Rule 6dd
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
14 February 2012
I had remitted Rent of 48000 cash deposited in the Parties Account.. Which is above Rs.20000/- Whether Rule 6DD benefit can be claimed or not?
14 February 2012
Benifit of Rule 6DD can be claimed if any of the condition mentioned there is satisfied
Querist : Anonymous
Querist :
Anonymous
(Querist)
15 February 2012
In Rule 6DD there is a provision that any payment made to any bank is exempt. Since I had remitted Cash in Bank to my Landlord's Account, whether Rule 6DD Benefit can be availed?
In Rule 6DD there is a provision that any payment made to any bank is exempt. Since I had remitted Cash in Bank to my Landlord's Account, whether Rule 6DD Benefit can be availed?
21 February 2012
Prepared By
CA Pankaj Jaiswal
Chartered Accountants
pankaj@anpllp.com
Our technical & legal analysis of the section 40A(3) Rule 6DD Circular 220 & Section 271 (1 ) ( c) revealed following things
1. Analysis of Section 40A(3)
2. Analysis of Rule 6DD
3. Learned Officer should adopt practical and not a technical approach –
4. Business Expediency to be tested
5. Reimbursement to Director means payment to Agent
6.. Circular no 220 Analysis under Judicial Pronouncement
7. Other Judicial Pronouncement
Analysis of Section 40A(3)
3) Where the assessee incurs any expenditure in respect of which 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, no deduction shall be allowed in respect of such expenditure.95a
(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 prescribed96, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors
Proviso used following words “considerations of business expediency and other relevant factors”
It means section care the business expediency since business expediency is not defined in the act so we have to study the various legal interpretation given by the learned judges so test the business expediency test. In coming paragraph we have given the detail of this.
Another part of this proviso is other relevant factor which is again not defined and scope for judgment of Assessee is left here. And also it shows that the circumstances mentioned in proviso are not exhaustive and it is inclusive and it includes other relevant factor and if the relevance decision is left to the assessee then how learned officer can impose penalty u/s 271 ( 1) (c )
Analysis of Rule 6DD
Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft.
6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment53b 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 rupees53c in the cases and circumstances specified hereunder, namely :—
(a) ……………………
(b) ……………………
(c) ……………………
(d ……………………
(e) ……………………
(f) ……………………
(g) ……………………
(h) ……………………
(i) ……………………
(j) ……………………
(k) where the payment is made by any person to his agent53k who is required to make payment in cash for goods or services on behalf of such person;
(1) ……………………
As per this rule 6 DD any payment made to the person who may be the agent can becovered under rule 6 DD later we will put the fact & cases where it was decided that directors are agent.
Learned Officer should adopt practical and not a technical approach –
As mentioned in the case of Girdharilal Goenka v. CIT (supra) the learned Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. In this disallowance
Business Expediency to be tested
if we analyze then we find that all the expenses are of business expediency like reimbursement of expenses is daily routine expenses employee or director does the expenditure in pieces and take the amount reimbursed in lump sum in this situation expenses went in pieces but they take reimbursement in agreegate and also we know that the Director & Employee are the agent of the company and any payment made to them as a reimbursement should be allowed as a expenditure. In above cases Mr A Kumar is a director to whom reimbursement made of Rs 74000/- and also travelling ticket booking is a reimbursement that need to be allowed. Repairs of car is also allowable on business expediency ground as we know many car mechanic does not have a bank account and giving them a cheque in practical situation is not possible.Also buying a gift from a retail shop and giving them cheque is not possible generally retailer does not accept the cheque when we go walk in.
Judicial Decisions about business expediency
Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667
(SC) while considering the constitutional validity of s. 40A(3) has also explained the reasons behind introduction of this provision. Various High Courts in the following cases have also taken the view that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in s. 40A(3) : (a) CIT vs. Rhydburg Pharmaceuticals Ltd. (2004)
187 CTR (Del) 485 : (2004) 269 ITR 561 (Del); (b) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989)
179 ITR 122 (Cal); (c) CIT vs. Chaudhary & Co. (1995) 129 CTR (All) 101 : (1996) 217 ITR 431 (All); (d) Shri
Mahabir Industries vs. CIT (1996) 136 CTR (Gau) 107 : (1996) 220 ITR 459 (Gau); (e) CIT vs. Chrome Leather
Co. (P) Ltd. (1999) 235 ITR 708 (Mad); (f) CIT vs. Mrinalini V. Sarabhai (2003) 184 CTR (Guj) 122 : (2004) 265
ITR 64 (Guj); (g) Walford Transport (Eastern India) Ltd. vs. CIT (1999) 240 ITR 902 (Gau).
CIT v. Hardware Exchange (1991) 190 ITR 61 (Gau), which was overruled. The Hon'ble Supreme Court in the said case has held that s. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. The section must be read along with the rule. Further, it was held that the terms of s. 40A(3) are not absolute considerations of business expeditious and other relevant factors are not excluded. Genuine and bona fide, transactions are not taken out of the sweep of the section.
In the case reported in Hasanand Pinjomal v. CIT (supra), the jurisdictional High Court held that cl. (j) of r. 6DD sets out four circumstances in which the rigour of the rule contained in sub-s. (3) of s. 40A has to be relaxed. One of such circumstances is, that where payment in the manner provided in s. 40A(3) is not practicable. It was held by the Hon'ble High Court that practicability for the purposes of r. 6DD(j)(2) must be judged from the point of view of the businessman and not of the Revenue.
For the purposes of carrying on his business, a businessman may have to make payment otherwise than by crossed cheque or draft in certain circumstances voluntarily and not out of sheer necessity. The legislature, therefore, prescribed in the second proviso to s. 40A(3) business expediency as one of the relevant factors. Therefore, practicability has to be judged from the angle of the businessman and not of the Revenue.
Analysis of Circular under judicial pronouncement
A further relaxation has been made in the provision in the Income-tax Rules requiring payments for business expenses exceeding Rs. 2,5001 to be made by crossed cheques or drafts.
The relaxation cover payments in cash in excess of Rs. 2,5001 made with a view to avoid difficulty to the payee or where it was not practicable to pay in cheque or draft [rule 6DD(j)]2. The availability of this benefit depends upon the nature of transaction as well as the need for its expeditious settlement. The assessee making such payments is, however, required to satisfy the Income-tax Officer about the genuineness of the payment and the identity of the payee.
There is also a residuary exception under clause (j) of rule 6DD which provides that the provision for the disallowance of the expenditure might not be applied if the assessee (i) establishes that the payment could not be made by crossed bank cheque or draft due to exceptional or unavoidable circumstances, and (ii) also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.
After considering representations from various quarters that the existing exceptions were not helpful in preventing disallowance of substantial payments for purchases of commodities on the ground that these were made in cash in amounts exceeding Rs. 2,500, the Central Board of Direct Taxes have now liberalised this residuary clause (j) of rule 6DD so as to avoid disallowance of such payments in genuine cases.
( Press Note : Dated 19-11-1970, issued by Ministry of Finance. )
386. Circumstances when Income-tax Officer can relax requirement of making payments in excess of Rs. 2,5001 by crossed cheques under clause (j)2 of rule 6DD
1. Clause (j) of rule 6DD provides that no disallowance under section 40A(3) shall be made where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft—
a. due to exceptional or unavoidable circumstances; or
b. because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof,
and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.
2. It would be seen that where payment of a sum exceeding Rs. 2,500 is made, otherwise than by a crossed cheque/draft, the assessee besides furnishing evidence as to the genuineness of the payment and the identity of the payee, is required to satisfy the Income-tax Officer that his case falls under any one of the circumstances mentioned in (a) and (b) above, if he claims that no disallowance should be made under section 40A(3).
3. Various representations have been received by the Board regarding the difficulties that are being experienced by the taxpayers due to lack of uniformity in the interpretation of the provisions of rule 6DD(j) by the Income-tax Officers. The Board have considered these representations and have decided to lay down certain guidelines to ensure uniformity of approach among the Income-tax Officers in this behalf.
4. All the circumstances in which the conditions laid down in rule 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are :
a. the purchaser is new to the seller, or
b. the transactions are made at a place where 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 purchased the goods; or
f. specific discount is given by the seller for payment to be made by way of cash.
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).
6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule 6DD(j).
Circular : No. 220 [F. No. 206/17/76-IT (A-II)], dated 31-5-1977EXPLAINED IN - The abovesaid circular was commented upon Girdharilal Goenka v. CIT [1989] 179 ITR 122 (Cal.) with the following observations :
“. . . The circular of the Board is not exhaustive but only illustrative. The Income-tax Officer has to take a pragmatic view of the matter. The Income-tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances.” (p. 128)
EXPLAINED IN - In CIT v. Trinity Traders [1987] 163 ITR 381 (Guj.), the above circular was referred to with the following observations :
“The circular makes it clear that these are merely illustrative instances of cases in which rule 6DD(j) would be applicable.
EXPLAINED IN - In Rajarajeswari Weaving Mills v. ITO [1978] 113 ITR 405 (Ker.), the above circular was referred to with the following observations :
“. . . We do not wish to get enmeshed in the intricacies as to the exact scope and purview of a circular under section 119 of the Income-tax Act, and as to whether, and, if so, to what extent, such a circular can fetter the judicial or quasi-judicial discretion of authorities functioning under the Act. In this particular case, the circular that we have noticed earlier is dated May 31, 1977, and the order of the Commissioner with respect to which the question has arisen in these appeals is dated June 21, 1976. It is obvious, therefore, that the circular in question can have no application to these cases. We are not impressed by the argument of the assessee that the circular is only clarificatory or declaratory.” (pp. 409-410)
See also CIT v. Union Agencies [1987] 166 ITR 529 (Delhi).
EXPLAINED IN - The above circular was explained in S. Venkata Subba Rao v. CIT [1988] 173 ITR 340 (AP), with the following observations :
“Mr. Y. Ratnakar relied upon a circular issued by the Central Board of Direct Taxes, being Circular No. 220, dated May 31, 1997 ([1997] 108 ITR (St.) 8). We have perused the said circular. It only elaborates and illustrates—though not exhaustively—the circumstances in which it is not practicable to comply with the requirements of section 40A(3). The circular nowhere says that it is not necessary for a person claiming the benefit of rule 6DD(j) to establish the genuineness of the payment and the identity of the payee. On the contrary, the said requirement is repeatedly reiterated. We are, therefore, of the opinion that the said circular cannot in any manner advance the case of the assessee.” (p. 345)
EXPLAINED IN - The above circular was explained in Paul Bros. v. CIT [1990] 186 ITR 356 (Gauhati), with the following observations :
“Pursuant to the provision in sub-section (3) of section 40A, rule 6DD was promulgated and Circular No. 220 was issued by the Central Board of Direct Taxes on May 31, 1977. Section 40A, rule 6DD and the Circular No. 220 recite that after March 31, 1969, any payments on account of expenditure of more than Rs. 2,500 will have to be made by a crossed cheque or by a crossed bank draft unless exempted by the revenue authorities. . . .
The Indian Parliament incorporated the above provisions to check evasion of taxes. Even in genuine cases where payments are shown to have been made in cash, the assessee is put to the necessity to prove that in the area of business, banking facilities are not adequate. Therefore, impelled by genuine difficulty, the assessee had to make payment in cash. The same idea is writ large in the Rules. The assessee will have to show that there was no way left for the assessee except to pay in cash. In the nature of things whether in the statute, rules or circulars, all the contingencies cannot be enumerated exhaustively. Parliament referred to the inadequacy of facilities in section 40A. The rule-making authorities illustrated some of the circumstances in the Rules. The Revenue supplemented the further circumstances when exemption can be claimed and allowed. (pp. 357-358)
RELIED ON IN - The above circular was relied on in CIT v. Meghdoot Sales [1993] 200 ITR 490 (Delhi), with the following observations :
“In our opinion, the answer to the said question which has been referred is self-evident. The Income-tax Tribunal has found as a fact that cash payments were made only under exceptional and unavoidable circumstances. This conclusion has been arrived at by the Tribunal after examining the entire material which was placed before it. It has further observed that the genuineness of the transaction was not in dispute. This being so, on the facts found by the Tribunal, the case not only fell within the provisions of rule 6DD(j), but the assessee was also entitled to claim the benefit of Circular No. 220, dated May 31, 1997, issued by the Central Board of Direct Taxes. In the said circular, it is, inter alia, stated that, if a seller refuses to accept payment by way of crossed cheque or crossed draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from the particular seller, then even if the payment is made by cash, the same would be allowable as a deduction.” (pp. 492-493)
EXPLAINED IN - Janambhumi v. CIT [1998] 99 Taxman 451/225 ITR 517 (Gau.) with the following observations :
“The circular itself indicates that these are not the only circumstances which can be said to be exceptional and unavoidable. There may be some other exceptional and unavoidable circumstances which may not be put in writing. The Commissioner (Appeals) upheld the order of the ITO on the ground that the assessee failed to establish exceptional and unavoidable circumstances under which payment had to be made in cash exceeding Rs. 2,500. While considering the exceptional circumstances the business exigencies, convenience and security should also be looked into.”
