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TMI Blog2018 (6) TMI 1240X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) - Decided in favour of assessee - ITA No.1065/JP/2016 - - - Dated:- 15-5-2018 - SHRI VIJAY PAL RAO, JM SHRI VIKRAM SINGH YADAV, AM Assessee by : Shri Rajeev Sogani (C.A) Revenue by : Shri J. C. Kulhari (JCIT) ORDER PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-1, Jaipur dated 28.10.2016 for Assessment Year 2013-14 wherein the assessee has taken the following ground of appeal:- In the facts and circumstances of the case and in law, the ld. CIT(A) has grossly erred in confirming the action of ld. AO in disallowing the claim of expenditure of ₹ 1,71,67,000/- by applying section 40A(3) of Income Tax Act, 1961. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please may be granted by deleting the entire addition &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as per copies of the sale deed furnished during the course of assessment proceedings, noticed that the assessee had made cash payments regularly, no specific circumstances have been brought to his knowledge that the cash payments were made due to some unavoidable circumstances. 5. The Assessing Officer further referred to the nature of business disclosed in the audit report as well as the fact that the assessee has sold plots of land amounting to ₹ 82 lacs during the year under consideration and held that the assessee is in the business of real estate and has purchased the subject properties for business purposes and the same were stock-in- trade and not investment as contended by the assessee. 6. Further, the AO referred to the Rule 6DD of the Income Tax Rules and stated that the case of the assessee does not fall in any of the sub-clauses of Rule 6DD. Regarding the Circular No. 220 (F No. 206/17/76-IT(A-11) dated 31.05.1977 relied upon by the assessee, it was observed by the AO that the said circular is very old and no reliance can be placed on the said circular. 7. The AO further held that the word expenditure has not been defined in the Act. It is a word of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es it a costly affair. Alternatively, they obtain Power of Attorney from the seller and pay advance on the basis of Agreement to Sell and after identification of the customer, the registry is being done in the name of final buyer/customer only, through the valid Power of Attorney. Whereas in the instant case under consideration, all the lands were transferred in the name of assessee firm through registered sale deeds and it incurred a sum of ₹ 14,99,996/- towards registration charges and stamp duty thereon, which support the assessee s intention of holding the purchased lands for longer term as investments. 11. It was further submitted that cash payments for the purpose of acquiring capital asset, being investments, are not covered by the provisions of section 40A(3) of Act. Regarding AO s observation that the auditors have mentioned that the assessee is engaged in the real estate business, it was submitted that the auditors have rightly mentioned their real estate business and nothing adverse could have been inferred by the AO because the investments in land were converted into stock-in-trade on 1st June, 2012 by passing appropriate entries in books of accounts and duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April-May, 2012 and these were converted into stock in trade on 01.06.2012 by passing the journal entries in its books of accounts. It is noted from column no. 28 of the tax audit report relating to quantitative details of principal items of traded goods for the year under consideration that opening stock of land was shown at 2270.71 square yards, which was valued at ₹ 49,25,295/- in its profit and loss account. Further, in Column no. 8(a) of tax audit report, the auditor has mentioned the nature of business as manufacturing trading of furniture, handicrafts, iron scrap and real estates and generation of wind power and in column no. 8(b), which is related to change in the nature of business during the year, it has been stated by the auditor that the assessee has undertaken the business of manufacturing of ballot boxes. Therefore, it is evident from these facts that the contention of the appellant that it made investments in 26 plots in the months of April-May 2012 do not match with its financial statements and tax audit report, which reveal that the appellant was engaged in the real estate business at least from the financial year 2011- 12 preceding to the assessment year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified therein, namely: (viii) It is evident from the above that the Rule 6DD has specified the circumstances in which payments exceeding the prescribed limits can be made in cash. It was the contention of the appellant that the payments were made in cash out of business expediency to safeguard its interest. It may be mentioned that it was the stand of the appellant that it purchased 26 plots as investment and now it is taking plea that due to business exigencies, it had to make cash payments which are contradictory to each other. The appellant has relied upon a number of judicial pronouncements, wherein it was held that the terms of section 40A(3) are not absolute, consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the appellant to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not brought on record any reasonable cause for making cash payments in violation of provisions of section 40A(3) of the Act and also not been able to specify under which clause of amended Rule 6DD its case falls to bring it out from the rigours of provisions of section 40A(3) of the Act. It was stated by the appellant that the sellers insisted on cash payment but no evidence has been brought on record to substantiate the claim and it has also failed to brought on record that if it did not made the cash payments, the sellers would cancel the deals. It is important to mention here that the sellers were residents of Jaipur and most of them belonged to the same family and more than 50% of the payments were accepted by them through cheques. Thus, in the absence of any documentary evidence, the contention of the appellant that the sellers insisted on cash payments deserves to be rejected. 16. Now, the assessee is in appeal before us against the aforesaid findings of the ld CIT(A). The ld AR took us through the findings of the AO and the ld CIT(A) and reiterated the submissions made before the lower authorities. Further, the ld AR raised various contentions which find mention in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO 59 taxmann.com 11 as under: It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. 