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TMI Blog2020 (2) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction and test of business expediency been satisfied, no disallowance is called for by invoking the provisions of section 40A(3) of the Act. In the result, we hereby direct the deletion of disallowance so sustained by the Ld. CIT (A). - Decided in favour of assessee - ITA No. 235/JP/2019 - - - Dated:- 28-1-2020 - Shri Vijay Pal Rao, JM And Shri Vikram Singh Yadav, AM For the Assessee : Shri Vedant Agarwal (Adv.) And Shri Satish Gupta (CA) For the Revenue : Smt Runi Pal (JCIT) ORDER PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-4, Jaipur dated 28.01.2019 wherein the assessee has taken the following grounds of appeal:- 1. On the facts circumstances of the case and in law, Ld. Lower authorities grossly erred in making and confirming addition of ₹ 71,55,130/- u/s 40A(3) of the Income Tax Act. 2. On the facts circumstances of the case in law, ld. CIT(A) grossly erred in holding that There is no case made out that appellant was under bonafide belief that payee is a govt. Agency . Whereas Ld. CIT(A) himself at para 4 at page 5 of appeal order reproduced assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority and has been clearly established. Referring to the provisions of Rule 6DD(b), it was submitted that the AVVNL is also a government body and therefore, the payment was made to the Government body and looking to the practical problems involved in making the payments through cheques, the assessee cannot be said to be in violation of provisions of section 40A(3) of the Act. It was further submitted that all the payments were made only after the due date and only cheque of local clearing bank are accepted by AVVNL. It was submitted that the nature of the business of the assessee is such that the maximum sale collection is generated through banking mode only. And in all these cases, it happens that the assessee was not having sufficient bank balance on the due date and therefore, the assessee was not in a position to make the payment before due date and he was forced due to the business circumstances to pay the electricity bill only after due date. It was submitted that the assessee first withdraw the cash from his bank account than only deposited the payment to AVVNL as there is a clear directions on the bill as well as of department that the payment through cheque will be acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other plea taken by the assessee that it was practically not possible for the assessee to arrange the payments at least 10 days before the billing due date, was also not found acceptable in view of the fact that the liability of payment to AVVNL is a regular feature of each month, which is pre decided and essential part of its business. Moreover, the facts of other cases on which the assessee has relied on are different from the facts of this case. Hence, provisions of section 40A(3) of the IT Act, 1961 are clearly applicable in this case and addition was made by the Assessing officer. 5. Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A). As per ld. CIT(A), there is no case made out by the assessee that it was under a bona fide belief that JVVNL is a Government agency, further, there are direct decision of the Jaipur Benches, Jaipur wherein it was held that AVVNL/JVVNL are treated as private entities. Further, the assessee has also not made out any case that its case falls in the ambit of rule 6DD(a) to (m). Further, the decision relied upon by the assessee in case of Aruna Rani vs. ITO (ITA No. 613/JP/2015) ACIT vs. Rahul Pancholi (ITA No. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpelled to make payments in cash, otherwise his electricity connection could have been disconnected resulting into closure of manufacturing activities/business. 7. Since all the payments have been made to AVVNL, a Government company where identity is proved and transactions are also genuine. Ld. Assessing Officer has not raised any doubt over these issues of Identity of payee and genuineness of the transaction. 8. Assessee is in the business of mining and crushing of stones and the gross receipts are at ₹ 22.66 crore. Total income was declared at ₹ 77,93,960/-.It was also submitted before Ld. Assessing Officer that the payment to AVVNL could not be made in due time because on the due date, there was no sufficient cash balance in the books of account of the assessee. 7. It was accordingly submitted by the ld AR that the payments made to AVVNL were the payments made to Government, and the AVVNL was not accepting payment through Account payee cheques/Demand Drafts of outstation clearing and were accepting only local clearing cheques that too of State Bank of India and the assessee was not having any account in The State Bank of India at Udairpurwati. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 10,00.000.00 3 ₹ 7,72,093/- 1.07.2014 16.07.2014 22.07.2014 Cash Withdrawal from Vijay Bank Dated 22/07/2014 Amount ₹ 7,75,100.00 4 ₹ 8,43,874/- 1.08.2014 16.08.2014 30.08.2014 Cash Withdrawal from Vijay Bank Dated 30/08/2014 Amount ₹ 4,78,000.00 and Dated 28/08/2014 Amount ₹ 5,00,000.00 5 ₹ 15,45,837/- 1.10.2014 16.10.2014 28.10.2014 Cash Withdrawal from Vijay Bank Dated 28/10/2014 Amount ₹ 5,50,000.00 and Dated 22/10/2014 amount ₹ 3,50,000.00 6 ₹ 15,04,601/- 1.11.2014 16.11.2014 28.11.2014 Cash Withdrawal from Vijay Bank Dated 28/11/2014 Amount ₹ 12,00,000.00 7 ₹ 17,23,336/- 1.01.2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard the rival contentions and perused the material available on record. It would be relevant to refer to the provisions of section 40A(3) of the Act which reads as under: (3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of 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. (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees: Provided that no disallowance shall be made and no payment shall be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant point in time, has held as under:- 6. As to the validity of section 40A(3), it was urged that if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary. 7. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the 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. Section 40A(3) only empowers the Assessing Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int so provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. The Hon ble Supreme Court has thus laid great emphasis on the intention behind introduction of these provisions and it would therefore be relevant to examine whether in the present case, there is any violation of such intention and if ultimately, it is determined that such intention has been violated, then certainly, the assessee deserves the disallowance of the expenditure so claimed. 24. The Hon ble Supreme Court referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee has held that: The terms of section 40A(3) are not absolute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of lastest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike. 27. We donot believe that by virtue of these amendments, the legal proposition so laid down by the Hon ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance. 28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal circumstances. The Hon ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the provisions of clause (j) under rule 6DD would operate to be exhaustive of such circumstances and had not been properly understood its implication. It was further observed by the Hon ble High Court that primary object of enacting section 40A(3) in its original incarnation was two-fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community. The consequence which was provided was to disallow of deduction of such payments/expenses which were not through bank either by crossed cheques or by demand draft or by pay order. It was further held by the Hon ble High Court that: Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar view has been taken by the Coordinate Bench in case of Ayub Ali (supra) where it was held as under: 6. We have heard the rival contentions and perused the material available on record. The assessee has entered into an agreement with a Government Hospital in Bikaner whereby it operates the MRI and CT Scan machines. The nature of such activities therefore demand a continuous supply of electricity and the assessee cannot risk the life of the patients especially those admitted in emergency cases by not operating these machines for want of electricity. Therefore, we find force in the contention of the ld AR that there was business expediency of making cash payments so that there is no disruption in supply of electricity required to operate the MRI and CT scan machines. Further, we note that it is not in all cases that the payments have been made in cash, rather the assessee has made cheque payments as well during the year. Therefore, it is in only those cases where the cheque payments couldn t be arranged nearing the due date of payment that the payments have been made in cash. In case of ACIT vs. Sh. Rahul Pancholi (ITA No. 949/JP/2013 order dated 30.09.2015), the Coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Judicial Member did not discuss in detail as to why he has not followed the order in the case of Shri Rahul Pancholi (supra) to which he himself is a signatory. The learned Judicial Member dismissed the appeal of the assessee on the sole reason that since the assessee has to make the payment of electricity bill regularly, it should have made such arrangement which is in accordance with the provisions of Section 40A(3) of the Income Tax Act. I may respectfully note that Tribunal is created by law and have to follow the law passed by legislator. If such view is considered, it would make proviso to section 40A(3) redundant. The ld. Counsel for the assessee, however, given an undertaking during the course of hearing that assessee, in future has made alternate arrangement to make payment for electricity bill as per provisions of law so that there is no violation of provisions of section 40A(3) of Income Tax Act. 6. Considering the totality of the facts and circumstances in the light of the above discussion, I agree with the view of the learned Accountant Member in allowing the appeal of the assessee holding that no disallowance should be made under section 40A(3) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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