EXPLAINED IN - Shri Mahabir Industries v. CIT [1996] 220 ITR 459 (Gau.) with the following observations :
“Circular No. 220, dated May 31, 1977, specifies some of the circumstances in which rule 6DD(j) of the Income-tax Rules, 1962, would apply. The circular itself indicates that these are not the only circumstances which can be said to be exceptional and unavoidable. Exceptional and unavoidable circumstances may vary depending on the facts of each case. Merely because the parties have bank accounts and there is a long gap between submission of the bill and making payment, the conclusion cannot be arrived at that the assessee failed to show exceptional and unavoidable circumstances. Before coming to a decision regarding failure to establish exceptional and unavoidable circumstances, the authority must give reasons why it came to such conclusions.”
COMMISSIONER OF INCOME –TAX V. RAJA PAL AUTOMOBILES (2010) 320 ITR 185 (ALL) PRAKASH KRISHNA & RITU RAJ AWASTHI J J (DECIDED ON 30-06-2009)
Income-tax Act, 1961 – section 40A(3) read with rule 6DD of the Income-tax Rules, 1962 – business expenditure – disallowance – payments made otherwise than by crossed cheques or bank drafts – nature of business and evidence in form of bills and cash memos – exceptional circumstances explained by the assessee – whether cash payments to be allowed – held, yes.
If Director is an Agent then Payment is covered under rule 6DD
In the case of BSNL it is already decided that any payment made to agent is not disallowed u/s 40A(3).
Now we analyze that the Reimbursement Payment made to Mr A Kumar ( Director ) will be treated as a payment to Agent or not . Actually Directors are agents of the Company in transactions they enter into on behalf of the Company, though they are not agents for individual shareholders or members. A director may be an employee, a servant or even a "worker" of the Company. He occupies the position of a trustee, though he is not a trustee in the strict sense in respect of the Company’s properties and funds.
Director’s liability arises because of their position as agents or officers of the Company as also for being in the position of trustees or having fiduciary relation with the Company or its shareholders.
Some of these liabilities are in contract, some are in tort, some are under the criminal law and others are statutory, i.e., under the Companies Act, 1956 and other laws. The courts have, in deciding the liability of Directors, taken into consideration a director’s position as a whole.
Contractual Liability: -
Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly, and act with such care as is reasonably expected from him, having regard to his knowledge and experience.
In R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company."
Express liability will usually arise only when a director has personally guaranteed the performance of a contract. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word "limited" or its abbreviation. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose v. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber.
As far as fiduciary duties/obligations are concerned, any breach by any director would visit them with liability. Our Supreme Court has considered this issue of fiduciary liability. It has been observed in Official Liquidator vs. PA Tendulkar.
Director As An Agent - Liabilities Under Contracts Act - 1872
Sec 182.of the Indian Contract Act, 1872 says that "An 'agent' is a person employed to do an act for another or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the principal"
Where one employs another to do an act for him or to represent him in dealings with third parties, the person so employed is called an agent. In the theory of the English law, the agent is a connecting line between the principal & third parties. He is an intermediary who has the power to create legal relationships between the principal and the third parties.
Sec. 2(13) of the Companies Act, 1956 defines that "'director' includes any person occupying the position of a director by whatever name called"
Thus, director is an individual lawfully appointed to the Board of Directors of a company which is duly constituted to direct, control and supervise the activities and affairs of a company. Directors of a company are in the eye of law agents of the company for which they act and the general principles of the law of principal and agent regulate in most respects the relationship of the company and its directors. (Somayazula vs. Hope Prodhome & Co. (1963) 2 An W.R. 112.)
The test of agency is whether the person is purporting to enter into transaction on behalf of the principal or not. In order to constitute an agency, it is not necessary to have a formal agreement.
Director as an agent: The Madras High Court observed that normally a director is not an agent of the Company but where he acts as a director- in- charge and corresponds with another party to bring about a contract he will act as an agent. As such the liability is of the company and not the agent personally. (Puddokottah Textiles Ltd. vs. B.R. Adityan (1975) 88 Mad. L. W. 688, 790)
The Supreme Court has described the office of a Director thus,
"The Director of a Company is not a servant but an agent inasmuch as a company cannot act in its own person but only through its directors, who qua the Company have a relationship of an agent to the principal." (Ramprasad Vs. Commissioner of Income Tax (1973) A. Sc. 637, 640; Commissioner of Income Tax Vs. Man Mohandas (1966) A. Sc. 743; 59, I.T.R. - 699)
A managing Director may have a dual capacity. He may both be a director and an employee. He has not only the persona of a director but also the persona of an employee or an agent depending on terms of his employment and the Company's Articles Association. The term 'employee' is facile enough to cover both these relationships.
An agent though bound to exercise his authority in accordance with lawful instructions given to him is not subject to the direct control and supervision of the principal. A Managing Director of a Company if he is to act under the directions of a board of Directors is a servant.
As a company is an artificial person and can only contract through its agents, the normal mode of signing is to use the words "on behalf of" so and so company before the signature of the agent signing, and if an agent so signs, no personal liability will attach to him. Directors are agents of the company to the extent of the authority delegated to them. Hence, where directors make a contract in the name of, or purporting to bind the company, it is the company- the principal- which is liable on it and not the directors. The directors are not personally liable unless it appears that they took personal liability.
Directors are not personally liable under a contract which is lawful and which they have made in the proper exercise of their authority. Directors purchased goods for their company and agreed with the supplier to allot him debentures for the price. Before the debentures could be issued, the company went into liquidation. The supplier was held not liable to make the directors personally liable under the contract (Elkington & Co. vs. Hurter, (1982) 2 Ch 452) .
Relevant Case of Section 40A ( 3 )
SRI RENUKESWARA RICE MILLS vs. INCOME TAX OFFICER
ITAT, BANGALORE ‘B’ BENCH
Deepak R. Shah, A.M. & Joginder Singh, J.M.
ITA No. 1102/Bang/2002
27th August, 2004
(2005) 93 TTJ (Bang) 912 : (2005) 93 ITD 263 (Bang)
Section 40A(3), 208, 234B, Rule 6DD(f), Rule 6DD(l),
Asst. Year 1998-99
Decision in favour of Assessee
Counsel appeared :
A. Shankar, for the Appellant : K.N. Shyam Sundar, for the Respondent
Order
deepak r. shah, A.M. :
Relevant Case of Section 40A ( 3 )
SRI RENUKESWARA RICE MILLS vs. INCOME TAX OFFICER
ITAT, BANGALORE ‘B’ BENCH
Deepak R. Shah, A.M. & Joginder Singh, J.M.
ITA No. 1102/Bang/2002
27th August, 2004
(2005) 93 TTJ (Bang) 912 : (2005) 93 ITD 263 (Bang)
Section 40A(3), 208, 234B, Rule 6DD(f), Rule 6DD(l),
Asst. Year 1998-99
Decision in favour of Assessee
Counsel appeared :
A. Shankar, for the Appellant : K.N. Shyam Sundar, for the Respondent
Order
deepak r. shah, A.M. :
This appeal by the assessee is arising out of the order of learned CIT(A), Davangere, dt. 2nd Jan., 2002 pertaining to asst. yr. 1998-99. The only issues in appeal is regarding disallowance of Rs. 2.04 lakhs, being 20 per cent of the sum paid to M/s K.Parameswarappa & Co. (KP) invoking provision of s. 40A(3) and charging of interest under ss. 234A and 234B.
The assessee is carrying on business of rice mill at Bhadravathi, a small town in Shimoga District of Karnataka. The assessee for the purpose of purchase of rice approached the regional market yard at Davangere. It is stated that purchase and sale of rice being agricultural commodity is regulated under the RMC Act and transaction takes place at market yard only. The Assessee instead of paying cash/cheque/draft to KP prepares a challan and deposits the cash to the account of KP. Such receipted challan is produced to KP and goods are purchased. The AO on the basis of accounting entries in the books of KP noted that they have recorded the receipt by way of cash. Thus the assessee is said to have purchased the goods by paying cash and not by way of crossed cheque/draft. He, therefore, invoking the provision of s. 40A(3) disallowed a sum of Rs. 2,04,000 being 20 per cent of the sum of Rs. 10.20 lakhs paid to KP. The AO did not entertain the argument of the assessee as to the exception provided in cl. (f) and cl. (l) of r. 6DD. He noted that KP is not agent of assessee. He also held that the assessee has not purchased the goods from agriculturists but KP who is a full-fledged dealer and not merely a commission agent. Even the contention that amount is remitted into the bank account of KP was turned down. Learned CIT(A) held that payment to the party by way of DD/cheque only has to be considered and if the payment is made otherwise than by cheque/draft it is in contravention of provision of s. 40(A)(3). The assessee is in further appeal before us. Learned counsel for the assessee, Shri. A. Shankar, submitted that the assessee has dealt with M/s K. Parameswarapa & Co., (KP) as an agent, who is required to make payment in cash to the agriculturists for procurement of paddy and hence, on account of exigencies of business, payments were deposited directly into the bank accounts of the agents by cash. The payment to KP is also covered under the exceptions granted under r.6DD(f) of the IT Rules, inasmuch as they constitute payment made for purchase of agricultural produce, through their agent.
The payments made to KP are to an agent only as KP is registered as an agent under the Karnataka
APMC Act and further, the nature of bills issued by them indicates that they are charging commission separately on the assessee. Further, the price of the goods is passed on to the agriculturists and the commission is retained by KP which clearly indicates that KP is acting as an agent of the assessee. In the end, he submitted that the spirit and intent of the entire provision of s. 40A(3) of the Act, is to ensure monies are routed through banking channels, which has been complied in all respects inasmuch as the amounts were deposited into the bank accounts of the supplier in a place other than where the assessee is carrying on the business and the entire proof of the same has been furnished to the AO which has not been disputed and hence, ought not to have invoked the provision of s.40A(3) of the Act.
Learned Departmental Representative, on the other hand, strongly supported the orders of authorities below. He submitted that the assessee is purchasing the goods from open market at market yard. KP has issued total bill for the goods sold and not merely commission. Thus KP has sold goods not as an agent but as a trader. Clause (l) of r.6DD will apply provided the payment is made by the assessee to his agent and not agent of somebody else. In this case KP is agent of farmers and not that of the assessee. Hence, cl. (l) of r. 6DD will not apply. Similarly, cl. (f) of r. 6DD will also not apply as the payment is not made by the assessee to the cultivator or grower of the product.
Since the payment is made in cash though to the bank account of KP, the same is not in accordance with s. 40A(3) and hence, the disallowance is to be upheld.
We have carefully considered rival submissions and relevant facts of the case. Hon’ble Supreme Court while interpreting the provision of s. 40A(3) in the case of Attar Singh Gurmukh Singh, etc.vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC) at pp. 672 and 673 held thus : "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 restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AO 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 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 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 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. [See Mudiam Oil Co. & Ors. vs. ITO & Ors. (1973) 92 ITR 519 (AP)]. If the payment is made by a crossed cheque drawn on a bank or 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." (emphasis, italicized in print, supplied)
The Hon’ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted that s. 40A(3) is intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of black money for business transactions.
Relevant Case of Section 40A ( 3 )
INCOME TAX OFFICER vs. KENARAM SAHA & SUBHASH SAHA*
ITAT, KOLKATA SPECIAL BENCH
Vimal Gandhi, President; G.D. Agrawal, Vice President & D.K. Tyagi, J.M.
ITA No. 1545/Kol/2007; Asst. yr. 2004-05
7th March, 2008
(2008) 116 TTJ (Kol)(SB) 289 : (2009) 116 ITD 1 : (2008) 8 DTR 124
Section 40A(3), 80HHC, Expln. (baa), RULE 6DD(b), RULE 6DD(f), RULE 6DD(h), RULE 6DD(k), RULE
6DD(l)
Asst. Year 2004-05
Decision in favour of Revenue
Counsel appeared :
Sushil Kumar & S. Guha, for the Revenue : S.K. Tulsiyan, Gautam Banerjee & S.C. Sarkar, for the Assessee : S.
Bandyopadhyay & Somnath Ghosh, for the Interveners
ORDER
by the bench :
Relevant Case of Section 40A ( 3 )
INCOME TAX OFFICER vs. KENARAM SAHA & SUBHASH SAHA*
ITAT, KOLKATA SPECIAL BENCH
Vimal Gandhi, President; G.D. Agrawal, Vice President & D.K. Tyagi, J.M.