3.6 In view of above it will be apt to state that the provisions of section 40A(3) have been enacted as one of the measures for countering evasion of tax. The provisions were enacted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. Genuine and bona fide transactions are taken out of the sweep of Section 40A(3). 3.7 In the present case the assessee firm has not made use of black money for purchase of land in cash. It was just on the insistence of the sellers, cash was withdrawn from bank and the payment was made in cash keeping in mind the business exigencies. This fact is clear from perusal of working table submitted and appearing at CIT(A) order (Page 12) and from Bank Statements of the assessee firm. 3.8 Just after introduction of section 40A(3), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for expeditious settlement thereof; and also furnishes evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and the identity of the payee. 1.4.1970 CBDT Circular No. 220: Circumstances when ITO can relax requirement of making payment in excess of ₹ 2,500 by crossed cheques under clause (j) of rule 6DD 31.05.1977 Omission of Rule 6DD(j) 27.7.1995 Reintroduction of Rule 6DD(j) Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Incometax Act, 1961, and when such employee- (A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (B) does not maintain any account un any bank at such place or ship 1.12.1995 Substitution of Rule 6DD(j) by notification dated 10.10.2008 where the payment was required to be made on a day on which the banks were closed either on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are made on a bank holiday; or d. the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller ; or e. the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchase the goods; or f. specific discount is given by the seller for payment to be made by way of cash. 15. It was further clarified in paragraph 6 that the above circumstances are not exhaustive but illustrative. 16. Therefore, in our opinion, the Tribunal was clearly in error in not travelling beyond the circumstances referred to in paragraph 4 of the Circular and to consider the explanation submitted by the assessee on its own merit 3.16 Ld. CIT(A) misdirected himself in distinguishing the case of Gurdas Garg (supra) with that of the assessee firm by holding that the judgment shall not apply for the period after A.Y. 2009-10. It is submitted that in the said judgment Hon ble Punjab High Court relates to A.Y. 2009-10 i.e. way after the substitution of 6DD(j) in 1995. The court has simply mentioned the fact of amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey really make out a case of business expediency. In this view, respectfully following the judgment of the Hon'ble Punjab Haryana High Court in the case of Gurdas Garg (supra), we hold that the payments cannot be disallowed under section 40A(3) of the Act [CLC 24-15] 3.18.ii Hon ble ITAT, Amritsar Bench in the case of Rakesh Kumar (2016) 46 CCH 270, pertaining to the AY 2010-11, pronounced on 09.03.2016 has held as under: In the present case, the genuineness of payment has not been doubted as Assessing Officer himself has held that sale deeds of properties were registered with the Revenue Department of Govt. Therefore, the case of the assessee is fully covered by the above decision of Hon ble Punjab and Haryana High Court. Therefore, respectfully following the same we allow the ground of appeal filed by assessee . 3.19 The assessee firm s case is squarely covered in its favour by the following judgment of Hon ble Courts, which relate to post amendment period and has held that where the cash payment in made, keeping in mind the exceptional and unavoidable circumstances, no disallowance u/s 40A(3) can be made. A.Y. Case Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established before ld. CIT(A) [CIT(A) Page 6]. Ld CIT(A) has not disputed the said factual aspect. Once the factual aspect is accepted by ld. CIT(A) there cannot be any reason for rejection of appellants contention of cash remittance because if not insisted why would we draw cash from bank and make payment in cash rather than issuing cheques is done in other cases. 3.22 Ld. CIT(A) in order to reject the claim of the assessee firm has held that the assessee firm has failed to bring on record that if it did not made the cash payment, the sellers would cancel the deals. In this regard it is submitted that the sellers while negotiating the deal have put such condition and, therefore, evidences in this regard do not exists. Ld. CIT(A) has asked for too much. 3.23 Ld. CIT(A) has also held that the sellers were residents of Jaipur and most of them belonged to the same family and more than 50% of the payments were accepted by them through cheques. In this regard it is submitted that belonging to same family does not mandate to follow same practice as others did. The mode of accepting the payment is always at the discretion of the seller. 3.24 It is also submitted that during the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature and extent of banking facilities available, considerations of business expediency and other relevant factors : Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words twenty thousand rupees , the words thirty-five thousand rupees had been substituted. (4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner. 19. The aforesaid provisions have to be considered and interpreted in light of various authorities which have been quoted at the Bar and relied upon by the ld AR and ld DR in support of their respective c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use blackmoney for business transactions. Mudiam Oil Co. v. ITO [1973] 92 ITR 519 (AP). If the payment is made by a crossed cheque on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black-money which is under circulation in our country. Any restraint intended to curb the chanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. 