Disallowance u/s 40A(3) for cash payments cannot be made if genuineness not doubted

INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR

I.T.A No. 102(Asr)/2014 Assessment Year: 2010-11

Rakesh Kumar (Appellant) vs. Asst. CIT (Respondent)

Date of Order: 09-03-2016

ORDER

PER T. S. KAPOOR (AM):

This is an appeal filed by assessee against the order of learned CIT(A), dated 4.11.2013, for Asst. Year: 2010-11.

2. The only ground of appeal has been taken by assessee.

“That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals), Bathinda is against law and facts on the file in as much as he was not justified in upholding the action of the Ld. Assessing Officer in disallowing expenditure under section 40A(3) of the Act ibid on account of bonus payable/paid to commission agents on the purchase of agricultural land amounting to Rs.16,70,000/-.”

3. The brief facts of the case as noted in the assessment order are that the assessee is engaged in trading of properties. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed that assessee had purchased certain properties which were registered with Registrar of Revenue Department. The Assessing Officer further observed that the payment for purchase of such properties was made in cash. The Assessing Officer observed that since the properties in the case of assessee were stock in trade therefore, payment of cash attracted the provisions of section 40A(3) of the Act and such payments were liable to be disallowed. The Assessing Officer, therefore, relying upon the case law of Attar Singh Gurmukh Singh Vs. ITO (SAC), 191 ITR 667 (SC), held that since there was no cogent reasons to make payments otherwise than a crossed eheque or bank draft as the place where the deeds were registered was well served by banking facilities. Therefore, he show caused the assessee as to why the disallowance be not made. The assessee in his reply submitted as below.

“That as regarding the invocation of the provisions of section 40A(3) of the Income Tax Act, 1961 on the cash payment for the purchases of land made by assessee at Rs.9,22,000/- and Rs. 8,99,500/- it is submitted as under:-

(a) The land purchased in the question was an agriculture land and the payment has been made to the agriculturists.

(b) The provisions of section 40A(3) are not applicable as the payment made is covered under the exceptions provided in rule 6DD of the IT rules 1962.

(c) It is not feasible to make the payment for purchase of land through bank because the seller don’t trust the buyer.

(d) There are a number of difficulties in making the payment through banking channel.

(e) The payment for the registration charges amounting Rs. 156500/- has been made to State Government which too falls in the exceptions provided in the rule 6Dd of the Income Tax Rules 1962.”

4. The Assessing Officer after considering the reply of the assessee made an addition of Rs.16,70,000/- being payment of Rs.18,21,500/- made in cash minus Rs.1,51,500/- deposited in Govt. account for purchase of Stamp Papers.

5. Aggrieved the assessee filed appeal before learned CIT(A), however, learned CIT(A) did not accept the contentions of the assessee and upheld the disallowance by holding as under:

“2.1 A perusal of the written submissions filed by the A/R of the appellant luring the course of assessment proceedings and during the course of appellate proceedings makes it clear that the A/R of the appellant did not produce any evidence either during the course of assessment proceedings or appellate proceedings that the payment was given to the sellers who are allegedly agriculturists justify the contention that the sellers did not trust the buyer andthere-were a number of difficulties faced by the appellant in making the payment through banking channel. The Hon’ble Punjab & Haryana High Court held in the case of Aggarwal Steel Traders V/s CIT 250 ITR 738 that unless the explanation of the assessee that the cash payment is covered by exceptional circumstances is supported by confirmatory letter from the concerned parties, the question that whether the provisions of section 40A(3) are applicable has to be decided against the appellant.

2.2 The contention of the A/R of the appellant that the payment fcr purchase of land is covered by Rule 6DD(e) is also not correct. The AO has dealt with this issue in his remand report and it has been stated by him in rebuttal that the said rebuttal that the said rule relates to purchase of agriculture produce from the “cultivator, grower, or producer of the relevant agriculture product. It is not related to purchase of LAND from anybody, agriculturist or not. To that extent the grounds of the applicant assessee is plainly not entertainable.”

2.3 The rebuttal of the AO in the remand report that the case of the appellant does not fall in the exception provided in rule 6DD(e) is also covered by the order of Jodhpur Bench of the ITAT in the case of Vaishali Builders & Colonizers (2012) 138 ITD 227. The relevant part of the order in para 11.3 is reproduced as under:-

“The Id. counsel for the assessee argued that for purchase of agricultural and payment made to the villagers, the provisions of section 40A(3) may not be applied as provided in exception to Rule 6DD. We have gone through the Rule 6DD applicable now and prior to amendment also, in which gone of the exception has been provided for making payment in cash for purchase of land. It is, however, provided that above rule can be a.r.ded if payment is made for purchase of agricultural produce which is not the case of the assessee at all.”

2.4 The judgment of Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 191 ITR 667 and Mudiam Oil Company vs. ITO (1973) 92 ITR 519 also supports the action of the AO of disallowing expenditure made for purchase of land for which payment has been made otherwise than by way of payees account cheque or draft, u/s 40A(3) of the Income Tax Act, 1961.