ITA No. 1545/Kol/2007; Asst. yr. 2004-05
7th March, 2008
(2008) 116 TTJ (Kol)(SB) 289 : (2009) 116 ITD 1 : (2008) 8 DTR 124
Section 40A(3), 80HHC, Expln. (baa), RULE 6DD(b), RULE 6DD(f), RULE 6DD(h), RULE 6DD(k), RULE
6DD(l)
Asst. Year 2004-05
Decision in favour of Revenue
Counsel appeared :
Sushil Kumar & S. Guha, for the Revenue : S.K. Tulsiyan, Gautam Banerjee & S.C. Sarkar, for the Assessee : S.
Bandyopadhyay & Somnath Ghosh, for the Interveners
ORDER
by the bench :
In the above mentioned 5 cases, the Hon’ble President, Tribunal constituted a Special Bench under s. 255(3) of the IT Act, 1961. The common issue involved in all these appeals is with regard to disallowance under s. 40A(3) of the Act.
2. Sri S.K. Tulsiyan, advocate, appearing on behalf of (i) M/s Kenaram Saha & Subhash Saha and (ii) Nadeem Iqbal led the arguments from assessees’ side. He argued the matter at great length. His arguments/submissions can
be summarized as follows :
2.1 That s. 40A(3) was introduced by Finance Act, 1968 w.e.f. 1st April, 1968. In the Memorandum Explaining the Provisions in the Finance Bill, 1968, it was explained that the purpose behind the enactment of provisions of s.40A(3) was to curb wasteful and lavish expenditure and to counter tax evasion. It was felt by the Government that the assessees claim expenditure incurred in cash which frustrate proper investigation by the Department as to identity of payee and reasonableness of payment. Sec. 40A(3) was designed to counter tax evasion through such claims or expenditure in cash.
Therefore, obviously the provisions of s. 40A(3) are attracted only in cases where the genuineness of the expenditure incurred in cash is in doubt. He stated that right at the time of insertion of s. 40A(3) in the Act, there was apprehension that the provisions may cause undue hardship and inconvenience to certain assessees in respect of cases where payment by cheque is not feasible due to some genuine reasons. So powers were given to the CBDT to notify in the IT Rules exceptions to the provisions of s. 40A(3) having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. Accordingly, the nature and circumstances under which provisions of s. 40A(3) will not be operative were specified in the IT Rules vide r. 6DD under Notification No. SO-624, dt. 14th Feb., 1969. Apart from the specific exceptions incorporated in the Rules, there was also a residuary exception, i.e. r. 6DD(j),which stated that where the taxpayer establishes that the payment could not be made by crossed cheque or draft due to exceptional or unavoidable circumstances, no disallowance under s. 40A(3) was to be made. The CBDT also issued Circular No.
220, dt. 31st May, 1977 [1977 CTR (Jour) 259 : (1977) 108 ITR (St) 8], wherein CBDT spelt out some of the circumstances which meet the requirement of r. 6DD(j). In the said circular itself the CBDT has mentioned that all the circumstances in which the conditions laid down in r. 6DD(j) would be applicable, cannot be spelt out. Thus it is clear that the circumstances spelt out in Circular No. 220 were inclusive by way of examples and not exhaustive.
2.2 That Finance Act, 1995 amended s. 40A(3) w.e.f. 1st April, 1996 by which disallowance under s. 40A(3) was reduced to 20 per cent of the expenditure claimed. Clause (j) of r. 6DD was also omitted w.e.f. 25th July, 1995.
The reasons behind these twin changes have been spelt out in the Memorandum Explaining the Provisions in the Finance Bill, 1995 [(1995) 124 CTR (St) 225 : (1995) 212 ITR (St) 356]. As per the above Explanation, cl. (j) was introduced at a time when banking facilities had yet to take routes in rural areas. Now banks have established themselves in rural areas and a vast branch network is available. Therefore, it was felt that cl. (j) of r. 6DD has outlived its purposes.
2.3 That second proviso to s. 40A(3) has directed the rule making authority to provide exception where s. 40A(3) would not be applicable considering (i) banking facilities, (ii) consideration of business expediency and (iii) other relevant factors. Clause (j) of r. 6DD was a residuary clause which took care of all the cases where payment by crossed cheque or bank draft was not practicable considering the banking facilities or business expediency or other relevant factors. The legislature while deleting r. 6DD(j) has only considered the availability of banking facilities in the rural areas and having satisfied about the banking facilities available in the rural areas, omitted r.6DD(j). However, no other rule is inserted in place of r. 6DD(j) so as to take care of the cases where the payment by account payee cheque/draft was not practicable due to business expediency and other relevant factors.
Therefore, the moot question is whether by omission of r. 6DD(j) the intention of the legislature is to disallow 20 per cent of the genuine and legitimate claim of bona fide business expenditure merely because the payment is made in cash exceeding Rs. 20,000 ? Whether the business necessity or commercial expediency recognized all along for the purpose of allowance of any expenditure now no longer to be a recognized reason while considering the disallowance of such expenditure ? He submitted that if the interpretation made by the AO is accepted, it would amount that 20 per cent of the genuine and bona fide expenditure incurred by an honest taxpayer would be disallowed merely because the payment was made in cash exceeding Rs. 20,000 even if there was business necessity or commercial expediency making the payment by account payee cheque/draft impracticable. At the same time, 80 per cent of the bogus expenditure by unscrupulous taxpayer would be allowed because of disallowance of just 20 per cent provided in s. 40A(3). He, therefore, submitted that s. 40A(3) and rules framed there under should be interpreted keeping in view the object of introduction of s. 40A(3). He stated that Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667
(SC) while considering the constitutional validity of s. 40A(3) has also explained the reasons behind introduction of this provision. Various High Courts in the following cases have also taken the view that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in s. 40A(3) : (a) CIT vs. Rhydburg Pharmaceuticals Ltd. (2004)
187 CTR (Del) 485 : (2004) 269 ITR 561 (Del); (b) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989)
179 ITR 122 (Cal); (c) CIT vs. Chaudhary & Co. (1995) 129 CTR (All) 101 : (1996) 217 ITR 431 (All); (d) Shri
Mahabir Industries vs. CIT (1996) 136 CTR (Gau) 107 : (1996) 220 ITR 459 (Gau); (e) CIT vs. Chrome Leather
Co. (P) Ltd. (1999) 235 ITR 708 (Mad); (f) CIT vs. Mrinalini V. Sarabhai (2003) 184 CTR (Guj) 122 : (2004) 265
ITR 64 (Guj); (g) Walford Transport (Eastern India) Ltd. vs. CIT (1999) 240 ITR 902 (Gau).
2.4 It is further contended by Sri Tulsiyan, learned counsel, that under the IT Act, what is chargeable to tax is the "income" of the assessee. Sec. 2(24) of the IT Act defines the word "income" which includes, inter alia, profits and gains. The word "profit" has not been defined in the Act. But Black’s Law Dictionary, Eighth Edition gives the meaning of the word "profit" as under : "The excess of revenues over expenditures in a business transaction."
It is needless to point out that bona fide business expenditure cannot but form part of the profits and gains of business or profession. A legitimate and genuine business expenditure cannot even be deemed to be income which can be said to be received or accrued or arose to the assessee. He further submitted that as per Art. 265 of the Constitution of India, no tax shall be levied or collected except by authority of law. Such dictum of the Constitution would necessarily exclude any interpretation of the statute that would result in denial of deduction of genuine business expenditure and consequent undue enrichment of the exchequer. He further relied upon the decision of Hon’ble apex Court in the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) in support of his contention that the onus of establishing that the conditions of taxability are fulfilled is always on the Revenue and the statutory provisions must be construed so that absurdity and mischief may be avoided.
2.5 He fairly pointed out that Hon’ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma vs. Union of India (2000) 158 CTR (AP) 35 : (1999) 239 ITR 687 (AP) and the Kerala High Court in the case of Kamath Marbles vs. ITO (2003) 182 CTR (Ker) 319 : (2003) 260 ITR 470 (Ker) have upheld the constitutional validity of s. 40A(3) and of r. 6DD after amendment by the Finance Act, 1995 and the IT (Fourth Amendment) Rules, 1995 respectively.
2.6 He further submitted that while upholding the constitutional validity of amendment in s. 40A (3), the Andhra Pradesh High Court in the case of Mangayamma Ch. vs. Union of India (supra) mentioned the exceptions provided in the second proviso of s. 40A(3). Therefore, even after the deletion of cl. (j) of r. 6DD, the exceptions mentioned in second proviso of s. 40A(3) would still continue to apply in view of the substantive provisions, i.e.,second proviso to s. 40A(3). He also relied upon the decision of Hon’ble apex Court in the case of Union of India vs. A. Sanyasi Rao (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC) in support of his argument that the heads of legislation in the lists should not be construed in a narrow and pedantic sense, but should be given a large and liberal interpretation.
2.7 He submitted that s. 295 of the Act empowers the CBDT to make rules by notification in the Gazette of India for carrying out the purposes of the IT Act. 1961. The rules are the delegated legislation empowering the Government to specify measures for fulfilling the intended purpose of the primary or principal legislation. Therefore, the rules cannot, in any way, restrict the general powers of the substantive legislation. In this view of the matter, even after the omission of r. 6DD (j), not only the purpose for which s. 40A(3) was enacted but the principles on which such law is to be administered remained unaltered. The sanctity of the legislation, i.e. s. 40A(3) including second proviso thereto, has not been affected by the amendment of r. 6DD(j).
2.8 He further submitted that as per second proviso to s. 40A(3), consideration of business expediency is a necessary consideration. The expression "commercial expediency" has been explained by their Lordships of Hon’ble apex Court in the case of S.A. Builders Ltd. vs. CIT (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC) in which it was held that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business.
2.9 That the Tribunal, Kolkata ‘C’ Bench in the case of Kumardev Seth vs. ITO vide ITA No. 1460/Kol/2006 for asst. yr. 2003-04 has allowed the relief on the considerations of business expediency and the Hon’ble jurisdictional High Court has upheld the order of the Tribunal in ITA No. 386/Kol/2007 vide order dt. 21st June, 2007. Copies of the aforesaid orders were furnished before us.
2.10 Coming to the specific facts of the case, Sri Tulsiyan submitted that the assessee M/s Kenaram Saha & Subhash Saha is an AOP. It is appointed by the Government of West Bengal as a big dealer in the public distribution system for distribution of kerosene oil in the State of West Bengal. In the State of West Bengal there is a chain, i.e. agent—big dealer—M.R. dealer for efficient running of public distribution system (PDS) of kerosene oil. The assessee is a big dealer in such chain. The Department of Food and Supplies issues allotment memo to the assessee for purchase of kerosene oil of a specified quantity from a specified agent. Similarly, allotment memos are issued to the assessee for supply of kerosene oil to the specified M.R. dealers in specified quantities. The purchase price to be paid to the agent as also the sale price to be charged from M.R. dealer is periodically determined by the Department of Food and Supplies. As per the allotment memo issued to the assessee by the Department of Food and Supplies for the purchase of kerosene oil, the assessee is required to make the payment in cash. In support of this contention, he produced before us the copies of allotment letters issued by Sub-divisional Controller, Food and Supplies, Jangipur. He stated that the assessee has only given a few
allotment letters as an example and in all other allotment letters similar directions are given. In the allotment letter, there is clear direction to the agent to deliver the specified quantity of kerosene oil to the assessee on cash payment. He, therefore, stated that when the assessee is working as a licensee being a part of the public distribution system of the Government of West Bengal, it is bound to make the payment as directed by the Government of West Bengal. The assessee cannot unilaterally decide the mode of payment to the agent. He,therefore, submitted that in the case of the assessee neither the identity of the seller nor the genuineness of the purchase is doubtful. Moreover, the payment has been made as per the rate fixed by the Government of West Bengal. Therefore, in the case of the assessee, provisions of s. 40A(3) are not applicable. In any case, the assessee’s case would squarely fall within the exception provided in second proviso to s. 40A(3). He further contended that the assessee’s case would also fall under cls. (b) and (l) of r. 6DD. He stated that the agent to whom the payment was made by the assessee was the agent of the Government of West Bengal and as per the direction of the Government of West Bengal through the office of the Sub-divisional Controller, Food and Supplies, Jangipur, the assessee was directed to make the payment in cash to such agent and, therefore, the condition of r. 6DD(b) would be squarely applicable. The payment to the agent of Government of West Bengal is
payment to the Government of West Bengal. He submitted that the rule should be interpreted liberally so as to serve the object of second proviso to s. 40A(3) and to avoid undue hardship to the bona fide and honest taxpayers. In view of the above, it was contended by the learned counsel that the CIT(A) has rightly allowed the appeal of the assessee. The order of the CIT(A) should, therefore, be sustained.
