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TMI Blog2021 (12) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowed in light of the restrictive interpretation of rule 6DD of the Income Tax Rules which is not self-exhaustive. We therefore quote hon ble apex court s yet another landmark decision in CIT Vs. K.Y.Pilliah [ 1966 (10) TMI 35 - SUPREME COURT] to express our complete agreement with the CIT(A) s conclusion deleting the impugned Section 40A(3) disallowance in entirety without delving much deeper in the relevant facts herein. - Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant's 50 odd medical shops was directly utilised by the two group companies which were the supplier of the appellant in order to expedite the payments to their suppliers in term. Thus the cash generated out of over the counter sales made by the appellant in its outlets were directly paid/collected to/by the concerns VPHRPL and VVOPL. The appellant stated that the payment made was genuine, the identity of the purchase party was established and a bona fide expenditure was incurred by the appellant and there was no intention to evade any tax on account of the same. The appellant further stated that already a sizable gross profit has been declared by the appellant. The appellant had a total turnover of ₹ 17,40,23,492/- and the corresponding purchases was ₹ 11,69,46,397/-, thus a gross profit of ₹ 5,70,77,095/- implying a gross profit of 33% on sales in the business. The above included the purchases made from the sister concern being 90% of the total purchases including the quantum paid in cash of ₹ 7,59,00,557/-. Thus on a primary basis the gross profit declared by the appellant was healthy and also the AO has not objected to the book result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 disclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the Section. It is open 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 ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 706 Orissa; UP. Hardware Store v. CIT, [1976] 104 ITR 664 Allahabad; Ratan Udyog v. ITO, [1977] 109 ITR 1 Allahabad; P.R. Textiles v. CIT. Kerala, [19801 121ITR 237 Kerala; CIT, v. Kishan Chand Maheswari Dass. [1980] 121ITR 23! P & H; Kanti Lal Purshottam and Co. v. CIT, [1985] 155 ITR 519 Raj; CIT, v. New Light Tin Mfg. Co., [1980] 121 ITR 229 P & H; Fakri Automobiles v. CIT, [1986] 160 ITR 504 Raj; Venkata Satayanarayana Timber Depot v. ITR, [1987] 165 ITR 253 AP.; and Akash Films v. CIT, [1991] ITR 32 Karnataka. The decisions of the High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab & Haryana, Rajasthan and Patna are to the effect that the payments made for purchasing stock-in-trade or raw materials should also be regarded as expenditure for the purpose of Section 40A(3). The only discordant note struck on this aspect is by the Gauhati High Court in CIT v. Hardware Exchange, [1991] 190 ITR 61. The Gauhati High Court has observed that Section 40A(3) applies' only to payments made on account of 'expenditure incurred' and the payment made purchase of stock-in-trade cannot be termed as 'expenditure incurred since money does not go irretrievab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bonafide transactions are not taken out of the sweep of the section. It is open 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 ride. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. " It was because of these considerations that this Court in case of Hynoup Foods Private Limited [Supra] observed that the ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reported in [2008] 298 ITR 349 (Raj) had observed that the exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally. Before closing, we may clarify that the above observations would apply only to the cash payments made by the assessee to the Tata Teleservices Limited. No such peculiar facts arise in case of payments made to the other two agencies viz., Rajvi Enterprise and R.D lnfocom. Learned counsel for the appellant also clarified that this appeal is confined to only the payments made to Tata Te\eservices Limited and no others. In the result, the question is answered in favour of the appellant assessee and against the Revenue. Judgment of the Tribunal is reversed. Tax Appeal is allowed. Order accordingly." In the case of appellant, the payment made to the group concerns is not douted, implying that the identity of the recipient is proved and also they have taken into account the transactions of sale to appellant and the receipt in cash in the books of accounts and the same has been disclosed to the department in the Income Tax Returns. The transaction between the appellant and the group concerns of the purchases made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettlement of amounts receivables from value Value Pharma Retail Private limited. Accordingly We have received cash collections to our account directly. We are herewith enclosing ledger account copy of Value Pharma Retail Private limited in Our books. We request you to consider the above clarification for the purpose of Scrutiny Assessment of Value Pharma Retail Private limited. The appellant further filed the MODs with both the suppliers as under: Memorandum of Understanding This memorandum of understanding is made and executed on this the day of 1st March of 2014 in Hyderabad in between Value Pharma Retail (Hyd) Pvt. Ltd., and Value Pharma Holistic Remedies Pvt. Ltd Value Pharma Retail (Hyd) Put. Ltd has retail pharmacy out lets and purchases all its required drugs/Medicines/General items from Value Pharma holistic Remedies Put Ltd., Value Pharma holistic Remedies Put. Ltd., is a wholesaler in Pharmacy and sells drugs/ Medicines/ General items to retailers against cash purchase. Hereby both parties agreed that the Value Pharma