2.5 The issue is also covered by the decision of Hon’ble Gujrat High Court in the case of Hasanand Pinjomal vs. CIT 112 ITR 134 in which the binding nature of the provisions of section 40A(3) has been discussed and it has been held that

“This is a mandatory directive given by the legislature to the taxing authority and on its plain term it commands such authority to disallow all expenditure , even if it is otherwise admissible, if the payment in respect of such expenditure in case when it exceeds Rs. 2,500/- (now Rs. 20,000/-) is made otherwise than in the manner specified. There is no discretion left with like taxing authority under this subsection to allow such expenditure.”

In view of the facts and law discussed supra, the action of the AO in disallowing Rs. 16,70,000/-u/s 40A(3) of the Income Tax Act, 1961 on account of expenditure claimed by the appellant in purchase of land is upheld and the disallowance is confirmed. The ground of appeal no. 1 is dismissed.”

6. Aggrieved the assessee is in appeal before us.

7. At the outset, the learned AR submitted that the case of the assessee was covered in favour of assessee by the order of Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg Vs. CIT, Bathinda, 63 taxman. 289 and in this respect filed a copy of the order. The learned AR submitted that the Hon’ble Punjab & Haryan High Court under similar circumstances has held that where genuineness of transactions in excess of Rs.20,000/- was not disbelieved by authorities then the payments in excess of Rs.20,000/- cannot be disallowed u/s 40A(3).

8. The learned DR, however, supported the order of authorities below.

9. We have heard the rival parties and have gone through the material placed on record. We find that the Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT (supra), under similar facts and circumstances has held that where the genuineness of payments is not disbelieved the disallowance u/s 40A(3) cannot be made. We find from the order of Hon’ble Punjab & Haryana High Court that in this case also the assessee was engaged in trading of properties and had paid cash in excess of Rs.20,000/- for purchase of properties. The Hon’ble Punjab & Haryana High Court has exhaustively dealt with the issue and has framed Question No.1 as below.

“Re: Question No.1 3.

The appellant is engaged inter alia in trading in properties in his individual name. As noted in the assessment order, during the course of assessment proceedings, the details of the closing stock as on 31.03.2009 alongwith details of sales/purchases were placed on record. The consideration, which in respect of each of the transactions was admittedly in excess of Rs.20,000/-, was paid in cash. Payment by demand draft was made only in respect of one of the transactions. These payments in cash were disallowed by the Assessing Officer and the order in this regard was upheld by the Tribunal. The CIT (Appeals) had allowed the deductions.”

The Hon’ble Punjab & Haryana High Court in the above case has considered the Supreme Court decision in the case of Attar Singh Gurmukh Singh V/s. ITO (supra) as relied upon by authorities below.

The findings of the Court are contained in para 7 to 10. The relevant findings of the Hon’ble High Court are reproduced below.

“7. The respondent/assessee’s case is supported by several judgments. The Rajasthan High Court in Smt. Harshila Chordia v. ITO [2008]298 ITR 349 held as under:

“14. About this clause, many doubts were raised and enquiries were directed to the Board as to what shall constitute exceptional and unavoidable circumstances within the meaning of Clause (j). That led to issuance of Circular by the Board on May 31, 1977 ([1977] 108 1TR (St.) 8), which is published in Taxmann, Vol. 1, 1988 Edition. Significantly paragraph 4 of the aforesaid Circular .^ows very clearly that all the circumstances in which the conditions laid down in Rule 6DD(j) could be applicable cannot be spelt out. However, some of them which will seem to meet the requirements of the said rule are as follows:

(a) the purchaser is new to the seller; or

(b) the transactions are made at a place whether either the purchaser or the seller does not have a bank account; or

(c) the transactions and payments 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.

17. Significantly paragraph 5 reproduced herein below gives a clear indication that Rule 6DD(i) 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(i) 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 fulfillment of the conditions of paragraph 5 of the circular has clearly escaped the attention of the Tribunal. The circular clearly indicates that ordinarily where the Income-tax Officer is satisfied about the genuineness of the transaction and payment and identification of the cash payment is established, the Income-tax Officer shall record his satisfaction about the fulfilment of the conditions for allowing the benefit of Rule 6DD(j). 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 in by issuing the aforesaid circular.

19. This clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO v. Swastik Roadways as noticed above.

20. In this case, there is no dispute about the genuineness of the transactions and the payment and identity of the receiver are established. Therefore, the case clearly fell within the parameters of paragraphs 4 and 5 of the aforesaid circular read together.”

8. The respondent’s case is also supported by the judgment of the Supreme Court in Attar Singh Gurmukh Singh v. ISO [1991] 191 1TR 667/59 Taxman 11. After referring to Rule 6DD, the Supreme Court held:-

“7. In our opinion, there is little merit in this contention. Section 40-A(3) must not be read in isolation or to the exclusion of Rule 6-DD. 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 40-A (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 40-A(3) arc 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 40-A(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 6-DD 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 40-A(3) and Rule 6-DD that they arc 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: Miidiam Oil Company v. ITO [(1973) 92 ITR 519 (API] ]. 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 curtailing the freedom of trade or business.”

9. 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 expediency.

10. 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.”

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.

10. In view of the above, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on 9th March, 2016.

(A.D. JAIN) JUDICIAL MEMBER  (T. S. KAPOOR) ACCOUNTANT MEMBER

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