25. Here, it is relevant to note that there has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors are concerned, as existed at relevant point in time and as considered by the Hon ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impunged assessment year i.e. AY 2013-14. However, Rule 6DD(j) has been amended and by notification dated 10.10.2008, it now provides for an exception only in a scenario where the payment was required to be made on a day on which banks were closed either on account of holiday or strike. A question which arises for consideration is whether the legal proposition so laid down by the Hon ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions. 29. We refer to the decision of the Hon ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (supra), where the facts of case were that the assessee had made certain cash payments towards purchase of scooter/mopeds which exceeded ₹ 10,000/- in each case to the principal agent instead of making payment through the cross cheques or bank draft. The Assessing Officer invoked the provisions of section 40A(3) and held that they were no exceptional circumstances falling under rule 6DD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. This is particularly so, because the consequence provided u/s 40A(3) for failure to make payments through bank is not absolute in terms nor automatic but exceptions have been provided and leverage has been left for little flexing by making a general provision in the form of clause (j) in rule 6DD. Thereafter, the Hon ble High Court refers to the clause 6DD(j) and the circular dated 31st May, 1977 issued by the Board in the context of what shall constitute exceptional and unavoidable circumstances within the meaning of section Clause (j). The Hon ble High Court observed that the circular in paragraph 5 gives a clear indication that rule 6DD(j) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and the identity of the receiver is established, the requirement of rule 6DD(j) must be deemed to have been satisfied. The Hon ble High Court observed that apparently section 40A(3) was intended to penalize the tax evader and not the honest transactions and that is why after framing of rule 6DD(j), the Board stepped i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the A.O. to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources, The terms of s. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the A.O. the circumstances under which the payment in the manner prescribed in s. 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tata Tele Services Ltd. had insisted that such payments be made in cash, which Tata Tele Services Ltd. in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of s. 40A(3) of the Act must be lifted. 23. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007) 208 CTR (Raj) had observed that the exceptions contained in r. 6DD are not exhaustive and that the said rule must be interpreted liberally. 34. In case of M/s Ajmer Food Products Pvt. Ltd., Ajmer vs. JCIT (supra), a similar issue has come up before the Co-ordinate Bench and speaking through one of us, it was held as under: 4.5 The genuineness of the transaction as well as the identity of the payee are not disputed. Further, the appellant has explained the business expediency of making the cash payments to both the parties which has not been controverted by the Revenue. Following the decision of Gujarat High Court in case of Anupam Tele Services (supra) and Rajasthan High Court in case of Harshila Chordia (supra), the addition of ₹ 45,738/- under section 40A(3) is deleted. 35. In case of Gurdas Garg vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that payments having been made. More importantly, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency. 36. The Co-ordinate Bench in case of M/s Dhuri Wine vs DCIT (ITA No. 1155/chd/2013 others dated 09.10.2015) has held that the proposition so laid down by the Hon ble High Court in case of Gurdas Garg (supra) is quite unambiguous to the effect that even if the case of the assessee does not fall in any of the clauses of Rule 6DD of the Income Tax Rules, invoking the provisions of section 40A(3) of the Act can be dispensed with if the assessee is able to prove the business expediency because of which it has to make the cash payments, the genuineness of the transactions have also to be verified. 37. The Co-ordinate Bench in case of Rakesh Kumar vs. ACIT (ITA No. 102(Asr)/2014 dated 09.03.2016) relying on the decision of Hon ble Punjab and Haryana High Court in case of Gurdas Garg (supra) has held that the genuineness of the payment has not been doubted as the Assessing Officer himself has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the instant case. 40. From perusal of the assessment order, it is further noted that the AO, on perusal of the details of the properties purchased, as per copies of the sale deed furnished, held that the assessee had made cash payments regularly and no specific circumstances have been brought to his knowledge that the cash payments were made due to some unavoidable circumstances. It was held by the AO that maximum cash payments were made to persons residing in Jaipur city and in single family, repeated cash payments were made which itself shows that there were no unavoidable circumstances to make cash payments to the sellers. What is therefore relevant to note that the AO has appreciated the necessity of determining the unavoidable circumstances which could have led the assessee to make cash payments. During the course of assessement proceedings, it was submitted by the assessee that the payment for purchase of land has been made in cash because the sellers were new to the assessee and refused to accept the cash. It was submitted that the delay in making the cash payment, it could have lost the land deals. In this regard, the ld AR submitted before us that the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,57,000 4-May-12 - - - 1,14,00,000 - - 11,57,000 7-May-12 - - - 1,14,00,000 - - 11,57,000 8-May-12 19,00,000 23,00,000 42,00,000 1,56,00,000 8-May-12 38,55,000 15,02,000 12-May-12 - - - 1,56,00,000 - - - 15,02,000 14-May-12 - - 1,56,00,000 - - - 15,02,000 15-May-12 - - 1,56,00,000 - - 15,02,000 16-May-12 - 15,00,000 15,00,000 1,71,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be compulsory made by the assessee on account of business expediency. Further, the source of cash payments is clearly identifiable in form of the withdrawals from the assessee s bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making the cash payments. 43. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that the identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee s bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by the Hon ble Rajasthan High Court in case of Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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