Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held that purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money and hence cash deposited directly in the bank account of the supplier does not come within the purview of section 40A(3)

Case Details:
ITA No.67/Kol/2013 AY: 2008-09
Sri Rampada Panda (Appellant) versus ITO (Respondent)
Date of Order: 07-10-2015

Case Laws referred:
Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC)
CIT vs CPL Tannery reported in (2009) 318 ITR 179 (Cal)
CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.7.2008 (Cal HC)
Anupam Tele Services vs ITO in (2014) 43 taxmann.com 199 (Guj)
Sri Laxmi Satyanarayana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (AP HC)
CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H)

Brief Facts of the Case:
The assessee was a proprietor of M/s Basanti Distributors engaged in the retail trading of poultry feeds . During the assessment year under appeal, the assessee made cash payments in excess of Rs. 20,000/- to a party M/s Pickme Feeds to the tune of Rs. 62,06,269/-. The books of accounts were not produced by the assessee before the Assessing Officer (AO). However, AO obtained information u/s 133(6) from one of the suppliers M/s Pickme Feeds from whom the assessee has purchased poultry feeds and from the ledger account of assessee as appearing in the books of Pickme Feeds produced by the said party , it was found that the assessee had made cash payments to the said party in excess of Rs. 20,000/- in a day in violation of section 40A(3) of the Act read with Rule 6DD of IT Rules. Accordingly, a sum of Rs. 62,06,269/- was disallowed u/s 40A(3) of the Act which was also confirmed by the CIT(Appeals).

Before ITAT the assessee argued that:

1. Payments were made for purchase of produce of animal husbandry or dairy or poultry farming and hence would fall under the exceptions provided in Rule 6DD(e)(ii) of the Income Tax Rules, 1962.
2. The assessee was having only one bank account in a co-operative bank and it practically takes 4-5 days for clearance of a single cheque issued by him to the supplier
3. The area in which the poultry feeds business were operated by the assessee were drastically affected by swine flu and hence the assessee was forced to make payments in cash.
4. Cash payments were made as per the forced directions of the concerned supplier M/s Pickme Feeds.
5. Cash payments were made in order to provide uninterrupted supply of poultry feeds to the farmers in the rural areas and as per business expediency.
6. The supplier of poultry feeds M/s Pickme Feeds had deputed their representatives to the assessee’s customer location ( i.e parties to whom poultry feeds is sold by the assessee) and received the sale proceeds directly from the said customer and deposited the same in the bank account of M/s Pickme Feeds for purchase of poultry feeds .
7. Genuineness of the payments never doubted by the revenue.

The ITAT was in agreement with the above contentions and held that the assessee had taken enough precautions from his side to ensure that the payee also don’t escape from the ambit of taxation on these receipts by directly depositing the cash in the bank account of the payee.

Important Excerpts from ITAT Judgment
It is pertinent to notice that the primary object of enacting section 40A(3) was two fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration. In the instant case, the cash has been deposited directly in the bank account of the supplier i.e M/s Pickme Feeds by the assessee.

The Hon’ble Apex Court in the case of CTO vs Swastik Roadways reported in (2004) 3 SCC 640 had held that the consequences of non-compliance of Madhyapradesh Sales Tax Act , which were intended to check the evasion and avoidance of sales tax were significantly harsh. The court while upholding the constitutional validity negated the existence of a mens rea as a condition necessary for levy of penalty for non-compliance with such technical provisions required held that “in the consequence to follow there must be nexus between the consequence that befall for non-compliance with such provisions intended for preventing the tax evasion with the object of provision before the consequence can be inflicted upon the defaulter.” The Supreme Court has opined that the existence of nexus between the tax evasion by the owner of the goods and the failure of C & F agent to furnish information required by the Commissioner is implicit in section 57(2) and the assessing authority concerned has to necessarily record a finding to this effect before levying penalty u/s 57(2).

Though in the instant case, the issue involved is not with regard to the levy of penalty, but the requirement of law to be followed by the assessee was of as technical nature as was in the case of Swastik Roadways (3 SCC 640) and the consequence to fall for failure to observe such norms in the present case are much higher than which were prescribed under the Madhya Pradesh Sales Tax Act. Apparently, it is a relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the 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 such nexus which defeats the object of provision so as to invite such a consequence. We hold that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions. Admittedly, this is not the case in the facts of the assessee herein. The assessee had directly deposited cash in the bank account of the supplier M/s Pickme Feeds which fact is also acknowledged by the concerned supplier by crediting the said cash receipts in the ledger account of the assessee and the same ledger account has been obtained by the Learned AO u/s 133(6) directly from the concerned supplier M/s Pickme Feeds. It is also pertinent to note that the Hon’ble Rajasthan High Court in the case of Smt.Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Raj) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally.

In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the addition made in the sum of Rs. 62,06,269/- u/s 40A(3) of the Act. Accordingly, the ground no. 1 of the assessee is allowed

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