2.11 Coming to the facts in the case of Nadeem Iqbal vide ITA No. 664/Kol/2007, it is stated by the learned counsel that the assessee is an individual who derives income from trading business in electronic items on wholesale-cum-retail basis. He carried on the business with a meager capital. The appellant was new in this line of trade and had a small capital. Therefore he had to employ the services of an agent for the purchases. It is submitted that it is the prevalent practice in Asansol and nearby region that the agents procure orders from traders at Asansol and obtain supplies from sellers in Kolkata. The agents also collect cash from the buyer to make the payments to the sellers at Kolkata. Since the assessee was new to the trade, cash payment was insisted. Moreover, the assessee had a limited capital and if cheque payments had been made, the parties would have received their
credit after a substantial period, which would have affected the business of the assessee very badly. He submitted that the CIT(A) has rightly appreciated the facts of the case and allowed relief to the assessee. The order of the CIT(A) should be sustained.
2.12 Sri Tulsiyan speaking on behalf of the assessees who are engaged in the business of manufacture and export of leather goods submitted that such assessees purchase hides from the producers thereof. Hides and skins obtained from slaughtered and dead animals would easily rot and decay unless proper precautions are taken. Tanneries are not often located very near to the source of raw hides and skins. So preservation of these articles assumes great importance. The sellers process these raw hides with wet or dry salting or drying, which process is called ‘curing’. So the sellers actually ‘cure’ the raw hides for converting them into saleable commodities. In that view, the sellers are not mere merchants, but at the same time producers of saleable hides. He referred to definition of ‘producer’ from the Bakshi’s The Law Lexicon, Vol. 2 and submitted that the word ‘producer’ has a very wide meaning and will include the person who trades or deals in such production. He, therefore, submitted that the purchase of hides and skins is squarely covered under r. 6DD(f)(ii). It is further submitted by him that the sellers produced the hides and skins in a cottage industry and, therefore, payment made to them would also be covered by r. 6DD(g).
3. Shri Gautam Banerjee, chartered accountant, appeared for and on behalf of Chong Hing Tannery vide ITA No. 2114/Kol/2006 and Li Chong Tannery vide ITA No. 1696/Kol/2007. He adopted the arguments advanced by Sri S.K. Tulsiyan, advocate and in addition stated that both the assessees, i.e. Chong Hing Tannery and Li Chong Tannery derived income from the business of tanning of hides to finished leather. The assessee purchased hides from the suppliers. The raw hide in its original stage is of perishable nature and cannot be brought to market. The suppliers of the assessee buy raw hides on piece-meal basis from villagers. Then they carry out various processes upon such raw hides. After those processes, the hides are sorted out according to size and thickness and then sell them in bulk. Since the suppliers process the raw hides so as to make fit for the purpose of commercial use, they are the producers of hides within the meaning of r. 6DD(f) of the IT Rules. He also referred to the certificate issued by Central Leather Research Institute, stating the processes which are carried out by the small suppliers/collectors of raw hides and skins so as to make them marketable. Copy of such certificate is produced before us. On the above basis, it is claimed by him that the suppliers from whom the assessees purchased the hides are the producers of such hides and, therefore, the payment made to them is duly covered by r. 6DD(f). He, therefore, contended that the disallowance made by the AO and sustained by the CIT(A) under s. 40A(3) was not justified.
Sri S. Bandyopadhyay, advocate, appeared as an intervener in the case of Paramount Leathers vide ITA No. 826/Kol/2007. He relied upon the arguments advanced by Sri S.K. Tulsiyan, advocate and stated that the producer can be a small concern, it can be a big concern also which may engage in the business of producing as well as trading of hides and skins. He submitted that considering the facts of the assessee’s case, r. 6DD(f) as well as r.6DD(g) both would be applicable in the case of the assessee. Sri Somenath Ghosh, advocate appeared as an intervener in the case of Mrinal Ghosh vide ITA No. 2375/Kol/2007. His arguments were twofolds. Firstly, that out of two payments disallowed by the AO, one payment was made on Sunday and, therefore, the same would be squarely covered by r. 6DD(k). Secondly, that the other payment was made to the decorator, who did not have the bank account at the relevant time and, therefore, payment is made to a person who did not have the banking facility at the relevant time. Therefore, his case would be covered under r. 6DD(h). He further submitted that even otherwise the decorators do not accept the cheque and they insist on cash payment as soon as their work as a decorator is over. Therefore, the assessee’s case would also fall within the second proviso to s. 40A(3) itself. In view of the above, it is submitted by the learned counsel that the disallowance made by the AO may be directed to be deleted.
7. The learned Departmental Representative, on the other hand, stated that s. 40A(3) is a computation provision for determination of profits and gains of business. Sec. 40A overrides the other provisions for computing the profits and gains of business. Therefore, sub-s. (3) of s. 40A would also be applicable while determining profits and gains of business in supersession to other provisions. The constitutional validity of s. 40A(3) has been upheld by the Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra). After the amendment by Finance Act, 1995, again the validity of s. 40A(3) was challenged and the Hon’ble High Courts have upheld its constitutional validity in the following cases : (a) Kamath Marbles vs. ITO (supra); (b) Smt. Ch. Mangayamma vs. Union of India (supra). He also stated that the Tribunal cannot adjudicate upon the constitutional validity of any provisions of the IT Act or Rules.
7.1 As per second proviso to s. 40A(3), the exception has been provided in such cases and under such
circumstances as may be prescribed. Sec. 295 of the IT Act empowers the CBDT subject to control of Central Government, to make rules for carrying out the purpose of the IT Act. Sub-s. (2) of s. 295 provides for the specific matters in which the rules can be framed by the Central Government. Clause (p) of s. 295 is a residuary clause which provides as under : "Any other matter which by this Act is to be or may be prescribed." Thus, in view of s. 295(2)(p), the CBDT is the rule making authority which has to prescribe the cases and the circumstances under which the provision of s. 40A(3) would not be applicable. The CBDT has already prescribed r. 6DD in pursuance to the powers conferred upon it by second proviso to s. 40A(3). These rules are part and parcel of the statute and s.40A(3) cannot be read in isolation. Sec. 40A(3) and r. 6DD should be read together. He contended that once the rules are framed by the Government through CBDT, the authorities are bound to follow such rules. In support of this contention, he relied upon the decision of Hon’ble apex Court in the case of Bharat Hari Singhania vs. CWT (1994) 118 CTR (SC) 125 : (1994) 207 ITR 1 (SC).
7.2 It is contended by the learned Departmental Representative that there is no equity in the income-tax. No relief can be given which is not permissible as per law/rules under the garb of substantial justice. When the language of statute is clear and unambiguous, there is no necessity to go into the intention of the legislature for which the provision was introduced. The intention of the legislature is to be gathered from the language of the statute. He submitted that the language of s. 40A(3) is clear and unambiguous and, therefore, the full effect is to be given to the language used in s. 40A(3) without going into the object behind introduction of s. 40A(3). In support of this contention, he has relied upon the decision of Hon’ble apex Court in the case of CIT vs. Tara Agencies (2007) 210 CTR (SC) 454 : (2007) 292 ITR 444 (SC).
7.3 Coming to the various provisions of the IT Rules, he stated that the rules are to be strictly interpreted and the burden is upon the assessee to prove in which particular sub-rule his case falls. Referring to the facts in the case of Kenaram Saha & Subhash Saha, he submitted that the contention of the learned counsel that his case falls under r. 6DD(l) is not correct, because the assessee has made the payment to the person who is not his agent. He may be agent of the Government of West Bengal, but r. 6DD(l) would be applicable where assessee makes payment to his agent who is required to make payment in cash for goods or services rendered, on behalf of the assessee. The assessee has not proved that the person to whom the payment is made is the assessee’s agent and he has also not proved that such person in turn is required to make the payment in cash. With regard to the assessee’s claim that
its case also falls under r. 6DD(b), he stated that this claim was not made earlier and the relevant facts are also not on record. He also referred to the copies of allotment memos issued by the Sub-divisional Controller, Food and Supplies, Government of West Bengal, which is enclosed by the assessee’s learned counsel with his written submission, and contended that such allotment letters are of 2007 and therefore, not relevant to the year under appeal. In view of the above, it is submitted by the learned Departmental Representative that the order of the CIT(A) should be reversed and that of AO should be restored.
8. In the rejoinder, it is stated by Sri S.K. Tulsiyan, advocate that as per second proviso to s. 40A (3), the
exceptions are to be provided, which will exempt the applicability of s. 40A(3), considering the (i) banking facility; (ii) business expediency; and (iii) other relevant factors. Rule 6DD takes care of banking facility only and no specific rule remains on statute book after deletion of r. 6DD(j) so as to take care of business expediency and other relevant factors. In such circumstances, the Courts have power to interpret s. 40A(3) in a manner so as to allow the deduction for genuine business expenditure where the identity of the payee is not in dispute and the payment by crossed cheque/bank draft could not be made due to business expediency or other relevant factors.
The Courts should do the justice considering the substantive provisions of the Act which include proviso to s. 40A(3). He also stated that if there are two opinions about the interpretation of a particular provision, the interpretation which is favourable to the assessee should be adopted. In support of this contention, he relied upon the decision of Hon’ble apex Court in the case of CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC).
11. We have carefully considered the arguments of both the sides and perused the material placed before us. First we will deal with the arguments of Sri S.K. Tulsiyan, advocate with regard to general applicability and scope of s.40A(3). At the outset we agree with the contention of Mr. Tulsiyan that income-tax is a charge on the "income" as defined under s. 2(24) of the IT Act. The definition of ‘income’ under the IT Act is an inclusive definition; cl. (i) of sub-s. (24) of s. 2 is "profits and gains". Thus, income includes profits and gains. Sec. 28 of the IT Act provides various types of income which are chargeable to income-tax under the head "Profits and gains of business or profession". It is not in dispute that all the assessees in the appeals under consideration before us have income which is chargeable under the head "Profits and gains of business or profession". Sec. 29 of the IT Act provides how the income under the head "Profits and gains of business or profession" is to be computed. It reads as under : "29. The income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D."
From the above it is evident that the income under the head "Profits and gains of business or profession" is to be computed in accordance with the provisions contained in ss. 30 to 43D of the IT Act. Sec. 40A of the Act provides expenses or payments which are not deductible in computing the profits and gains of business or profession. Subs. (1) of s. 40A reads as under : "(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ‘Profits and gains of business or profession’." Thus, the provisions of s. 40A have been given overriding effect upon the other provisions of this Act relating to the computation of income under the head "Profits and gains of business or profession". Sub-s. (3) of s. 40A, with which we are directly concerned in these appeals, reads as under : "(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), (twenty per cent of such expenditure shall not be allowed as a deduction) : Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding twenty thousand rupees otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), the allowance originally made shall be deemed to have been wrongly made and the AO may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of s. 154 shall, so far as may be, apply thereto,
the period of four years specified in sub-s. (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made : Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), 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 relevant factors." Thus, sub-s. (3) of s. 40A is a part of the computation provision while determining the profits and gains of business or profession. In view of the above, we are unable to accept the contention of the learned counsel for the assessee that disallowance of expenditure under
s. 40A(3) would be in violation of Art. 265 of the Constitution of India which states "no tax shall be levied or collected except by authority of law". Admittedly, Central Government enjoys the constitutional right to levy tax on income. The IT Act also provides the levy of tax upon the income of the assessee. However, such income has to be computed in accordance with the provisions prescribed under the IT Act which includes the disallowance under certain circumstances. The issue of constitutional validity of s. 40A(3) has been settled long back by the Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra). In this case, their Lordships held as under : "Sec. 40A(3) of the IT Act, 1961, which provides that expenditure in excess of Rs. 2,500 (Rs. 10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with r. 6DD of the IT Rules, 1962, it will be clear that the provisions are not
intended to restrict business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AO 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 upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of s. 40A(3) are not absolute. Consideration 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 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." 12. After the amendment in s. 40A(3) by Finance Act, 1995 w.e.f. 1st April, 1996 and the amendment in r. 6DD of the IT Rules by the IT (Fourteenth Amendment) Rules, 1995, again the constitutional validity of s. 40A(3) was challenged. However, the Hon’ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma vs. Union of India (supra) upheld the constitutional validity of s. 40A(3) and held as under : "The main object of s. 40A(3) of the IT Act, 1961, is to regulate financial transactions and to prevent the use of unaccounted money or reduce the chances of use of black money for business transactions. Under r. 6DD(j) of the IT Rules, 1962, prior to its amendment, the rule making authority by virtue of the powers conferred, made provision for unavailable circumstances and genuine difficulties as permissible grounds for waiving the requirement. The said rule was in force for quite some time and it was left to the discretion of the assessing authorities to test such transactions onthe touchstones of the said limitations. The rule making authority, in the light of experience and in its wisdom, sought to take away the said permissible factors. It is not as if the section itself does not provide for exceptions to be prescribed by the rule making authority in appropriate cases having due regard to the factors set out in the proviso to sub-s. (3). The mere fact that the rule making authority did not retain the old rule, does not make the main section itself unconstitutional. Any changes made in the subordinate legislation would not in any way affect the substantive provision."
