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TMI Blog2023 (11) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... late business transactions and to prevent the use of unaccounted money or reduce the changes to use black money for business transactions. Therefore, if the assessee has brought on record to establish genuineness of the transactions and payment as well as identity of the payee to the satisfaction of the AO then the benefit of Rule 6DD is available. Hon ble High Court has observed that section 40A(3) was intended to penalize the tax evader and not honest transactions and that is why after framing Rule 6DD(j) the CBDT steps in by issuing the circular dated 31st May 1977. Therefore, the disallowance u/s 40A(3) cannot be made without considering the business expediency and other relevant factors falling in the exceptions given in Rule 6DD of I.T. Rules. Decided in favour of assessee. Disallowance on account of salary/remuneration paid to the directors - AO question the justification and reasonableness of such huge amount paid two directors in view of the provisions of section 40A(2)(b) and asked the assessee to furnish the specific details supporting documentary evidences and finally made disallowance of 30% also confirmed by CIT(A) - HELD THAT:- For the year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and the provisions of law. 2. Ground no.1 is general in nature which has not been pressed by the Ld. AR of the assessee during the course of hearing therefore, no specific adjudication is required on this ground. 3. Ground no. 2 is regarding disallowance of Rs. 2,75,000/- u/s 40A(3) of the Act on account of cash payment to the farmers/land owners. During the course of scrutiny assessment the AO noted that the assessee has made cash payments to various parties in excess of Rs. 20000/- as prescribed the limit envisaged in the provisions of section 40(A)(3) of the Act. The AO accordingly made disallowance of the payment made by the assessee to ten parties included the electricity expenses and vehicle repair expenses. On appeal the Ld. CIT(A) has deleted the disallowance made by the AO on account of electricity expenses but confirmed the other disallowance made by the AO. 4. Before Tribunal the Ld. AR of the assessee has submitted that the assessee has purchased two parcel of land vide two sale deeds both dated 27.03.2014. He has referred to the details of the cash payment and submitted that the payment of Rs. 25000/- each to seven co-owners in respect of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the genuineness of the payments was not exposed to any doubt then the disallowance u/s 40A(3) is not justified. Thus, Ld. AR has pleaded that when the transaction is genuine and identity of the payee is not in dispute then the disallowance is not justified. He has also relied upon the order of this tribunal date 11.04.2019 in assesse s own case arising from original assessment order passed u/s 143(3) in ITANo.900/Ind/2016 and submitted that the Tribunal has deleted the addition made by AO u/s 40A(3) of the Act in respect of the cash payment. 6. On the other hand, ld. DR has submitted that the case law relied upon by the assessee are not applicable in the facts of the present case. He has further submitted that there was no business expediency as pleaded by the Ld. AR of the assessee when the subsequent payment was made in Cheque then the initial payment also could have been made in Cheque. The case of the assessee does not fall in any of the exceptions incorporated in Rule 6DD of the Income Tax Rules. 7. Ld. DR has referred to the finding of the Ld. CIT(A) and submitted that the genuineness of the transaction is not relevant for disallowance u/s 40A(3) of the Act. In suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o these seven persons and balance purchase consideration was paid through Cheques as per details given in the sale deed itself. Therefore, the payment was made as token amount at the time of initial negotiation which is almost three months prior to the date of sale deed and thus we find merit and substance in the explanation of the assessee that the token payment was made at the time of initial negotiation with the land owner and thereafter the sale deed was executed wherein the payment of total consideration of Rs. 4,05,30,000/- has been explained with full details including these payments of Rs. 25000/- each to these co-owners. Similarly a sum of Rs. 1 lac was paid by the assessee to one Shri Sevaram and subsequently the sale deed dated 27.03.2014 was executed between the assessee and said Shri Sevaram wherein the total consideration of Rs. 79,10,000/- has been shown including a sum of Rs. 1 lac paid in cash. Therefore, the explanation of the assessee that these cash payments were made as token money at the time of initial negotiation of deal with land owners and thereafter the land were purchased by the assessee through registered sale deed. These facts as evident from the regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asses- see 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. See: Mudiam Oil Company v. ITO, [1973] 92 ITR 519 A.P. If the payment is made by a crossed cheque drawn 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 chances and opportunities to use or create black-money should not be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AU 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 AO 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 in the circumstances specified under the rule. It will be clear from the provisions of s. 40A(3) and r. 6DD that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 belifted. 24. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007)208 CTR (Raj) 208 (2008) 298 ITR 349 (Rai) had observed that the exceptions contained in r. 6DD are not exhaustive and that the said rule must be interpreted liberally. 12. The Hon ble High Court has observed that if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. 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. The Hon ble High Court further observed that provision of section 40A(3) and Rule 6DD are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the changes to use black ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 17. Significantly paragraph 5 reproduced herein below 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 identity of the receiver is established, the requirement of Rule 6DD(j) must be deemed to have been satisfied. Paragraph 5 of the Circular reads as under [1977] 108 ITR (St.) 8, 9: 5. It can be said that it would, generally, satisfy the requirements of Rule 6DD(j), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of Rule 6DD(j). 18. It appears that fulfilment of the conditions of paragraph 5 of the circular has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, having regard to the nature and extent of having facilities available, considerations of business expediency and other relevant factors. The Appellate Tribunal found that the genuineness of the payee has not been doubted by the Assessing Officer. It was found that the payment of the exceeding the limit was made under exceptional and unavoidable circumstances. Placing reliance on Porwal Udyog (India) v. CIT (1982) 135 IIR.991 (MP) it was found that no disallowance was permissible. Why should every exercise begin with mistrust or no trust? In 1979, Ireland abolished wealth-tax, Germany, substantially lowered it. The U.S.A. cut capital gains tax and the UK reduced its maximum rate of personal tax from 83 to 60 per cent. In 1982, Sweden reduced its marginal rate of personal income-tax from 85 to 50 per cent. In this country, the Government purpons to simplify the income-tax law but pursues the course, may be due to compulsions, in the opposite direction. The provision on hand is intended to destroy intentions of dealing with unaccounted moneys, the purpose behind insistence on cross-cheque or cross-draft is to assure and ensure genuiner of dealing and proper assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original assessment order passed u/s 143(3) (supra) has considered this issue in para 8 to 10 as under: 8. We have heard rival contentions and perused the records placed before us and gone through the paper book filed by the assessee. The issue raised in this appeal by the assessee revolves around the disallowance of Rs. 5,40,000/- u/s 40A(3) of the Act. We observe that the assessee is into the business of purchase and sale of land and civil construction business. It purchased land from Smt. Anar Bai for a total consideration of Rs. 36,00,000/-. Out of the total purchase consideration of Rs. 36,00,000/- assessee paid cash of Rs. 6,20,000/- (verifiable from the Essarjee Constructions Pvt.Ltd ITA No.900/Ind/2016 Registered sale deed as well as affidavit placed in the paper book). Out of the cash payment of Rs. 6,20,000/- Ld. A.O has disputed only sum of Rs. 5,40,000/- which in view of Ld. A.O was payment for expenditure in cash exceeding Rs. 20,000/-. The total transaction of purchase of land for Rs. 36,00,000/- is not disputed and the complete details of consideration paid in cash and cheque are mentioned in the registry sale deed which has been executed before the Registe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act and asked the assessee to furnish the specific details supporting documentary evidences. The AO has finally made disallowance of 30% of the total salary paid to these two directors amounting to Rs. 28,94,400/-. On appeal the Ld. CIT(A) has confirmed the disallowance made by the AO. 17. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. An identical issue has been considered by this Tribunal in assessee s own case for A.Y. 2012-13 vide order dated 31st July 2023 in ITANo.8/Ind/2023 in para 28 to 30 as under: 28. We have considered the rival submission as well as relevant material on record. The details of qualification experience of the directors and payments of the salary to them are given at page 84 to 86 as under: 29. Thus, the assessee has explained the qualification and work experience as well as business knowledge of the directors who are responsible for overall business affairs of the assessee company. we further note that the AO has made disallowance of 40% of enhancement without doing any exercise to determine what should be the fair salary to the directors having regard to the services t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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