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TMI Blog2013 (12) TMI 1605X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance u/s.40A(3) of the I.T.Act in as much as the cash payments made towards purchase of agricultural lands squarely covered under exception provided in Rule 6DD (j) & (g) of I.T.Rules, 1962. 1.3 The disallowance u/s.40A(3) of I.T.Act is bad in law when cash payments were made due to business expediency. The ld CIT(A) ought to have considered this judicially accepted proposition more so when the genuineness of payments were not disputed. 1.4 The ld CIT(A) failed to consider the various case laws relied upon while disposing of the subject disputed issue." 3. Grounds of appeal raised by the revenue read as under: "The order of the CIT(A) is erroneous both in law and on facts. 2. The ld CIT(A) is not correct in deleting the addition basing on the details of PANs and TDS particulars furnished in respect of the land agents without verifying when PANs were obtained and when the TDS was made (before passing of assessment order or after passing of assessment order). 3. The ld CIT(A) ought to have afforded an opportunity to the AO as per the provisions of Rule 46A of I.T.Rules. 4. The CIT(A) ought not to have deleted the addition without coming to the conclusion that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O on the basis of above facts issued a show cause notice to the assessee to explain as to why sale consideration paid in cash totaling to Rs. 5,02,60,550/- should not be disallowed under section 40A(3) of the Act. In response to show cause notice, assessee replied that at no point of time the possession is given to the assessee nor the assessee purchases the agricultural land in question. It was submitted that these types of arrangements with the land owners are made through middlemen brokers and brokerage expenditure is incurred by the assessee. It was submitted that the land owner as per agreement were paid substantial advance by the assessee in order to safeguard their interests. In turn, the land lords execute a sale agreement in favour of the assaessee in order to safeguard the assessee's investment in development of land. The excess price realized from the purchasers of housing plots over and above the expenditure incurred by the assessee after reimbursement of advance of purchase is considered as assessee's profit. Hence, it was contended that the land in question is not purchased by the assessee. It was submitted that the cost incurred by the assessee in purchase of agricul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, he deleted the addition of Rs. 2,32,20,500/-. 6. However, so far as amount of Rs. 2,70,40,050/- is concerned, ld CIT(A) did not accept any of the contentions of the assessee with regard to the claim that assessee has not purchased the land in question so as to attract provisions of section 40A(3) or the contention of the assessee that the agricultural lands are capital assets. So far as the contention of the assessee with regard to application of Rule 6DD(g) and 6DD(j) are concerned, the CIT(A) observed that assessee's contention in that regard also cannot be accepted as neither clause (g) or clause(j) of Rule 6DD is applicable to the facts of the assessee's case. Ld CIT(A) held that clause (g) would not be applicable as Vijayawada City as well as the adjacent areas including Kanchikacheria are covered by banking facilities. He was further of the view that it is improbable that the landlords, who have received a substantial amount as sale consideration and are persons of significant means, would not have bank accounts and otherwise also, assessee did not produce any evidence in that regard. So far as assesse's claim of application of Rule 6DD(j) is concerned, the CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t pages 197 to 203 of PB. Specifically drawing our attention to page 197,200 & 203 of PB, ld A.R. submitted that the total cash payments made through three partners are of Rs. 73,06,500, Rs. 69,03,000 and Rs. 48,46,550/-. Ld A.R. submitted that atleast these payments should have been held to be not in violation of section 40A(3) as they clearly come within the exception of sub-rule (j) of Rule 6DD. Ld A.R. submitted that the expression "required to be made" as find place in sub-rule (j) of Rule 6DD cannot be interpreted in a manner as has been done by the CIT(A) to suggest that requirement must be on account of insistence by the payee. Ld A.R. submitted that proviso to Section 40A(3) of the Act makes the intention of the legislature clear by providing that no disallowance shall be made under such circumstances as may be prescribed having regard to the nature of existence of banking facilities available considering business expediency and other relevant factors. Ld A.R. submitted that the proviso makes it clear that in cash payment automatically cannot attract provisions of section 40A(3) but it has to be considered in the context of business expediency, availability of banking faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what identical facts of purchase of land and considering the nature of transaction involving illiterate farmers from villages who insisted for cash payment, has deleted the disallowance made u/s.40A(3) of the Act. Ld A.R. therefore submitted that the disallowance to the extent of Rs. 2,70,40,050/- sustained by ld CIT(A) has to be deleted considering the facts and circumstances of the case. 8. On the other hand, ld D,R. strongly supporting the order of ld CIT(A) in this regard submitted that the provisions of section 40A(3) r.w. Rule 6DD have undergone changes from time to time keeping in view the changing circumstances and there is no ambiguity in the provisions. Ld D.R. submitted that assessee having not explained with clarity why payments were required to be made on Sundays and Holidays, the disallowance was justified. He further submitted that the payments made as revealed from the chart submitted by the assessee placed at pages 197,200 & 202 would show that the payments made on Sundays and Holidays are much more than other days. Hence, it is a matter of practice by the assessee to make payments on Sundays and Holidays rather than necessary