12.1 Hon’ble Kerala High Court in the case of Kamath Marbles (supra) also upheld the constitutional validity of s. 40A(3) after the amendment therein in the year 1995 and held as under : "Parliament is absolutely competent to fix ceiling on expenditure and lay down conditions for allowance. In Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC), the Supreme Court upheld the constitutional validity of s. 40A(3) of the IT Act, 1961. The Supreme Court was dealing with s. 40A(3) prior to its amendment by Finance (No. 2) Act,1966, wherein the provision was for complete disallowance of expenditure if the same was in excess of the limit provided than under s. 40A(3) which was Rs. 10,000. While considering the validity of s. 40A(3), the Supreme Court has also strongly relied on r. 6DD(j) of the IT Rules, 1962, as it stood then. In principle, the Supreme Court held that s. 40A(3) does not violate Arts. 14 and 19(1)(g) of the Constitution. Any restriction in the IT Act on expenditure cannot be said to be violative of the right to carry on business and therefore, there is no violation of Arts. 14 and 19(1)(g) of the Constitution. Even after the amendment there is a provision for complete deduction of expenditure over Rs. 20,000 incurred in cash. Clause (h) of r. 6DD r/w cl. (k) itself provides sufficient
liberalization of the rigor of s. 40A(3) which entitles the parties to claim full deduction on cash payments over Rs. 20,000 where banking services are not available in the place where the expenditure is incurred or on the day the expenditure is incurred. In other words, the statute and the rules insist on payment through account payee cheques or demand drafts only in cases where banking services are available to the parties. It cannot be said that insistence on money transactions being carried out through the bank where the facilities are available which is to ensure transparency in transactions any way affects the rights of the parties to carry on any trade or business; the amendment to the rule does not affect the validity of the statute sustained by the Supreme Court."
13. Now we come to interpretation of s. 40A(3). It has been contended by the learned counsel Sri S.K. Tulsiyan that s. 40A(3) was introduced by Finance Act, 1968 w.e.f. 1st April, 1968. He referred to the Memorandum Explaining the Provisions in the Finance Bill, 1968 and pointed out that the purpose of introduction of s. 40A(3)was to curb wasteful or lavish expenditure in the business or profession and to counter tax evasion. He also referred to Circular No. 6P dt. 6th July, 1968 and specifically drew our attention to the following portion of the said circular : "This provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and reasonableness of the payment."
In the light of above submission it was claimed by him that section should be interpreted in a manner which fulfills the object for which s. 40A(3) was introduced and should not be interpreted in a manner by which a genuine business expenditure, where the identity of the payee is also established, can be disallowed. In contrast, it was claimed by the Revenue that the language of s. 40A(3) is clear and unambiguous and, therefore, the same should be interpreted literally.
13.1 We have carefully considered the rival submissions of the parties. We find that the Hon’ble apex Court in the case of CIT vs. Tara Agencies (supra), relied upon by the learned Departmental Representative, has laid down the rules of interpretation. Their Lordships held as under : "The intention of the legislature has to be gathered from the language used in the statute which means that attention should be paid to what has been said as also to what has not been said. It is the bounden duty and obligation of the Court to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the legislature in its wisdom has deliberately not incorporated."
13.2 Similarly, their Lordships of Hon’ble apex Court in the case of CIT vs. Anjum M.H. Ghaswala & Ors. (2001) 171 CTR (SC) 1 : (2001) 252 ITR 1 (SC) held as under : "The exercise of purposive interpretation by looking into the object and scheme of the Act and legislative intendment would arise only if the language of the statute is either ambiguous or conflicting or gives a meaning leading to absurdity."
13.3 In the light of the above guidelines laid down by Hon’ble apex Court, let us examine the provisions of s. 40A(3). From the plain reading of the section itself it is evident that it would be applicable where the assessee incurs any. expenditure exceeding Rs. 20,000 otherwise than by a crossed cheque or by a crossed bank draft. In such circumstances, 20 per cent of such expenditure shall be disallowed. In our opinion, there is no ambiguity in the language of s. 40A(3) and, therefore, relying upon the abovereferred decisions of Hon’ble apex Court in the cases of Tara Agencies (supra) and Anjum M.H. Ghaswala (supra), we hold that the section is to be interpreted by giving literal meaning to the language used in the section itself. In view of the above, the purpose behind the enactment of s. 40A(3) is not relevant. What is relevant is the enactment itself, i.e. s. 40A(3).
The IT authorities have to give effect to the section as enacted by the Parliament.
13.4 Both the parties have relied upon catena of judgments in support of their respective claims. It would be relevant to refer to those decisions. Sri S.K. Tulsiyan, advocate has relied upon the following decisions : (i) CIT vs. Rhydburg Pharmaceuticals Ltd. (supra). In this case, their Lordships held as under : "Dismissing the appeal, that, in the present case, the Tribunal was of the opinion that the payee insisted on cash payment as observed by the CIT(A) and further that the transactions were found to be genuine. The Tribunal was justified in allowing the expenditure. No substantial question of law arose from its order."
We have gone through the entire decision and we find that the assessment year for which the above decision has been delivered has not been given. However, we find that in the first part of the decision of Hon’ble High Court, there is reference to r. 6DD(j) and the Board’s circular. From the above it appears that this decision is relevant to the period when r. 6DD(j) was applicable. We may point out that before its omission by the IT (Fourteenth Amendment) Rules, 1995 w.e.f. 25th July, 1995, r. 6DD(j) reads as under : "(j) in any other case, where the assessee satisfies the AO that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft— (1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof; and also furnishes evidence to the satisfaction of the AO as to the genuineness of the payment and the identity of the payee." The CBDT had also issued a circular i.e. Circular No. 220, dt. 31st May, 1977 in which the circumstances are spelt out in which r. 6DD(j) would be said to be applicable. However, in the appeals for consideration before us, assessment years involved are asst. yrs. 2002-03 to 2004-05. All these assessment years are after the omission of r.6DD(j). Therefore, the above decision of Hon’ble Delhi High Court will not be applicable. (ii) CIT vs. K.K.S.K.
Leather Processor (P) Ltd. (2007) 292 ITR 669 (Mad). In this case it was held as under : "That the assessee had produced necessary grounds for making cash payment. The Tribunal noted that these payments were made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power. The Tribunal also noted from the order of the CIT, that considering the fact that the purchases were made from the unorganized sector, cash
payments were indispensable. The order of the Tribunal with regard to the cash payments was justified." In that case assessment year involved was asst. yr. 2001-02 and therefore, the ratio of the above decision would be applicable to the appeals under consideration before us. However, we find that in the above case, the Tribunal has found as a matter of fact that the above payments were made to small time vendors who came from the surrounding villages and carried out the process of dressing of skin without the aid of power. The Hon’ble High Court taking note of the abovementioned finding of fact by the Tribunal dismissed the Revenue’s appeal in limine.
Therefore, it would be necessary to examine the facts of the case under consideration before us whether they are identical to the facts before the Hon’ble High Court. We will revert to the facts of the case subsequently after considering all the decisions relied upon by the parties. (iii) CIT vs. Chaudhary & Co. (supra). In this case it has been held as under : "That the Tribunal had found that the seller had been insisting on cash payment. The identity of the seller had been disclosed by the assessee. The assessee had furnished the certificates from the sellers stating that they had insisted on cash payment and as to the genuineness of the payments. Hence, the Tribunal was justified in holding that the payments in question were not hit by s. 40A (3) and in deleting the addition of Rs. 65,537." However, we find that the assessment year involved in the above case was asst. yr. 1972-73, i.e. prior to omission of r. 6DD(j). Therefore, the above decision would not be applicable to the appeal under consideration before us. (iv) Shri Mahabir Industries vs. CIT (supra). In this case, their Lordships of Hon’ble Gauhati High Court held as under : "The ITO and the CIT(A) had not taken into consideration the Circular No. 220, dt. 31st May, 1977. The Tribunal reached the conclusion without giving any reason whatsoever as to the non-existence of exceptional and unavoidable circumstances. The Tribunal was not justified in law in holding that the disallowances by the ITO in respect of cash payment of Rs. 61,200 made on various dates to S was proper." This decision is also for asst. yr. 1985-86, i.e. prior to omission of r. 6DD(j). (v) CIT vs. Chrome Leather Co. (P) Ltd. (supra).
In this case, their Lordships held as under : "That the Tribunal took into account the commercial need in keeping cash and referred to the need for keeping cash for making purchase of raw skins from shandies. The Tribunal found that the issue of crossed cheques was not practicable and having regard to the nature of the transaction and necessity for expeditious settlement and nature of the relationship between the payer and payee, it found that the issue of payment by crossed cheques would have caused genuine difficulty to the payee. The Tribunal also found that the identity of the payee was established and the genuineness of the payment was established beyond doubt.
The payments made by the assessee were not liable to be disallowed while computing its business income." This decision is for asst. yr. 1974-75, i.e. prior to omission of r. 6DD(j) and hence not applicable to the assessment years under appeal before us. (vi) CIT vs. Mrinalini V. Sarabhai (supra).
In this case their Lordships of Hon’ble Gujarat High Court held as under : "Held that the assessee had adopted a peculiar method of maintaining her books of account and having her business transactions and the entire work with regard to payment and collection of money was entrusted to the firm. In such a set of circumstances the firm made payment on behalf of the assessee by account payee cheques. Hence it could not be said that there was any cash or there was any possibility of having chances and opportunities to use or create black money. The amount, which was paid on behalf of the assessee by the firm, was paid in cash but was paid by way of account payee cheques. This factual position could not be denied on behalf of the Revenue. Such transactions could not be hit by the provisions of s. 40A(3) of the Act. The ITO made a mistake in understanding the term ‘pay order’ and the manner in which the payments were made on behalf of the assessee by the firm. It was nothing but an instruction by the assessee to the firm with regard to making payment on behalf of the assessee. Therefore, the Tribunal was justified in confirming the order passed by the CIT(A), whereby the disallowance made by the ITO had been deleted."
From the above it is evident that in this case the payment was actually made by account payee cheque, though by the firm on behalf of the assessee. Thus in this case no cash payment was involved. Therefore, this decision was on altogether different facts than the facts in the cases under appeal before us. In none of the cases before us it was claimed by the assessee that the payment was made by cheque. (vii) Walford Transport (Eastern India) Ltd. vs. CIT (supra).In this case, their Lordships of Hon’ble Gauhati High Court held as under : "Held, that the reason indicated by the assessee regarding its financial stringency compelling it to make payment in cash, was accepted. The majority transactions in which payments were made for more than Rs. 2,500 was accepted. The circumstances in respect of
the transactions were obviously the same except the distinction which had been indicated by the AO to the effect that in some of the transactions the name of the payee was not indicated in the vouchers. The CIT(A) held in his appellate order that he had examined each and every voucher submitted by the assessee and it was found that each voucher disclosed the name of the payee. The Tribunal had not upset the finding of the CIT(A). Hence the payments made by the assessee in cash exceeding Rs. 2,500 could not be disallowed."
This decision is for asst. yrs. 1987-88 and 1988-89, i.e. prior to omission of r. 6DD(j) and hence not applicable to the assessment years under appeal before us. (viii) Girdharilal Goenka vs. CIT (supra). "The object of s. 40A(3) is to check evasion of tax and not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the AO has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the CBDT (No. 220, dt. 31st May 1977) is illustrative and not exhaustive and. the AO has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. Where the Tribunal had found that the assessee’s business was new and the transactions were genuine but there was a time-lag between the dates of the bills and the
dates of the payments : Held, that the disallowance of the payments in terms of s. 40A(3) of the IT Act, 1961 was not justified."
