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TMI Blog2016 (9) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... Mallikarjuna, Ld. Departmental Representative represented on behalf of Revenue. 2. First issue raised by Revenue in Ground No.1 is that Ld. CIT(A) erred in deleting the addition made by the AO disallowing a sum of Rs. 3,23,88,960 u/s. 40A(3) and 40A(3A) of the Act on account of cash payment exceeding the prescribed limit. 3. The facts in brief as have been brought on record are that the assessee, a Private Limited Company, engaged in the business of manufacturing of finished leather. During the course of assessment proceedings, the AO found that the assessee has made payments exceeding Rs. 20,000/- in a single day through bearer cheques, totaling to Rs. 3,23,88,960/-, to suppliers of raw hide, in violation of the provisions of section 40A(3) of the Act. It was submitted before the AO that the payments were made to the producers of raw hide and, therefore, the provisions of Section 40A(3) of the Act are not applicable in view of Rule 6DD(e) of the IT Rule, 1962. The assessee also submitted that the purchase bills, transport bills and sales tax bills to prove the genuineness of the parties. However the AO from the perusal of the purchase bills observed that the suppliers were merc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or poultry farming is not covered by the provision of section 40A(3) of the Act. similarly Rule 6DD(f) provides that any payment made for purchase of the products manufactured or processed without the aid of power to the producer of such products is not covered by section 40A(3) of the Act. iii) That the Hon'ble Jurisdiction High Court in the case of CIT v CPL Tannery [2009] 318 ITR 179 (Cal) has held as under:- "BUSINESS EXPENDITURE DISALLOWANCE PAYMENTS IN CASH TO PRODUCERS OF HIDES AND SKINS GENUINENESS OF TRANSACTIONS NOT DOUBTED OR DISPUTED BY ASSESSING OFFICER DISSALLOW NOT JUSTIFIED INCOME TAX ACT, 1961, s.40A(3) INCOME TAX RULES, 1962, R.6DD(f)(ii)." iv) That the Hon'ble Kerala High Court in the case of CIT v Interseas (2010) 233 CTR (Ker) 77 has held that payment made for purchase of hides and skins is covered by Rule 6DD hence no disallowance can be made by applying provision of section 40A(3) of the Act. v) In ITO v. Kenaram N.Saha & Subhash Saha [2009] 116 ITD 1 (Kol- Trib.)(SB) it was held that the payment for purchase of hides and skins would be covered by sub-clause (ii) of clause (f) of rule 6DD [now rules 6DD(e)] being the producer of animal husbandry. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessing officer was not justified in making the addition of Rs. 3,23,88,960/- under section 40A(3)/40A(3A) of the Act. ix) In view of above discussed legal and factual position, I am of the considered view that the payment of Rs. 3,23,88,960/- made by the appellant is covered by Rule 6DD of the Income tax Rules 1962, and accordingly the disallowance of Rs. 3,23,88,960/- made by the AO u/s 40A(3) of the Act is hereby deleted and these grounds of appeal of the appellant are allowed." Being aggrieved by the order of ld. CIT(A), Revenue is in appeal before us. 5. Before us the ld. DR submitted that the assessee failed to bring the evidence to prove that the payment in cash exceeding Rs. 20,000.00 was made to the producers of the raw hides and skin. As per the ld. DR the assessee has violated the provisions of section 40A(3), therefore the deduction is not available to the assessee. The Ld. DR also contended that the suppliers of skin and hides were are having good turn over in their business. Therefore, it cannot be said that they are not having their bank account and there is no justification for making payment in cash. He, therefore, urged before the bench to confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the sellers were the producers whose bill accompanied the way bill. The said copies are enclosed herewith along with the ledger of the parties from where the facts stated above are corroborated. Thus there was prima facie evidence that the purchase was made from the producers of hide and skins. The AO has not brought on record to prove to the contrary except that the notices u/s 133(6) was not served on them. Simply because notices were not served it cannot be inferred that the purchase was not made from producers. The assessee also maintained day to day stock register of the raw, hide and skins and such purchase of raw hide and skins were duly entered in the stock register. There was no evidence to suggest that such purchase was not made from the producers of raw, hide and skins. The attention of the Ld. AO was drawn to the Tax Audit Report wherein it was specifically mentioned that the assessee was maintaining day to day stock register of the raw material and the same was also verifiable from the quantity details filed before the Ld. AO. The purchase of raw, hide and skins from the producers of the same was specifically exempt from the application of sec. 40A(3) vide rule 6D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40A(3) was inserted by the Finance Act 1968 with the purpose mentioned in the explanatory note Para 73 which read as under : It will be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provision was inserted by Finance Act 1968 with the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 06.07.1968 reiterates this view that "this provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the department as to the identity of the payee and reasonableness of the payment." In this regard, it is pertinent to get into the following decisions on the impugned subject:- Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC) "Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs. 2,500 (Rs.10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 202 of 2008 dated 30.7.2008 - Jurisdictional High Court decision "It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding Rs. 20,000/- since it is not made by crossed cheque or bank draft but by hearer cheques and has computed the payments falling under provisions to Section 40A(3) for Rs. 78,45,580/- and disallowed @ 20% thereon Rs. 15,69,116/-. It is also made clear that without the payment being made by bearer cheque these goods could not have been procured and it would have hampered the supply of goods within the stipulated time. Therefore, the genuineness of the purchase has been accepted by the ld. CIT(Appeal) which has also not been disputed by the department as it appears from the order so passed by the learned Tribunal. It further appears from the assessment order that neither the Assessing Officer nor the CIT(Appeal) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine." Anupam Tele Services vs ITO in (2014) 43 taxmann.com 199 (Guj) "Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be fallen on account of non-observation of Section 40A(3) of the Act must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has produced the sales bills along with the transport details and road permit issued by the Government to the company. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash. We also find that the assessment was framed under section 143(3) of the Act for the assessments years 2012-13 and 2013-14 without making any disallowance under section 40A(3) of the Act. From this fact we find that the parties from whom the raw hide and skin purchased were accepted as producers. No such issue was raised by the AO in the assessment. 8. In view of above facts and circumstances of the case and relied on the various case laws cited above, in the background of the above discussions and precedent we do not find any infirmity in the order of Ld. CIT(A) and accordingly we uphold the same. This gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there were sundry debtors of equal amount in the Balance sheet which shows that in this trade there remain outstanding sundry creditors and debtors. When purchase was accepted as genuine then the sundry creditors cannot be treated as bogus. vii) Regarding applicability of provisions of section 68, I find that the appellant has brought substantial material on record to show that these are sundry creditor for purchases paid in subsequent years and that part of the purchases from the very parties were already accepted by the Assessing Officer. Evidently, the creditors were held to be bogus on the ground that enquiry letters under sec. 133(6) of the Act were received back unserved with the remarks 'not known' leaving the Assessing Officer to conclude that the appellant has failed to discharge his onus of proving the capacity of the creditors and genuineness of the transactions. Apparently, in my opinion, the Assessing Officer has not appreciated the facts of the case in its entirety. This is a case, where the books are not outrightly rejected, there is no adverse inference drawn regarding quantum of purchases or sales and even the purchase accounts of the sundry creditors have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration. ix) In view of above discussed legal and factual position, I am of the considered view that the sundry creditors of Rs. 4,29,02,130/- cannot be treated as bogus sundry creditors and cannot be added to the income of the appellant. Accordingly, the impugned addition made by the AO is hereby directed to be deleted and thus, these grounds of the appeal of the appellant are allowed." Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. 12. Before us Ld. DR vehemently relied on the order of AO whereas Ld. AR submitted that the AO has made further addition of Rs. 4,29,02,130/- from Sundry Creditors. It is submitted that these creditors stood in the books of the company and the amount was never written off. The purchases of goods from these parties have been accepted to be genuine. There was no evidence to suggest that no liability to sundry creditors was payable. The details of these Sundry creditors were filed. The AO has also accepted that the payments to these parties were made by bearer cheques. However, as per the AO that payment by bearer cheques causes a serious doubt that sundry creditors did not exist. Simply because the AO doubted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the AO for making the addition of the sundry creditors without disallowing the purchases is based on wrong interpretation of Income Tax Laws. The sundry creditors can be added as income under section 41(1) of the Act once it is written off in the books of accounts. In the instant case the same has not been written off and very much reflecting in the books of the assessee. Therefore in our considered view the sundry creditors reflecting in the books of accounts cannot be disallowed and added to the total income of the assessee. In the instant case, the balances of many of the sundry creditors were outstanding coming from earlier years. Payments were made to some or the creditors during the year. The said payments have been accepted by the AO which means genuinity of the payments to these creditors as well as the genuinity thereof till last year have not disputed by the AO. In the instant case the firstly the AO has not specifically invoked the provisions of section 41 (1). Further in any case no such addition can be made u/s 41. In this connection we are putting our reliance in the judgment in the case of DSA Engineers. In the case of DSA Engineers v. ITO 30 SOT 31 (Mum-Trib), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, there was no occasion to treat the said amount as taxable under section 41 (1) and if department intends to assess the same by applying the provisions of section 41 (1), then the onus will be on the revenue to show that the liability which is appearing in the balance sheet has ceased finally and there is no possibility of the revival of the liability. Hence, addition could not be sustained under section 41(1). The said judgment of the Tribunal was confirmed by Delhi High Court on 23-12-2011 In the case of National Insulated Cable Co. v. ITO ITA No. 421/Del/2011 dt. 8-7-2011 (Del 'E'-Trib) it was held that the fact that the creditors were old creditors brought forward from earlier years has not been disputed by the department. These creditors have not been introduced during the year under consideration. There is no evidence or material on record to establish that the assessee liability to pay the amount to the creditors have been ceased during the year under consideration. Further, the amount payable to these creditors can be added to the assessee's total income in the year in which the assessee's liability to pay the amount ceased or extinguished and not in the year under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned addition u/s 68 and as such no fault could be found with the order of the Tribunal which had endorsed the decision of Commissioner (Appeals). In Mahabir Prasad Prem Chand Jain v. ITO (1988) 40 Taxman 35 (Del- Trib )(Tax Mag), it was held that amounts found in the books of assessee were in existence much prior to the beginning of the accounting period corresponding to the relevant assessment year and the same could not, therefore, be treated as the income of assessee earned during the relevant previous year. In Nuchem Ltd. v. Dy. CIT (2004) 87 TTJ (Del-Trib) 166, it was held that revenue had failed to prove that the amounts were credited to the books of account of the assessee in the year under consideration. These amounts were brought forward from earlier years and it is settled law that the addition under section 68 could be made only if the amount was credited in the accounts of the assessee in the relevant financial year. In Shri Vardhman Overseas Ltd. v. Asstt. CIT (Del-Trib): 24 SOT 393, it was held that no new amount had been credited by assessee in its account during the year under consideration. Therefore, applicability of section 68 of the Act is also ruled o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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