao was not justified in making any disallowance. In the case of CIT Vs. Transport Corporation of India Ltd. relied upon by the DR the assessee has not proved the commercial exigency that warranted the payments. In that case the payment itself was not established, and the department took a stand that the vouchers signed only by the employees of the assessee could not be accepted as genuine, as any number of such vouchers could be produced by the assessee to defraud the department. Since in the case under consideration, the entire payment was through computerized system, duly audited by the Independent CA at the end of each racing day, and since the payments were effected only on the basis of the winning ticket numbers etc. through the system of accounting followed, the assessee has proved all the four conditions noted above in support of its payments. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The AO disallowed 20% of the same at ₹ 30,69,356/- u/s 40A(3). 11. On appeal the CIT(A) confirmed the order observing that the he entirety of the business operation in the case of the assessee, such winning payments, made to punters, on the winning tickets, clearly constitute business expenditure and the same as squarely covered under the provisions of section 40A(3) of the Act. The CIT(A) clearly held that payments made to punters constitute business expenditure, and that the same squarely fall under the provisions of section 40A(3) of the Act. Since the facts during the current year are same, following the said decision, the CIT(A) held that the winning payments made in this case, constitute business expenditure in the hands of the assessee and the same are fully covered under the provisions of section 40A(3) of the Act. 12. It was submitted by the assessee before the CIT(A) that with respect to the claim of the assessee for allowing exemption in respect of such payments made on different days during the previous year, as per the provisions of Rule 6DD(j), no disallowance u/s 40A(3) of the Act shall be made, where the payment was required to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6DD, as it was on the statute book during the years under appeal, is the one prescribed under clause (j) which replaced the earlier one extracted above w.e.f. 25.7.1995, i.e. where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike. We do not find merit in the contention of the learned DR that nowadays many banks are operating even on holidays at places where substantial collections/payments are involved does not hold force because the rule 6DD(j) is very clear and categorical and disallowance cannot be made, where payments were covered by the circumstances prescribed under that clause. The AR argued that almost all the payments were made on only during Sundays and holidays as the races were conducted during Sundays and holidays. All the case law except for the decision in the case of Shri Renukeswara Rice Mills (supra), relied upon the AR related to the period when earlier form of Rule 6DD clause (j), which was omitted w.e.f. 27.5.1995, was applicable, as such the ratio of those cases have no application to the facts of the present case. In the case of Sri R.R. Mills (supra) the assessee made the payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of contractual obligations undertaken by the assessee in the normal course of business. We observe that the payments made to punters represent merely money laid out or paid out by way of an obligation under a wagering contract, which is distinct from a business contract. It is merely a distribution of winnings to the punters, out of the collections received before a particular racing event. These punters who get the payment have won the betting, merely by way of a chance and they were not entitled to the same under any business contract, for the supply of goods, services or facilities, before the end of the race. Therefore, such payments may not amount to business expenditure in the strict sense of that term so as to fall within the scope of provisions of S.40A(3). At the same time, we may also note at this juncture, that in the course of its business activity of conducting races, must have incurred several other items of expenditure distinct from the winning payments to punters, like on the maintenance of turf, pavilions, other assets, staff salaries, office expenses and so on. It is such business expenses which are caught within the web of S.40A(3), if payments in respect of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and n o payment shall be deemed to be the profits and gains of business or profession under sub section (3) and this sub section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees 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 expenditure and other relevant factors. 17. The exceptions to the application of sec 40A (3) is laid down in Rule 6DDJ. Rule 6DD after its amendment from 1995, reads as under: Rule 6DD Prior to 25.7.1995, clause (j) of Rule 6DD of the IT Rules read as follows: 6DD....... i) in any other cause, where the assessee satisfies the Assessing Officer that the payment could not be made by a cross cheque draw on a bank or by a drawn on a bank or by a crossed bank draft...... (1) due to exceptional or unavoidable circumstances or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances. In view of the above there is absolutely no merits in the challenge made as to the validity of section 40A(3) of the Act by mere deletion of sub clauses (1) and (2) of rule 6DD(j). The said provision is perfectly valid and we may hasten to add that the deletion of sub clauses (1) and (2) of rule 6DD(j) is only a step forward in the achievement of the avowed object envisaged u/s 40A(3) of the Act. 18. Therefore the only exception that the Assessee can claim is when payments are required to be made on days when the Banks were closed on account of holidays or strike. Transactions after the banking hours in the course of regular business will not fall within this exception. In those transactions, the payment is not required to be made when the banks are closed i.e. after banking hours. Further the purpose of the disallowance u/s 40A (3) is to dissuade transactions by cash. However, the activity of the Assessee is a peculiar one in which thousands of betters place their bet and on completion of the race/s, they are required to be paid their winnings on presentation of their winning ticket. Therefore the Assessee is required to make their payments immediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Hon ble Supreme Court in the case of CIT Vs. Rajesh Jhaveri Stock Brokers P Ltd. (291 ITR 500). Hence we confirm the order of the CIT(A) on this ground and reject this ground of appeal. This appeal is partly allowed for statistical purposes. 25. In the result, the appeal of the assessee in ITA No.1059/Hyd/2011 for assessment year 2006-07 is partly allowed for statistical purposes. 26. ITA Nos. 313 312 /H/2011 Assessment year 2004-05, 2005-06. The only issue is with respect to disallowance u/s 40A(3) of the Income Tax Act, 1961 which has been decided in ITA.No.1425/Hyd/2011 for the assessment year 2007-08 at Paras. 18 19. 26.1. In the result, both these appeals of the assessee are allowed for statistical purposes. 27. ITA No 1569/H/11. AY 2007-08 Departmental Appeal: The first ground of appeal by the Revenue is against the order of the CIT(A) restricting the disallowance in respect of winning payments, each less than ₹ 2500/- on the ground that the AO had failed to provide the full particulars. In the Assessee's appeal supra, on the same issue we had deleted the entire disallowance made on this account, following the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments of less than ₹ 2500/- which has been decided in assessee s appeal in ITA No.1425/Hyd/2011 at Para 8. which is as follows: 8. We find that the earlier order of the ITAT have elaborately dealt with the issue. The Department has not brought anything to show that the facts of the case are any different from that for the AY 2004-05 and 2005-06 covered by the ITAT order. The activity of the Assessee is such that they have to deal daily with numerous individuals in a short span of time when the bettings are on. They accept bets and settle the winning amounts to the winning punters. It will be difficult to maintain complete details about all the persons. The entire payment was through computerized system. The payment was made to the person holding the winning ticket. The Department has not brought to our notice of any instance of payment when there was no winning ticket. In the circumstances, respectfully following the decision of the coordinate bench in the Assessee's own case we delete the ad hoc disallowance of 10% of the total payment for winning bets of less than 2500/- each. The Appeal of the Assessee on this issue is allowed. Therefore, the Revenue appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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