This decision of Hon’ble Calcutta High Court is also for asst. yr. 1975-76, i.e. prior to omission of r. 6DD(j) and, therefore, the same is not applicable to the assessment years involved in the appeals before us. (ix) CIT vs. Kumardev Seth (IT Appeal No. 386 of 2007) In this case, their Lordships of Hon’ble Calcutta High Court held as under : "We have heard learned counsel for the appellant. Perused the order passed by the Tribunal. We find that no substantial question of law is involved in this matter. Hence this appeal being IT Appeal No. 386 of 2007 is dismissed." Thus the Hon’ble jurisdictional High Court has approved the order of the Tribunal by dismissing the Revenue’s appeal, holding that no substantial question of law arises. Therefore, it would be relevant to refer the decision of the Tribunal, which is approved by their Lordships. The Tribunal in the said case, i.e. Kumardev Seth vs. ITO vide ITA No. 1460/Kol/2006 held as
under : "Heard both the parties, perused the record and find force in the contention of the assessee that he has to make this cash payment to M/s B.S.K.B.S Ltd. out of business expediency in view of the fact that there was no branch of United Bank of India at the place where the business of the assessee is located. The assessee’s case also finds support from the above mentioned decision in the case of ITO vs. Binod Kr. Agarwala (supra) decided by the Hon’ble Tribunal, Kolkata. We are therefore, of the opinion that the addition made by the AO under s. 40A(3) of the IT Act, 1961 was not justified in the instant case."
From the above it is evident that the Tribunal arrived at the conclusion that s. 40A(3) is not applicable because there was no branch of United Bank of India at the place where the business of the assessee is located. Though in the order it is not mentioned which specific clause of r. 6DD was applicable, yet inference to cl. (h) which still exempt cash payment at a place not served by a bank can explain the decision. Rule 6DD(h) provides :"(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;"
Moreover in the abovementioned decision the Tribunal has not held that the assessee would be entitled to relief even if assessee’s case does not fall in any of the clauses of r. 6DD by virtue of the second proviso to s. 40A(3). On the facts of the particular case, the Tribunal held that s. 40A(3) is not applicable. The facts in all the cases under appeal before us are different, because the payment is made in Kolkata where there are sufficient banking facilities. Therefore, the above decision of Tribunal, Kolkata ‘C’ Bench, which is approved by Hon’ble jurisdictional High Court, would not be applicable to the facts of the cases under appeal before us.
14. The cases relied upon by the learned Departmental Representative before us are as under : (i) Bagmari Tea Co. Ltd. vs. CIT (supra). Their Lordships of Hon’ble Calcutta High Court in the aforesaid case held as under : "That cash payment of Rs. 65,000 had been made. The CIT(A) as well as the Tribunal had found that the assessee had not shown compelling circumstances under which he had made the payment in cash. Therefore, the amount had been rightly disallowed." (ii) Silk Fab Exports vs. CIT (supra).
In this case, it has been held by their Lordships of Hon’ble Kerala High Court as under : "Dismissing the appeal, that the order of the AO and the appellate authorities showed that in many cases details of payees and transactions were not furnished and in cases where payees addresses were furnished, notices were sent by the Department. But the notices were returned by the postal authorities stating that such parties did not exist or with endorsement that the addresses were not known. In fact there was no necessity for the Department to try and trace the addresses of the suppliers to whom payments were made. It was for the assessee to produce evidence including the addresses of the suppliers and to establish that the case fell under the exception clause. The findings by the authorities were purely on the facts. The claim of exception under r. 6DD(j) was not applicable as the suppliers to whom payments
were made were well established business concerns and the payments were worth lakhs of rupees. Therefore, the assessee was not entitled to benefit under r. 6DD(j)." (iii) Nahgi Lal vs. CIT (supra). Their Lordships of Rajasthan High Court in the said case held as under : "That the facts showed that the payments had been made six or seven days after the transactions. There was no evidence of any exceptional or unavoidable circumstance necessitating payments otherwise than by crossed cheques. The case of the assessee was not also covered by any of the circulars issued by the CBDT. Hence, the payments in sums exceeding Rs. 2,500 made for the purchases were hit by the provisions of sub-s. (3) of s. 40A of the Act and, as such, such amounts were rightly added to the total income of the assessee in terms of the said section. (iv) Hari Chand Virender Paul vs. CIT (supra). In the aforesaid case, it has been held as under : "That since the assessee had ample opportunity to make payment by crossed cheques or crossed bank draft and need not have waited till the demand was made for payment, there was no exceptional or unavoidable circumstance which justified a non-compliance with the provisions of s.
40A(3) and the disallowance of the sum of Rs. 28,231 was justified." We find that all the above four decisions relied upon by the learned Departmental Representative were prior to omission of r. 6DD(j). However, despite the existence of r. 6DD(j), their Lordships of various High Courts after considering the facts of the case in appeal before them have come to the conclusion that the conditions specified in
r. 6DD(j) have not been satisfied. However, in the appeals under consideration before us, assessment years involved are after the omission of r. 6DD (j). Therefore, these decisions cannot be said to be applicable. (v) CIT vs. Pehlaj Rai Daryanmal (supra).
In this case, their Lordships of Allahabad High Court held as under : "The idea in enacting cl. (f) of r. 6DD of the IT Rules, 1962, was that since the cultivators, growers or producers of agricultural or forest produce, produce of animal husbandry, fish or fish products are mostly residents of rural areas not used to banking systems or not having bank accounts, the requirement of sub-s. (3) of s. 40A would be impracticable and would lead to difficulties in its application. The idea could never have been to exempt all payments in respect of purchase of forest or other produce and products mentioned in sub-cls. (i) to (iii) of cl. (f) of r. 6DD from whomsoever they are purchased. The words ‘cultivator, grower or producer’, occurring at the end of r. 6DD(f) qualify the words occurring in all the preceding four sub-clauses and not only sub-cl. (iv). The exemption is confined to payment to grower or producer of forest produce." Though this decision is also for asst. yr. 1970-71. however, in this case, their Lordships of Hon’ble Allahabad High Court have considered the applicability of r. 6DD(f) which still exists and in some of the cases before us the parties have claimed that r. 6DD(f) is squarely applicable. Therefore, this decision would be directly applicable while dealing with the cases wherein r. 6DD(f) is claimed to be applicable.
We will revert back to this decision when we discuss the facts of the cases wherein applicability of r. 6DD(f) is claimed.
15. While referring to the second proviso to s. 40A(3), it has been claimed by the learned counsel that this proviso provides certain exceptions where s. 40A(3) is not applicable. The exemption from applicability of s. 40A(3) is to be allowed having regard to the (i) nature and extent of banking facilities available, (ii) consideration of business expediency, and (iii) other relevant factors. He stated that the second proviso to s. 40A(3) is a substantive provision of the law, full effect to which should be given. Therefore, even if the facts of the case of an assessee are not squarely covered by any of the clauses of r. 6DD, still the exemption from the rigor of s. 40A(3) can be allowed in view of the provisions of second proviso to s. 40A(3). We are unable to agree with the contention of the learned counsel. At the cost of repetition we reproduce the second proviso to s. 40A(3) hereinunder :"Providedfurther that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty
thousand rupees is made otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), 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 relevant factors." (Emphasis, italicized in print, supplied)
From the above, it is evident that no disallowance under this sub-section shall be made where any payment in a sum exceeding Rs. 20,000 is made otherwise than by a crossed cheque/crossed bank draft in such cases and under such circumstances as may be prescribed. Thus, the mandate of the proviso is to exempt the payment in violation of provisions of s. 40A(3) in such cases and under such circumstances as may be prescribed. The last sentence of the proviso, i.e., "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors", is the guideline for the authority who has to prescribe the cases and circumstances under which the disallowance under s. 40A(3) will not be made despite the payment exceeding Rs. 20,000 other than by crossed cheque/bank draft. In pursuance to this proviso, r. 6DD has been brought into the statute vide Income-tax (Amendment) Rules, 1969 w.e.f. 1st April, 1969. Rule 6DD prescribes the cases and the circumstances in which ‘payment in a sum exceeding Rs. 20,000 may be made otherwise than by crossed cheque drawn on a bank or a crossed bank draft. Thereafter this rule has been amended from time to time. Rule 6DD, as applicable to the assessment years evolved in the appeals before us, reads as under : "Cases and circumstances in which payment in a sum exceeding (twenty thousand) rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. 6DD. No disallowance under sub-s. (3) of s. 40A shall be made where any payment in a sum exceeding (twenty thousand) rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely : (a) where the payment is made to— (i) the RBI or any banking company as defined in cl. (c) of s. 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) the State Bank of India or any subsidiary bank as defined in s. 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society as defined in cl. (cii) of s. 2 of the RBI Act, 1934 (2 of 1934), or any primary
credit society as defined in cl. (civ) of that section; (v) the LIC of India established under s. 3 of the Life
Insurance Corporation Act, 1956 (31 of 1956); (vi) the Industrial Finance Corporation of India established under s. 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948); (vii) the Industrial Credit and Investment Corporation of India Ltd.; (viii) the Industrial Development Bank of India established under s. 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964); (ix) the Unit Trust of India established under s. 3 of the Unit Trust of India Act, 1963 (52 of 1963); (x) the Madras Industrial Investment Corporation Ltd., Madras; (xi) the Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad; (xii) the Kerala State Industrial Development Corporation Ltd., Trivandrum; (xiii) the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay; (xiv) the Punjab State Industrial Development Corporation Ltd., Chandigarh; (xv) the National Industrial Development Corporation Ltd., New Delhi; (xvi) the Mysore State Industrial Investment and Development Corporation Ltd., Bangalore; (xvii) the Haryana State Industrial Development Corporation Ltd., Chandigarh; (xviii) any State Financial Corporation established under s. 3 of the State Financial Corporations Act, 1951 (63 of 1951); (b) where the payment is made to Government and under the rules framed by it, such payment
is required to be made in legal tender : (c) where under any contract entered into by the assessee before the 1st day of April, 1969, the payment is required to be made in legal tender; (d) where the payment is made by— (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank. Explanation : For the purposes of this clause and cl. (h), the term ‘bank’ means any bank, banking company or society referred to in sub-cls. (i) to (iv) of cl. (a) and includes any bank (not being a banking company as defined in cl. (c) of s. 5 of the Banking Regulation Act, 1949 (10 of 1949), whether incorporated or not, which is established outside India; (e) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; (f)
where the payment is made for the purchase of— (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (i) where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or the heirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the
income chargeable under the head ‘Salaries’ of the employee in respect of the financial year. In which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs. 7,500; (j) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of s. 192 of the IT Act, 1961, and when such employee— (A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (B) does not maintain any account in any bank at such place or ship; (k)where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (l) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (m) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.
Explanation : For the purpose of this clause, the expression ‘authorised dealer’ or ‘money changer’ means a person authorised as an authorised dealer or money changer to deal in foreign currency or foreign exchange under any law for the time being in force."
In view of the above, in our opinion, the assessee will get the exemption from the rigors of s. 40A (3) if he is able to establish that his case falls within any of the clauses of (a) to (m) of r. 6DD. Burden would be upon the assessee to establish under which particular clause his case falls.
16. Now we revert back to the facts of each case. First we will take up ITA No. 1545/Kol/2007 i.e., ITO vs.
Kenaram Saha & Subhash Saha.
16.1 The assessee is an AOP which is a big dealer in the chain of agents involved in the public distribution system for supply of kerosene oil within the State of West Bengal. During the year under consideration the assessee made the payment of Rs. 1,34,58,430 for purchase of kerosene oil in cash exceeding Rs. 20,000. As per AO, the payment was in violation of the provisions of s. 40A(3). He, therefore, disallowed 20 per cent of the payment made by the assessee. Accordingly, the disallowance was worked out at Rs. 26,91,680. On appeal, the CIT(A) deleted the disallowance holding that the assessee’s case is covered under r. 6DD(k) as well as r. 6DD(l) of IT Rules. Before us the assessee’s learned counsel further claimed that the case of the assessee is also covered by r. 6DD(b). However on perusal of the orders of the authorities below we find that before the AO the assessee did not make a specific claim under which clause of r. 6DD its case falls. The claim was that the purchase was made
from the Government. The assessee’s explanation before the AO was of general nature explaining the manner in which the business is being carried on by it. The CIT(A) has mentioned that the assessee’s case falls within r. 6DD(k) and also alternatively under r. 6DD (l). We find that r. 6DD(k) would be applicable where the payment was required to be made on a date on which the banks were closed either on account of holiday or strike.
Therefore, it would be a matter of factual verification with reference to each payment whether the payment was made on bank holiday or not. The date-wise details of the payments and whether on those dates it was bank holiday or not has not been placed before us. Therefore, we are unable to give any finding whether r. 6DD(k) is applicable in the case of the assessee.
16.2 Rule 6DD(l) would be applicable where the payment is made by any person to his agent, who is required to make the payment in cash for goods or services on behalf of such person. Whereas r. 6DD(b) would be applicable "where the payment is made to Government and. under the rules framed by it. such payment is required to be made in legal tender". It was claimed by the assessee that as per the public distribution system in the State of West Bengal, there is a chain of persons as follows—"Agent—Big dealer—M.R. dealers." The assessee purchases kerosene oil from the agent appointed by the Government of West Bengal and the assessee supplies kerosene oil to the M.R. dealers. However, whether the "agent" to whom the payment is made by the assessee can be said to be agent of the assessee within the meaning of cl. (l) of r. 6DD is an important question, because r. 6DD(l) would be
applicable only where the payment is made by the assessee to his agent. While claiming exemption under r. 6DD(b), it was claimed by the assessee that the agent is the representative of Government of West Bengal and, therefore, payment made to the agent being representative of Government of West Bengal is a payment to the Government of West Bengal. However, as we have noted, no such claim was made by the assessee before the AO.