requirements either by way of insiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, no deduction shall be allowed in respect of such expenditure.:" 12. A plain reading of the aforesaid provision makes it clear that the expenditure incurred by the assessee exceeding the amount of rupees twenty thousand, if made in cash, then such expenditure shall not be allowed. However, proviso to said section makes an exception by providing that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section(3) in such a case 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 relevant factors. Therefore, addition to be made under section 40A(3) on payment of cash is not automatic or mandatory. If situation exists as provided in the proviso to sub-section (3) of Section 40A r.w. Rule 6DD, then disallowance cannot be made under section 40A(3) of the Act. Now reverting back to the facts of the present case, so far as the contention of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of black money. In the case at hand, there is no allegation with regard to the fact that payments have been made to the landlords for purchase of land to whom assessee has identified. 14. The Hon'ble Delhi High Court in the case of R.C.Goel(supra) while interpreting the similar provision as contained in sub-rule (k) of Rule 6DD, where the expression 'required' find place, held as under: "In the present case, the previously noted discussion would reveal that the assessee engages itself in executing catering contracts for Railways in respect of two trains. In those trains, its personnel are deployed for sale of small articles of daily necessity and use to the passengers. Per force, the payments received by them are necessarily in cash. These amounts are collected and in turn handed over to the assessee. The assessee in terms of its contract is bound to maintain constant supplies in the trains and ensure that at no point in time can the passengers be deprived of these articles (which are food articles, soft drinks and other items necessary for travel). In the course of such transactions, it sources these articles from M/s Shruti Enterprises. Apparently, that concern is also a sma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urring of bogus and fictitious expenses to non existing parties. In the present case, the appellantassessee has furnished explanations on the basis of the bank statements as well as the ledger accounts of the payees to show that the appellant-assessee did not have sufficient cash balance. This position is clear and cannot be doubted. The appellant-assessee had submitted that if they had failed to make cash payments, they would have breached terms of the agreements entered into with the third parties or would have missed out on the business opportunity. In cases of earlier bounced cheques and when a party is facing liquidity problem, it can get difficult as third parties are reluctant to accept cheques and insist on cash payments. Arranging funds is also a problem and not easy. It is submitted that the Assessing Officer did not doubt the funds and no addition on this ground and reason was made. The stand of the appellant was that the cash was made available since M/s. Ritz Theatres (P) Ltd. was holding the cash collection out of the hire charges. On the said aspect an order of remit was passed by the tribunal and no addition or adverse observation was made by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e villages prior to registration of the sale. In our view this submission cannot be out rightly 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 facilities did not exist. 30. Even if it is assumed that pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... require the payments to be made in cash on Holidays and Sundays, otherwise, they would have sold the lands to some other persons. In these circumstances, if the assessee would have insisted for payment by way of cheque or DD or have deferred it, it might have resulted in a loss of business opportunities as the land owners would not have agreed to sale the lands to the assessee. Therefore, the expression 'required to be made' understood in this context and keeping the intention of legislature in mind can be construed to mean that payments required to be made for the purpose of the business of the assessee. In these circumstances, payments made on Sundays and Holidays have to be held to be coming within the ambit of Rule 6DD(j), hence provisions of section 40A(3) will not apply to such payments. Therefore, payments made in cash atleast to the extent made on Sundays and Holidays cannot be disallowed u/s.40A(3) of the Act. We, therefore, direct the AO to verify such payments made on Sundays and Holidays and delete the addition of these amounts. 19. So far as addition of the rest of the amount sustained by the CIT(A) is concerned, though assessee has stated that such payments come with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant itself in cash to the landlords. In view of the same, addition to the extent of Rs. 2,32,20,500/-, relating to such payments is hereby deleted. " 21. On going through the findings of the CIT(A), as extracted hereinabove, we do not find any infirmity in the impugned order to interfere with the same. It is not only a fact that assessee has paid the amount of Rs. 2,32,20,500/- to third parties but such payments have also been made through cheques. The assessee has also furnished back account copies, TDS particulars, PAN of the said parties. Therefore, the entire transactions having been made through proper banking channel is transparent. Only because third parties have withdrawn the amount and paid the same in cash to landlords, assessee cannot be brought within the mischief of section 40A(3) of the Act. Accordingly, we confirm the order of ld CIT(A) on this issue. 22. With regard to the department's contention that the AO has not been afforded an opportunity as per provisions of Rule 46A of I.T.Rules, on perusal of the impugned order, we observe that ld CIT(A) after taking into consideration the bank account copies, TDS particulars and PAN of the third parties, which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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