Retail (Hyd) Put. Ltd will access the authorized person of Pharma holistic Remedies Put. to all of its retail stores to collect the cash collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest by directly depositing the cash so received, substantially reduces the interest burden of the supplier group company. The interest cost is almost five times the net profit of the company so any reduction of the interest cost will drastically improve the profits of the supplier company VPHRPL, similarly in the case of VVOPL it is seen Terms of Repayment Repayable on Demand Nature of Security Cash Credit availed from Bank of Baroda, Punjagutta Branch, against primary security of Hypothecation of all Stocks and Receivables and also persoan1 Guranlee of Directors (Sri. Dileep Chakravarthy Byra and Pavani Chitikuri and colleteral Security of Property Belonging to In this case the gross profit is around 13% and the interest cost is around 2.5 percent, leaving a net profIt of approximately 0.32%. Thus, the interest cost is approximately 8 times the net profit and any change in the reduction of interest servicing will affect the profitability of the group company. It is important to note that VVOPL and VVHRPL do not have a strong asset base and they have hypothecated stocks and receivables along with other guarantees. Thus, the borrowings of 2.42 crore which are secured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on an assumed income. It is said that the provision authorizing levy of tax on an assumed income would be a restriction on the right to carry on business, besides being arbitrary. 18. 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 OjJicer 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 section 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 satisfactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his. The question as to whether there was justification on the part of the seller of the goods in imposing such conditions, is outside the scope of the enquiry. As a matter of fact, there existed some justification for the traders, at least at the relevant point of time, in insisting the payment of amounts, in cash. The reason is that the banking activity was not that prominent and popular, and instances of cheques issued by agencies or persons, in the course of business being bounced, were not infrequent. The delay in receiving the consideration for any material supplied by a trader would have its own cascading effect on the business activities. It is only when both the parties to the contract are known to each other so intimately, and the seller is very confident not only of the solvency of the purchaser, but also his business ethics, that he would be inclined to receive the consideration through cheque. 22. Obviously because the Parliament as well as the CBDT were live 10 these issues, the provisions referred to above, wer enacted or incorporated. The Assessing Authority has taken a hyper technical view and failed to discern the spirit underlying the relevant provisions. Thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 40A(3) as the payments which were over ₹ 20,000/- were made in cash The Tribunal, therefore. disallowed the same only on a construction of Section 40A(3) The Tribunal restricted the ambit of the proviso to the circumstances mentioned in Rule,6DD of the Income Tax Rules, 1962. At the cost of repetition, the Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important. 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 expedience. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act." The Chandigarh Bench of ITAT in the case of Dreamland Colonizers Pvt. Ltd vide order dated 15-2-2016 held that where expenses incurred in cash were genuine which were paid to the seller for purchase of land and there were practical expediency because of which the payments have to be made in cash no disallowance uj s. 40A(3) is called f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Gurmukh Singh further observes, 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 black-money for business transactions .... " The above judgment is also squarely applicable to the transactions entered into by the appellant with the group concerns to be not covered under the provisions for disallowance u/s.40A(3) as no unaccounted money was involved and nor it was an out of books transaction. It is also important to note that in the case like the appellant's, if the sale made by the appellant is let say Y and the purchases made are X and let us pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant had 100% supply from the group company and the repayment was in cash, it would result in an income of 100% of cost + net profit and would result in an artificial tax burden, which the statue never desired. x. The section 40A(3) was to curb black money and unaccounted transactions. Both the elements are absent in the case of appellant as the transactions are accounted and genuine. To sum up the transaction entered by the group company with its associate group company was neither to evade taxes nor involve black money or to get into unaccounted transactions. Rather the transactions are genuine and accounted. The appellant was also at the mercy of the supplier company who insisted on certain payments to be received in cash for their banking limits. Thus, as the transactions were fairly priced, following the ratio of the Apex Court in the case of Attar Singh, the quantum of ₹ 7,59,00,557/- made in cash from the group concerns is held out of the purview of section 40A(3) and the addition made by the AO is deleted. In view of the above, the appellant gets relief on ground no. 1 and 2 and the ground no. 3 needs no adjudication as the relief has been allowed in g ..... 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