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TMI Blog2016 (12) TMI 1240X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Hon‟ble Supreme Court in the case of : Attar Singh Gurmukh Singh (1991 (8) TMI 5 - SUPREME Court ) interpreting the scope of Sec. 40A(3), had held -“Genuine and bona fide transactions are not taken out of the sweep of the section.”, therefore the aforesaid contention of the assessee would thus fail on the said count too. Thus in light of our aforesaid observations, the ground no.1 of the appeal is dismissed and the order of the CIT(A) to the extent sustaining the addition/disallowance of ₹ 13,11,455/- is upheld. - Decided against assessee Disallowance of loss on sale of fenders - Held that:- In the present case, now when the assessee had reflected the fenders as a capital asset in its "books of accounts", but however had claimed that the same were purchased as a tradable commodity in the normal course of its business of supplier of stores to ships, therefore a very heavy onus was cast on the assessee to irrebutably substantiate his contention, all the more when the said claim was found to be in absolute contradiction of the facts as emerged from its "books of accounts", and therein prove that the fenders were purchased as a tradable commodity in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leting the addition made under the provisions of Section 40A(3) of the Income Tax Act, 1961 and on account of loss on sale of fenders. 3. Brief facts of the case are that the assessee firm which is engaged in the business of supplier of stores to ships had filed its return of income for AY 2009-10 as on 30/09/2009, declaring total income at ₹ 4,00,16,475/-. The case of the assessee was taken up for scrutiny proceeding and the A.O after deliberating on certain issues assessed the income at ₹ 4,29,04,040/-. The assessee being aggrieved with certain additions/disallowances so made by the A.O carried the matter in appeal before the CIT(A), however the appeal of the assessee was partly allowed. 4. That assailing the order of the CIT(A) the assessee had filed the present appeal before us on the following issues :- Sr. No. Particulars Amount 1 Disallowance under section 40A(3) of the Act ₹ 13,11,455/- 2 Disallowance of loss on sale of fenders ₹ 14,74,982/- However, before adverting furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city therefore their cheques were not accepted by the local suppliers, coupled with the fact that during the year under consideration the bank of the assessee was not having RTGS/NEFT facility, therefore in light of the pressing business exigency and being left with no other alternative, the payments had to be made to the suppliers upfront in cash. It was further submitted by the Ld. A.R that though the purchases were made in cash, however the genuineness of the transactions and the identity of the supplier were well established before the lower authorities and had not been doubted at any stage. The Ld. A.R in order to fortify the genuineness of the purchase transactions, therein referred to his Paper book (for short APB ) and brought to our notice the complete details of the parties from whom purchases were made, alongwith the respective PAN Nos. of the majority of the said parties, as well as took us through the copies of the purchase bills, bank certificate, letters by agents and the affidavits of the supplier parties, which did go to support the genuineness of the purchases as well as the compelling circumstances under which the cash payments had to be made by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is an overriding provision which operates in spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head Profits and gains of business or profession and being mandatory in nature, calls for a strict compliance, with the only exceptions as regards its applicability being carved out in Rule 6DD. That in the present case there is no denying of the fact that the assessee had made payments aggregating to ₹ 13,11,455/- in cash, which had been held by the revenue to be in contravention of the statutory provisions contemplated u/s 40A(3) of the Act . The assessee had not been able to demonstrate either before the lower authorities, nor before us, that its case is covered by either of the exceptions contemplated U/rule 6DD. Rather, the only contention of the ld. A.R is that as the genuineness and veracity of the purchase transactions under consideration are not in doubt, coupled with the fact that the same were prompted on account of business exigencies, therefore no disallowance u/s 40A(3) of the Act was warranted. We find the contention of the Ld. A.R at the first blush to be very logical and convincing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplated by Sub-rule (J) of Rule 6DD which prescribed the mitigating circumstances with a view to relax the rigors of Sec. 40A(3) in genuine and bonafide cases was omitted from the statute by the legislature in all its wisdom, on the basis of the amendment carried out vide the Finance Act, 1995, w.e.f 01.04.1996, the scope and effect of which amendment is found elaborated in Circular No. 717, dated 14th August, 1995 , as under:- 27.1 .Sub-rule (j) of rule 6DD prescribes the mitigating circumstances with a view to relax the rigors of section 40A(3) in genuine and bonafide cases. Sub-rule (j) was introduced at a time when banking facilities had yet to take roots in rural areas. Now that the banks have established themselves in rural areas and a vast branch network is available, it is felt that sub-rule (j) has outlived its utility. Thus, pursuant to omission of the aforesaid Rule 6DD(j) from the statute, and absence of any such pari materia rule or exception being thereafter made available, the concession or benefit which was earlier available to an assessee as per Sub-rule (J) of the pre amended Rule 6DD, cannot be transposed from the said pre-amended provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3), were given in context of and in the course of interpreting the scope of the aforesaid pre-amended Rule 6DD(J) as had specifically been referred to and appreciated by the Hon ble Apex Court in its aforesaid judgment. Thus in light of our aforesaid observations that the pre-amended Rule 6DD(j) would not be applicable to the case of the assessee, the reliance placed on the said judgment can safely be held to be misconceived. We are further of the considered opinion that even otherwise a bare perusal of the aforesaid judgment of the Hon'ble Supreme Court therein reveals that the Hon'ble Court had nowhere held that the applicability of the rigors of Sec. 40A(3) of the Act can be relaxed in situations other than those covered by the exceptions carved out in Rule 6DD. 7.2. That as regards the reliance placed by the assessee on the judgment of the Hon ble Allahabad High Court in the case of : Chaudhary And Co.(supra) and the Hon ble Dellhi High Court in the case of Ramaditya Investments (supra), we find that both of the Hon ble High Courts in the aforesaid cases too had interpreted the scope and gamut of Sec 40A(3) in light of the pre-amended Rule 6DD(J). Thus on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank draft, shall not be allowed as a deduction. Clause (b) of sub-section (3) of section 40A also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding ₹ 20,000/- otherwise than by an account payee cheque or by an account payee bank draft. However, the provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962. 13.2 Sub-section (3) of section 40A is an anti-tax evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transactions. Thereby the risk of evasion is substantially mitigated. Field formations have reported that assesses tend to circumvent the provisions of sub-section (3) of section 40A by splitting a particular high value payment to one person into several cash payments, each below ₹ 20,000/-. This splitting is also resorted to for payments made in the course of a single day. The Courts have approached such splitting by interpreting the words in a sum used in the section to mean a single sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra), relevant extract of which had been reproduced hereinabove, therein reveals that now when the Hon ble Apex Court in clear and unambiguous terms while interpreting the scope of Sec. 40A(3), had held :- Genuine and bona fide transactions are not taken out of the sweep of the section. , therefore the aforesaid contention of the assessee would thus fail on the said count too. Thus in light of our aforesaid observations, the ground no.1 of the appeal is dismissed and the order of the CIT(A) to the extent sustaining the addition/disallowance of ₹ 13,11,455/- is upheld. 8. We now advert to the disallowance of a sum of ₹ 14,74,982/- pertaining to loss on sale of fenders made by the AO, which thereafter had been sustained by the CIT(A). The brief facts emerging from the issue under consideration are that the assessee firm had purchased fenders in F.Y 2007-08 for a consideration of ₹ 34,80,380/-, which were reflected as a Fixed asset in the Balance sheet as on 31.03.2008. The fenders were sold by the assessee in the month of June, 2008 for a consideration of ₹ 20,05,398/-, therein leading to a resultant loss of ₹ 14,74,982/- ,which was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,74,982/- arising on the sale of the same could not be allowed to be booked as a business loss and as such though had rightly been disallowed by the authorities below, but in all fairness while deducing the income of the assessee the consequential depreciation of ₹ 3,15,278/- pertaining to the said capital asset was fairly allowed in the hands of the assessee. It was thus submitted by the Ld. D.R that the order of the CIT(A) be upheld and the appeal of the assessee on the said issue be dismissed. 8.3 We have considered the rival submissions and perused the material placed on record before us and find that the genesis of the issue under consideration emerges from the fact that though the fenders had been reflected by the assessee in its balance sheet for the year ended 31/03/2008 as a fixed asset , but such a treatment in the books of account as claimed by the assessee was due to an inadvertent mistake on the part of the accountant, as it was claimed that the assessee pursuant to an order placed on it by a customer had purchased the fenders as a tradable commodity in the normal course of its business of supplier of stores to ships. Though we are not oblivious of the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein reveals that the fenders had been rented out by the assessee immediately after carrying out the respective purchases of the same, which on going by the Principle of preponderance of human probabilities can safely be concluded to have been purchased by the assessee with a clear intent and purpose of exploiting the same by renting out the same to third parties, and deriving income there from. We further find that the assessee had not only failed to place on record any material which could go to substantiate its claim that the fenders were purchased pursuant to orders placed on it by a shipping company, which orders could not fructify for the reason that by the time the fenders were received the vessels had already left the docks, but rather on the contrary a thoughtful consideration on our part of the details of purchase of fenders [Page 50-58 of the APB ] reveals an inextricable nexus between the regular and systematic purchase of fenders by the assessee over a period of three months i.e 08/01/2008 to 05/03/2008, vide eight bills from two parties, with the renting of the same to the third parties over the period 29/01/2008 to 05/06/2008. Thus a conjoint perusal of the purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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