It was also stated by the learned Departmental Representative that the necessary facts are not available on record to examine the contention of the assessee that its case falls in cls. (k), (l) or (b) of r. 6DD. We agree with the learned Departmental Representative. The claim of the assessee would require examination of the facts with reference to the books of account so as to ascertain on which particular date payment was made and whether such date was bank holiday or not so as to ascertain the applicability of r. 6DD(k). With regard to applicability of r.6DD(l) and r. 6DD(b) also further facts are required to be examined. The learned counsel for the assessee has given the copy of the supply order issued by Sub-divisional Controller, Food and Supplies, Jangipur giving direction to the assessee to make the payment in cash. However, it was pointed out by the learned Departmental Representative that these supply orders are dated 2007 and, therefore, will not be applicable to the year under consideration. What was the exact direction of the supply order in the accounting year relevant to assessment year under consideration would require to be examined. In view of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the AO with the direction that he will examine the facts of the case afresh and will adjudicate upon the assessee’s contention that its case falls under cls. (b), (k) and (l) of r. 6DD. Needless to mention that he will allow adequate opportunity of being heard to the assessee. Cross-objection, i.e., CO No. 58/Kol/2007 filed by the assessee is only in support of the order of the CIT(A), In view of our finding while disposing of the Revenue’s appeal, the cross-objection filed by the assessee is also simultaneously disposed of. Now we will take up ITA No. 664/Kol/2007 i.e., ITO vs. Nadeem Iqbal. The assessee is an individual who derives income from trading business in electronic items on wholesale-cum-retail
basis. During the accounting year relevant to assessment year under consideration, the assessee made total cash payment of Rs. 1,09,56,190 exceeding Rs. 20,000. The AO applying the provisions of s. 40A(3) disallowed 20 per cent of the cash payment. Accordingly, the AO disallowed the expenditure of Rs. 21,91,238 under s. 40A(3). On appeal, the CIT(A) deleted the same. Hence, this appeal by the Revenue.
18.1 We have considered the rival submissions and perused the material placed before us. After hearing both the parties and perusing the order of the CIT(A), we find that the CIT(A) deleted the disallowance without giving any finding with regard to any specific clause of r. 6DD in which the assessee’s case falls. As we have already discussed that once there is payment of any expenditure in violation of s. 40A(3), the assessee can escape the disallowance under the said section only if assessee’s case falls within the ambit of any of the clauses of r. 6DD. The matter was required to be examined whether assessee’s case falls under any specific clause. In this case we find that neither the assessee properly claimed nor the AO examined the case with reference to the relevant rule.
Even before the CIT(A) the position did not change. But the arguments of the assessee’s counsel were having regard to business expediency, smallness of assessee’s capital, assessee being new to the business, etc. payment in cash was made. At the time of hearing before us, the assessee made a specific claim that the cash payment was made to the agent who in turn was required to make the payment in cash to the sellers of such goods. Therefore, assessee’s case falls within the ambit of cl. (l) of r. 6DD and this was the claim before the Revenue authorities.
However, this claim has to be examined in accordance with law. In the above circumstances, in our opinion, it would meet the ends of justice if the orders of the authorities below on this point are set aside and the matter is restored back to the file of the AO with the direction that he will allow adequate opportunity to the assessee to produce the necessary evidence in support of his claim. Thereafter the AO will readjudicate the matter in accordance with law and in the light of our observations/findings in this order. (1) ITA No. 2114/Kol/2006—
Chang Hing Tannery vs. Asstt. CIT; (2) ITA No. 1696/Kol/2007—Li Chang Tannery vs. Asstt. CIT.
The facts of the case and, the arguments of the parties in both these cases were identical and, therefore, they are being considered together. Both these assessees derived income from the business of tanning of raw hides to finished leather. During the accounting year relevant to assessment year under consideration, the assessees made the payments for purchase of raw hides by bearer cheques. Since as per s. 40A(3) payment is required to be made by account payee cheque or account payee bank draft, the AO treated the payment by bearer cheques to be in violation of s. 40A(3) and disallowed 20 per cent of such payment. On appeal, the CIT(A) sustained the same.
Hence these two appeals by the assessees. At the time of hearing before us, it was claimed by the learned counsel that the payments made by the assessees are covered by r. 6DD(f) as well as by r. 6DD(g). Rule 6DD(f) reads as under : "(f) where the payment is made for the purchase of— (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or products;" The payment for purchase of hides and skins would be covered by sub-cl. (ii) of cl. (f) being the produce of animal husbandry. However, as per cl. (f), the payment is to be made to the producer. At this juncture it would be relevant to again refer the decision of Hon’ble Allahabad High Court in the case of CIT vs. Pehlaj Rai Daryanmal (supra) relied upon by the learned Departmental Representative. In the said case, the Hon’ble High Court has considered the applicability of cl. (f) of r. 6DD and held that the words "cultivator, grower or producer", occurring at the end of r. 6DD(f) qualify the words occurring in all the preceding clauses and not only sub-cl. (iv). In view of this decision of Hon’ble Allahabad High Court, to satisfy the test of r. 6DD(f), not only the payment should be made for purchase of produce of animal husbandry but payment is to be made to the producer of such produce. Though it has been claimed by the learned counsels that the payment has been made to the producer, but no evidence in support of such claim has been brought on record by the assessees. On the other hand, the learned Departmental Representative referred to the copy of the sale bills issued by the sellers and pointed out that from the sale bill it is evident that all the sellers are the merchants, i.e. the traders. However, in our opinion, merely because the sellers are the traders or the merchants of hides and skins’, that does not mean that they cannot be producer thereof. A person may produce the hide and skin and sell the same. Thus he can have the twin capacities of producer as well as trader thereof. There can be another situation that a person purchases hides and skins produced by others and trade those items, then he will be a trader of hides and skins and will not be covered within r. 6DD(f)(ii). It was contended by the learned counsel for the assessee that as per the meaning of the term "producer" in Bakshi’s The Law Lexicon, Vol. 2, the word "producer" includes any person who trades or deals in such production. We are unable to accept this contention of the learned counsel. If the word "producer" is to be given such a wide meaning, then there was no necessity of providing the words "to the producer of such article" after r. 6DD(f), because when
the payment is made for purchase of an article, the seller is necessarily trader thereof. He may or may not be a producer. Therefore, by providing the words "producer of such articles" in r. 6DD(f), the application of rule is being restricted in respect of payments made only to producer and not to any other person. The learned Departmental Representative has relied upon the decision of Hon’ble apex Court in the case of CIT vs. Tara Agencies (supra), wherein their Lordships considered the meaning of the words "manufacture", "production", "process", etc. In that case the assessee derived income from the business of export of tea. It purchased tea of diverse grades and brands and blended the same by mixing different kinds of tea. The assessee was having a small scale industrial undertaking for the above process of tea. It claimed weighted deduction under s. 35 of the IT Act, 1961. As per s. 35B, weighted deduction was available to a small scale exporter who exports goods manufactured or produced in any small scale industrial undertaking. In this context their Lordships of the apex Court examined the meaning of the word "produce". At p. 451 of 292 ITR, their Lordships referred the dictionary meaning of the word "produce" which is as under : "In Black’s Law Dictionary (5th Edn.), the term production has been defined as under : "Production, process or act of producing. That which is produced or made, i.e., goods. Fruit of labor, as the productions of the earth, comprehending all vegetables and fruits; the productions of intellect, or genius, as poems and prose compositions; the productions of art, as manufactures of every kind." The term "produce", as defined in the New Webster’s Dictionary of the English language (Deluxe Encyclopedic Edition), is as follows : "Produce, to bring forth into existence; to bring about; to cause or effect, esp. intellectually or creatively; to give birth to; to bear, furnish, yield; to make accrue; to bring about the performance of as a movie or play; to extend, as a line.—v.i. To bring forth or yield appropriate offspring, products, or consequences." At p. 452, again their Lordships dealt with the meaning of the word "produce" as under : The expression "produced" was given a wider meaning than the word. "manufacture" pointing out that the word "produced" will include an activity of
manufacturing the materials by applying human endeavour on some existing raw material, but the word "produce" may include securing certain produce from natural elements, for example, by growing plants on soil, or by operating mines and the like or for example, by milching the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk.
20.1 Whether the sellers to whom the assessees made the payments exceeding Rs. 20,000 by way of bearer cheques were producers or not would depend upon the facts of the case of each seller. Before us, the assessee has only produced the sales bills issued by the seller and the transport receipts for transportation of the goods to the assessee’s destination. From the sales bill itself it cannot be decided whether the sellers are producers or not. It has been claimed by the learned counsel for the assessee, Sri Gautam Banerjee, that the AO had raised the issue of applicability of s. 40A(3) at the fag end of the assessment proceedings in the month of March, 2006 and he did not allow any opportunity to the assessee to produce necessary evidence that the sellers from whom the assessee purchased hides and skins are producers thereof.
20.2 It was also contended by the learned counsel for the assessees in the above mentioned cases that the assessee’s case also falls within cl. (g) of r. 6DD. Clause (g) would be applicable where the payment is made for purchase of the products manufactured or processed without the aid of power in the cottage industry to the producer of such products.
20.3 To verify the contention of the learned counsel, we referred to the assessment orders in the cases of both the assessees. In the case of Li Chong Tannery the relevant finding at p. 2 of the assessment order reads as under : "In the course of hearing on 13th March, 2006, the Authorised Representative Shri Sumantra Guha was requested to show cause why the payments exceeding Rs. 20,000 otherwise than crossed or account payee cheques shall not be disallowed under s. 40A(3) of the Act. The Authorised Representative vide his written submission dt. 21st March, 2006 explained the nature of payments under s. 40A(3) which are as follows : ‘Rule 6DD(f)(ii) of the IT Rules stated that ‘No disallowance under s. 40A(3) shall be made when any payment exceeding Rs. 20,000 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft where the payment is made
for the purchase of the produce of animal husbandry (including hides and skins) to the cultivators, growers or producers of such articles, produces or products.’
In the instant case, the payments have been made for the purchase of raw hides and skins to the cultivators, growers or producers of such raw hides and skins (i.e., butchers) and hence the provisions of s. 40A(3) of the IT Act, 1961 will not be applicable for such payments.
The assessee’s contentions have been examined but it could not be proved that the parties from whom the purchases of raw hides were made during the year are either cultivators, growers or producers of raw hides and skins related to animal husbandry, dairy or poultry farming. As such, the above payments in excess of rupees twenty thousand to those dealers of skin/hide does not quality for exemption as per r. 6DD(f) of the IT Rules."
20.4 From the above it is evident that for the first time on 13th March, 2006, the AO asked the assessee to show cause why the payment exceeding Rs. 20,000 otherwise than by crossed or account payee cheque should not be disallowed under s. 40A(3). The assessee furnished its explanation on 21st March, 2006 claiming that its case falls within r. 6DD(f)(ii). The AO rejected the assessee’s contention on the ground that the assessee could not prove that the parties, to whom the payment had been made, were either cultivators, growers or producers of raw hides and skins. However, it is evident that the AO did not allow any opportunity whatsoever to the assessee to lead necessary evidence in support of its contention that the persons from whom hides and skins were purchased were the producers thereof. The CIT(A) has discussed the legal aspects of the issue at length, but the factual matrix of the case has not been examined even at his end. In view of the above, we set aside the orders of the authorities
below on this point and restore the matter back to the file of the AO and direct him to allow adequate opportunity to the assessee to produce necessary evidence in support of its contention. Thereafter he will readjudicate the issue in accordance with law and in the light of our observations/findings in this order.
20.5 We may further mention that the facts in the case of Chong Hing Tannery are more or less identical because in this case also the query was raised sometime in March, 2006 and the assessee furnished reply on 21st March, 2006 and 30th March, 2006. More or less similar explanation was given by the assessee and the AO rejected the assessee’s claim without allowing opportunity to the assessee to produce necessary evidence in support of its claim. Therefore, for the detailed discussions in the case of Li Chong Tannery, we set aside the orders of the authorities below in the case of Chong Hing Tannery also on this point and restore the matter back to the file of the AO to readjudicate the issue as per our direction above.
