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TMI Blog2025 (4) TMI 1125X X X X Extracts X X X X X X X X Extracts X X X X ..... these appeals for adjudication. ITA No. 1217/KOL/2023 for A.Y. 2015-16 04. The only issue raised and pressed at the time of hearing is against the order of ld. CIT (A) upholding the assessment order, wherein the ld. AO has made the addition of Rs.3,14,43,700/- by invoking the provisions of Section 40A(3) of the Act. 05. The facts in brief are that the assessee filed the return of income on 30.09.2015, declaring total income at Rs.10,81,150/-, which was processed u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee along with questionaire. Pertinent to state that assessee was engaged in the business of purchase and sale of lands/ plots which were duly recorded in the books of accounts maintained and audited by the auditors of the assessee. The land purchased by the assessee was held as stock-in-trade for which the payments were made in cash as well as by cheques. The ld. AO perused from the tax audit report in form no.3CEB filed by the assessee that payments toward purchase of land/plots/expenses made/incurred which are covered u/s 40A(3) of the Act. Accordingly, the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellate order that there is no infirmity in the actions of the AO in disallowing the payments in excess of Rs. 20,000/- aggregating to Rs.3,14,43,700/- under the provisions of Section 40A(3) of the Act. 07. After hearing the rival contentions and perusing the materials available on record, we find that assessee is engaged in the business of purchases and sale of land/plots. The assessee has purchase lands/plots during the instant financial year for which various sale deeds were executed. The payments were made partly in cash and partly by cheques, which were duly disclosed in the deeds of conveyance. The books of accounts of the assessee were also audited and assessee filed the audited accounts along with audited report before the ld. Assessing Officer. The ld. AO on the basis of the said audit report observed that tax auditor has reported 3 payments in the tax audit report which were not allowable in terms of Section 40A(3) of the Act; i.e. (i) cash component paid as per sale deeds as details given by the ld. AO in para no.2 which aggregating to Rs.2,37,97,293/- (ii) the amount of payments made to various persons in connection with the purchase of land/plots and registrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where 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, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rizing 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 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 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 Assessing Officer the circumstances under which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Consideration of business expediency and other relevant factors are not excluded. The 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transactions and it being free from vice of any device of evasion of tax is relevant consideration which has been overlooked by the Tribunal." 31. It was accordingly held by the Hon'ble High Court that it is the relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in light of Rule 6DD as clarified by circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s office at Surat. In that factual background, the Hon'ble High Court held as under:- "17. Rule 6DD of the IT Rules, 1962 provides for situations under which disallowance under s. 40A(3) shall not be made and no payment shall be deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, cl. (j) which is relevant, read as under: (j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; 18. It could be appreciated that s. 40A and in particular sub-cl. (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of account payee cheque drawn on a bank or account payee bank draft. 19. As held by the Apex Court in case of Attar Singh Gurmukh Singh (supra). "..In our opinion, there is little merit in this contention. Sec. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of the Act does not eliminate considerations of business expediencies. (b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow- (i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time; (ii) the assessee was, therefore, required to make cash payments only; (iii) Tata Tele Services Ltd. assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee; (iv) It is not disputed that the Tata Tele Services Ltd. did not act on such promise; (v) if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. We would find that the payments between the assessee and the Tata Tele Services Ltd. were genuine. The Tata Tele Services Ltd. had insisted that such payments be made in cash, which Tata Tele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not attracted. The Hon'ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions and it is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market and therefore it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to settle the deals. The Tribunal did not doubt this case. The Tribunal, however, held that the claim for deduction was not sustainable. In view of Section 40A(3) as the payments which were over Rs. 20,000/- were made in cash. The Hon'ble High Court accordingly observed that "the Tribunal has not disbelieved the transactions or the genuineness thereof nor has it disbelieved the fact that payments having been made. More importantly, the reasons furnished by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,425/-, out of which payment amounting to Rs. 1,71,67,000/- were made in cash to various persons, payment amounting to Rs. 59,48,920/- were made in cheque to various persons, and Rs. 8,15,700/- and Rs. 6,84,296/- were paid in cash towards stamp duty and court fee respectively. During the course of assessment proceedings, the assessee submitted copies of the sale deed, the particulars of which find mention on page 7 and 8 of the assessment order. On perusal of the said details, it is observed that the said details contains the name of the seller, date of sale deed, plot no., purchase value, stamp duty, Court fee and mode of payment - cash/cheque. Therefore, as far as the identity of the persons from whom the purchases have been made and genuineness of the transactions of purchase of various plots of land and payment in cash is concerned, the same is evidenced by the registered sale deeds and there is no dispute which has been raised by the Revenue either during the assessment proceedings or before us. The identity of the sellers and genuineness of the transactions is therefore fully established in the instant case. 40. From perusal of the assessment order, it is further noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - - 30,02,000 17-May- 12 - 15,00,000 15,00,000 1,86,00,000 17-May- 12 30,69,000 14,33,000 Total 63,50,000 1,42,50,000 1,86,00,000 1,71,67,000 41. It was submitted by the ld AR that in order to secure the deal, assessee had no other option but to make the payment in cash. Cash payments were made from the disclosed sources being the amount withdrawn from bank. It was for sheer insistence of the seller that the payments were made in cash. Had the assessee denied the cash payment looking to the provisions of sections 40A(3), the deal could not have been finalized. In such circumstances, in the business interest and to complete the deal, the assessee had chosen to make the payments in cash fortified through registered sale deed. The payment has been made out of the explained sources, through the registered document and as a disclosed transaction. 42. We find force in the contentions so raised by the ld AR. The transactions hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the genuineness of the transactions and it being free from vice of any device 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) of the Act. In the result, the appeal of the assessee is allowed." We note that it is not the case of the AO that the cash payments were not genuine and intended to evade taxes. Therefore the cash payments made by the assessee were out of business compulsion and commercial consideration and are covered by the exception provided in Rule 6DD. The facts of the instant case are materially similar as decided by the co-ordinate bench above. Therefore, respectfully following the case of M/s A Daga Royal Artis Vs. ITO (supra), we set aisle the order of the ld. CIT (A) and direct the ld. AO to delete the addition. ITA No. 1216/Kol/2023 for A.Y. 2017-18 08. The issue raised in ground of appeal is against the confirmation of addition of Rs.13,50,000/- and Rs.23,65,276/- by the ld. CIT (A) as made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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