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TMI Blog2017 (11) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Tribunal was justified in reversing the order of CIT(A) as well as Assessing Offuicer and thereby deleting the addition of Rs. 19,05,000/-, ignoring the specific provisions of 40A(3) of the Act, ignoring that the said expenses was incurred in cash and were not falling within the exceptions provided under Rule 6DD of the Income Tax Rules?" 4. In view of the decision in ITA No.45/2012, Commissioner of Income Tax-Central Vs. M/s. ACE India Abodes Ltd., decided on 11.09.2017 observed as under:- "1. By way of this appeal, the appellant has challenged the judgment of the Tribunal whereby the Tribunal has allowed the appeal filed by the assessee. 2. This Court while admitting the appeal on 19.03.2012, framed the following substantial questions of law:- "I.Whether in the facts and circumstances of the case the Tribunal was justified in deleting the addition of Rs. 1,89,21,509/- and Rs. 53,85,000/- confirmed by the CIT(A) on account of cash payment being made for an expenditure in violation of Section 40A (3) for purchasing stock in trade by the assessee? II.Whether in the facts and circumstances of the case the Tribunal was justified in holding that the provisions of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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." After going through the above provisions, it is seen that where any expenditure has been incurred in cash then in that case no deduction will be allowed. Assessee has not claimed any deduction on account of purchase of land which was shown in stock-intrade. The ld. CIT(A) by placing heavy reliance on the decision of Hon'ble Apex Court in case of Attar Singh Gurmukh vs. ITO, 191 ITR 667 (SC) has held that once an item has been shown in closing stock then it has to be presumed that assessee has claimed expenditure. However, in the said decision of Hon'ble Apex Court it is seen that the Hon'ble Supreme Court has observed that the value of stock in trade has to be taken into account while determining the gross profits under section 28 on principles of commercial accounting. The ration is not applicable on the facts of the present case as assessee has not claimed any expenditure and there is no gross profit earned by essessee. Neither any trading account was drawn as assessee has not claimed any expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-contractor pursuant to an agreement. On appeal, as stated above, the Hon'ble Karnataka High Court affirmed the view of the Tribunal. 14. This ratio of Hon'ble Karnataka High Court can be applied on the facts of the present case as in this case also no expenditure has been claimed by the assessee in its Profit & Loss account. Language of section 40A(3) is very clear where it is provided that no deduction will be allowable if any expenditure has been incurred in cash. 15. We further noted that the Board had occasion to deal with several representations from various Chambers of Commerce, trade associations and businessmen regarding the scope of provisions of section 40A(3) of the IT Act, 1961, and Rule 6DD of IT Rules, 1962. Since many of the points raised therein were of an important nature, the clarifications thereon was issued by the Board by Circular No. 33 dated 29.12.1969 wherein it was clarified that the provisions of section 40A(3) would apply in computing the income under the head Profits and Gains of business or profession, where any expenditure has been incurred. The Board circular supports the case of the assessee as assessee has not claimed any expenditure on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is completed at a later stage wherein they have agreed to receive the amount from the assessee either in cash or cheque as the case may be. This contention of the ld. Counsel of the assessee remained uncontroverted, therefore, we see no reason to interfere with the finding of ld. CIT (A) and held that ld. CIT (A) was right in deleting the disallowance made by AO under section 40A(3)." 19. Similar view has been expressed by the Tribunal in case of PACL India Ltd., 3 8 DTR 1(JP) also wherein it has been held as under:- "Clause (h) of r. 6DD takes out of the purview of s. 40A(3) such cash payment which is made in a village or town which is not served by any bank to any person who ordinarily resides or is carrying on any business in such village or town. There is no dispute that the sellers of the land are villagers engaged in farming activities and are residing at places and are carrying on farming activities at places which are not served by any bank and such sellers have no bank accounts anywhere. It has been emphatically argued on behalf of the appellant-company that all apyments were made at the villages prior to registration of the sale. This submission cannot be outrightl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of r. 6DD(h), the very object to the legislature would be frustrated. There is no dispute regarding the identity of the payee and the genuineness of the land transactions in respect of which payments have been made. It is notable that r. 6DD(k) provides an exception in respect of cash payment which is made on a day on which the banks were closed. This proves that the object of the legislature is to provide exception in respect of such payment which is required to be made in cash or absence of banking facilities. Rule 6DD(h) must be interpreted keeping in view this object and purpose. Therefore, the cash payments recovered under Section proviso to s. 40A(3) and rs. 6DD(h). The AO is directed to delete the addition of Rs. 1,60,69,350/- sustained by the CIT (A)". While holding so, the Tribunal has taken into consideration cases of M/s P.Pravin & Co.,274 ITR 534 (Guj.), Hasanand Pijomal, 112 ITR 134 (Guj.), Venkata Satyanarayana Timber Depot, 165 ITR 253 (AP) and Chaudhary & Co.,217 ITR 431 (ALL). 20. While deciding this issue, the id. CIT (A) has taken into consideration the decision of Hon'ble Gujarat High Court in case of Hasanand Pinjormal (supra). In this case also it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of crossed account payee cheque or bank draft. Therefore, so long as the payees are identified and the genuineness of the transaction is not questioned and so long as the payments have been made at the time of registration in the presence of the Sub Registrar, the case would fall under the exceptions provided in Clause (j) of Rule 6DD. This position has also been clarified by Circular No. 220, dated 31-5-1977. [Para 23]" 3. CIT vs. Chaudhary and co. [1996] 217 ITR 431 (Allahabad) observed as under : The object of section 40A(3) of the Income Tax Act, 1961, is that a fictious amount should not be claimed as revenue expenditure. The intention of section 40A(3) was not that cash payment can never be allowed as a deduction. The terms of section 40A(3) are not absolute. 4. Walfare Transport v/s CIT (240 ITR 902) & CIT vs. Chrome Leather (235 ITR 708) observed as under : Where a transaction was found to be genuine and the identity of the payee was established, a liberal view of compelling and mitigating circumstances should be taken. 5. CIT vs. Raja Pal Automobiles [2010] (320 ITR 185 (All.)) observed as under: Where Tribunal had held that assessee had fully expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake cheque payments alone, it would have received recharge vouchers delayd by 4/5 days which would severely affect its business operation - Assessee, therefore, made cash payment - Whether in view of above, no disallowance u/s 40A(3) was to be made in respect of payment made to principal - Held, yes [ paras 21 to 23] 10. CIT V/s Balaji Engineering [2010] 323 ITR 351 (Karnataka) observed as under: "The assessee who was a civil contractor, after obtaining a contract from the Government entrusted the work to a sub contractor. According to him, on the total cost of project, the assessee was entitled to 1 per cent commission for having transferred his right in favour of the subcontractor. According to the assessee, though it had received the payments form the Government, 99 per cent of the amount had been passed to the sub-contractor in cash and therefore, the said amount had to be considered as an amount paid to the sub-contractor by the assessdee. The contention of the assessee was rejected by the Assessing Officer on the ground that, since the amount was paid in cash the same had to be considered as an expenditure and the assessee was not entitled to claim any deduction. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amine any of the sellers to verify as to whether the payments were received at the villages or at the town. Considering the entire facts the proposition that the payments were made at villages where banking facilities did not exist is accepted. Even if it is assumed that payments were made at a town where banking facilities were available, the cash of the appellant-company would still fall under the exceptions of r.6DD . Rule 6DD(h) has to be interpreted liberally so as not to frustrate the object of the legislature. The object of section 40A(3) is not to disallow genuine payments and the r.6DD has to be interpreted keeping in view of the object of the main provision. The second proviso to s. 40A(3) refers to "the nature and extent of banking facilities available, considerations of business expediency and other relevant factors," which means that the object of the legislature is not to make disallowance of such cash payments which have to be compulsorily made by the assessee in view of absence of banking facilities at the place of payment. In the present case, even if it assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not ..... 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