21. The learned counsel for the assessee had also raised an additional ground in both the above cases which was with regard to computation of deduction under s. 80HHC. The additional ground is admitted by us vide our finding in para 3.1 above. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that at the end of s. 80HHC, there is explanation which defines several terms used in s. 80HHC. Explanation (baa) defines the words "profits of the business" which reads as under : "(baa) ‘profits of the business’ means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by— (1) ninety per cent of any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;"
From the above it is evident that profits of business for the purpose of s. 80HHC means the profits of business as computed under the head "Profits and gains of business or profession". Sec. 29 of the IT Act provides that profits and gains of business shall be computed in accordance with the provisions contained in ss. 30 to 43D of the IT Act. Thus, whatever is the profits and gains of the business as computed by the AO under the head "Profits and gains of business or profession", should be taken as profits of the business for the purpose of computation of deduction under s. 80HHC. We, therefore, direct the AO to recompute the deduction under s. 80HHC as per our observation above.
22. Now coming to the case of Paramount Leathers vide ITA No. 826/Kol/2007, which is a Departmental appeal, Sri S. Bandyopadhyay appeared as an intervener. He submitted that considering the facts of the assessee’s case, r.6DD(f) as well as r. 6DD(g) both would be applicable in the case of the assessee. We find that the facts in the case of Paramount Leathers are also similar to the facts in the case of Li Chong Tannery discussed above. In the case of Paramount Leathers also, the AO vide letter dt. 13th March, 2006 asked the assessee to show cause as to why disallowance under s. 40A(3) should not be made. The assessee furnished the written submissions dt. 20th March, 2006 claiming that the payments were made to the producers of hides and skins and, therefore, r. 6DD was applicable. The AO rejected the assessee’s explanation without allowing any opportunity to the assessee to produce evidence in support of its contention. The facts being similar to Li Chong Tannery, for the detailed discussions in paras 20 to 20.3 above, we are of the opinion that the matter in this case also needs to be reexamined at the end of the AO as per our direction in the case of Li Chong Tannery. However, in the case of this
assessee, other issues are also involved and, therefore, this Departmental appeal will now be placed before the Division Bench for consideration and adjudication of the other issues. The issue with regard to disallowance under s. 40A(3) is to be restored back to the file of the AO to be readjudicated upon as per our observation/direction above.
23. Sri Somenath Ghosh appeared as an intervener in the case of Mrinal Ghosh, According to him the assessee’s case falls under r. 6DD(k) and r. 6DD(h). We find that during the accounting year relevant to assessment year under consideration, the assessee made two cash payments exceeding Rs. 20,000 at a time. The first payment was made on 30th April, 2000 amounting to Rs. 36,000 and the second payment on 16th June, 2000 amounting to Rs. 34,000. The assessee has produced before us the xerox copy of the calendar of the year 2000 and we find that 30th April, 2000 was Sunday, i.e. bank holiday. Therefore, the payment made on 30th April, 2000 will squarely fall within cl. (k) of r. 6DD. With regard to other payment made on 16th June, 2000, it was contended by the assessee that the payment was made to the decorator who did not have the bank account at the relevant time and, therefore, the assessee’s case would fall within the ambit of cl. (h) of r. 6DD. We find that cl. (h) of r. 6DD reads as under : "(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such
village or town;" From the above it is evident that where the payment is made in a village or town which is not served by any bank, then only the conditions of the above clause would be satisfied. In the case before us, the AO has recorded the finding that the decorator is of locality of Chinsurah, Dist. Hooghly having full banking facilities. The above finding of fact recorded by the AO has not been controverted before us by the learned counsel. He has not claimed that the place where the payment is made does not have the banking facility. But his claim is that the person to whom he made the payment did not have bank account at the relevant time. In our opinion, if the place where the recipient resides or carries on business is having banking facility, conditions of r. 6DD(h) would not be satisfied merely because the recipient has not opened his bank account. In view of the above, we reject the assessee’s claim with regard to applicability of r. 6DD(h) in respect of payment of Rs. 34,000 on 16th June, 2000. In this appeal, other issues are involved. Therefore, the matter will be placed before the Division Bench for consideration and adjudication of other issues.
24. Now coming to Departmental appeal in the case of Shyamal Kr. Dey, the AO has determined the income by applying a net profit rate of the turnover. The AO in addition to the determination of net profit as a percentage of turnover, made further disallowance under s. 40A(3). The CIT(A) deleted the disallowance made under s. 40A(3), Revenue aggrieved with the order of the CIT(A) is in appeal before us. It is contended by the learned counsel that once a net profit rate is applied, no further addition/disallowance can be made under s. 40A(3). In support of this contention, he has relied upon the decision of Hon’ble Allahabad High Court in the case of CIT vs. Banwarilal Banshidhar (supra) in which their Lordships held as under : "affirming the decision of the Tribunal, that no disallowance could be made in view of the provisions of s. 40A(3) r/w r. 6DD(j) of the IT Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the GP rate was applied, that would take care of
everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases made by the assessee." The above decision of Hon’ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of Hon’ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance under s. 40A (3) made by the AO. Accordingly, we uphold the order of the CIT(A) and dismiss the Revenue’s appeal.
25. The results of the aforesaid appeals are summed up as under : (i) ITA No. 1545/Kol/2007—ITO vs. Kenaram Saha & Subhash Saha; (ii) ITA No. 664/Kol/2007—ITO vs. Nadeem Iqbal; All the aforesaid Revenue’s appeals and cross-objection of the assessee are allowed for statistical purposes. (iii) ITA No. 2114/Kol/2006—Chong Hing Tannery vs. Asstt. CIT; (iv) ITA No. 1696/Kol/2007—Li Chong Tannery vs. Asstt. CIT. The aforesaid appeals of the assessees are allowed for statistical purposes. (v) ITA No. 1772/Kol/2007—Asstt. CIT vs. Shyamal Kr. Dey. The aforesaid Revenue’s appeal is dismissed.
CA Pankaj Jaiswal
Chartered Accountants
pankaj@anpllp.com
Our technical & legal analysis of the section 40A(3) Rule 6DD Circular 220 & Section 271 (1 ) ( c) revealed following things
1. Analysis of Section 40A(3)
2. Analysis of Rule 6DD
3. Learned Officer should adopt practical and not a technical approach –
4. Business Expediency to be tested
5. Reimbursement to Director means payment to Agent
6.. Circular no 220 Analysis under Judicial Pronouncement
7. Other Judicial Pronouncement
Analysis of Section 40A(3)
3) Where the assessee incurs any expenditure in respect of which 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, no deduction shall be allowed in respect of such expenditure.95a
(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 prescribed96, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors
Proviso used following words “considerations of business expediency and other relevant factors”
It means section care the business expediency since business expediency is not defined in the act so we have to study the various legal interpretation given by the learned judges so test the business expediency test. In coming paragraph we have given the detail of this.
Another part of this proviso is other relevant factor which is again not defined and scope for judgment of Assessee is left here. And also it shows that the circumstances mentioned in proviso are not exhaustive and it is inclusive and it includes other relevant factor and if the relevance decision is left to the assessee then how learned officer can impose penalty u/s 271 ( 1) (c )
Analysis of Rule 6DD
Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft.
6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment53b 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 rupees53c in the cases and circumstances specified hereunder, namely :—
(a) ……………………
(b) ……………………
(c) ……………………
(d ……………………
(e) ……………………
(f) ……………………
(g) ……………………
(h) ……………………
(i) ……………………
(j) ……………………
(k) where the payment is made by any person to his agent53k who is required to make payment in cash for goods or services on behalf of such person;
(1) ……………………
As per this rule 6 DD any payment made to the person who may be the agent can becovered under rule 6 DD later we will put the fact & cases where it was decided that directors are agent.
Learned Officer should adopt practical and not a technical approach –
As mentioned in the case of Girdharilal Goenka v. CIT (supra) the learned Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. In this disallowance
Business Expediency to be tested
if we analyze then we find that all the expenses are of business expediency like reimbursement of expenses is daily routine expenses employee or director does the expenditure in pieces and take the amount reimbursed in lump sum in this situation expenses went in pieces but they take reimbursement in agreegate and also we know that the Director & Employee are the agent of the company and any payment made to them as a reimbursement should be allowed as a expenditure. In above cases Mr A Kumar is a director to whom reimbursement made of Rs 74000/- and also travelling ticket booking is a reimbursement that need to be allowed. Repairs of car is also allowable on business expediency ground as we know many car mechanic does not have a bank account and giving them a cheque in practical situation is not possible.Also buying a gift from a retail shop and giving them cheque is not possible generally retailer does not accept the cheque when we go walk in.
Judicial Decisions about business expediency
Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667
(SC) while considering the constitutional validity of s. 40A(3) has also explained the reasons behind introduction of this provision. Various High Courts in the following cases have also taken the view that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in s. 40A(3) : (a) CIT vs. Rhydburg Pharmaceuticals Ltd. (2004)
187 CTR (Del) 485 : (2004) 269 ITR 561 (Del); (b) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989)
179 ITR 122 (Cal); (c) CIT vs. Chaudhary & Co. (1995) 129 CTR (All) 101 : (1996) 217 ITR 431 (All); (d) Shri
Mahabir Industries vs. CIT (1996) 136 CTR (Gau) 107 : (1996) 220 ITR 459 (Gau); (e) CIT vs. Chrome Leather
Co. (P) Ltd. (1999) 235 ITR 708 (Mad); (f) CIT vs. Mrinalini V. Sarabhai (2003) 184 CTR (Guj) 122 : (2004) 265
ITR 64 (Guj); (g) Walford Transport (Eastern India) Ltd. vs. CIT (1999) 240 ITR 902 (Gau).
CIT v. Hardware Exchange (1991) 190 ITR 61 (Gau), which was overruled. The Hon'ble Supreme Court in the said case has held that s. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. The section must be read along with the rule. Further, it was held that the terms of s. 40A(3) are not absolute considerations of business expeditious and other relevant factors are not excluded. Genuine and bona fide, transactions are not taken out of the sweep of the section.
In the case reported in Hasanand Pinjomal v. CIT (supra), the jurisdictional High Court held that cl. (j) of r. 6DD sets out four circumstances in which the rigour of the rule contained in sub-s. (3) of s. 40A has to be relaxed. One of such circumstances is, that where payment in the manner provided in s. 40A(3) is not practicable. It was held by the Hon'ble High Court that practicability for the purposes of r. 6DD(j)(2) must be judged from the point of view of the businessman and not of the Revenue.
For the purposes of carrying on his business, a businessman may have to make payment otherwise than by crossed cheque or draft in certain circumstances voluntarily and not out of sheer necessity. The legislature, therefore, prescribed in the second proviso to s. 40A(3) business expediency as one of the relevant factors. Therefore, practicability has to be judged from the angle of the businessman and not of the Revenue.
Analysis of Circular under judicial pronouncement
A further relaxation has been made in the provision in the Income-tax Rules requiring payments for business expenses exceeding Rs. 2,5001 to be made by crossed cheques or drafts.
The relaxation cover payments in cash in excess of Rs. 2,5001 made with a view to avoid difficulty to the payee or where it was not practicable to pay in cheque or draft [rule 6DD(j)]2. The availability of this benefit depends upon the nature of transaction as well as the need for its expeditious settlement. The assessee making such payments is, however, required to satisfy the Income-tax Officer about the genuineness of the payment and the identity of the payee.
There is also a residuary exception under clause (j) of rule 6DD which provides that the provision for the disallowance of the expenditure might not be applied if the assessee (i) establishes that the payment could not be made by crossed bank cheque or draft due to exceptional or unavoidable circumstances, and (ii) also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.
After considering representations from various quarters that the existing exceptions were not helpful in preventing disallowance of substantial payments for purchases of commodities on the ground that these were made in cash in amounts exceeding Rs. 2,500, the Central Board of Direct Taxes have now liberalised this residuary clause (j) of rule 6DD so as to avoid disallowance of such payments in genuine cases.
( Press Note : Dated 19-11-1970, issued by Ministry of Finance. )
386. Circumstances when Income-tax Officer can relax requirement of making payments in excess of Rs. 2,5001 by crossed cheques under clause (j)2 of rule 6DD
1. Clause (j) of rule 6DD provides that no disallowance under section 40A(3) shall be made where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft—
a. due to exceptional or unavoidable circumstances; or
b. because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof,
and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.
2. It would be seen that where payment of a sum exceeding Rs. 2,500 is made, otherwise than by a crossed cheque/draft, the assessee besides furnishing evidence as to the genuineness of the payment and the identity of the payee, is required to satisfy the Income-tax Officer that his case falls under any one of the circumstances mentioned in (a) and (b) above, if he claims that no disallowance should be made under section 40A(3).
3. Various representations have been received by the Board regarding the difficulties that are being experienced by the taxpayers due to lack of uniformity in the interpretation of the provisions of rule 6DD(j) by the Income-tax Officers. The Board have considered these representations and have decided to lay down certain guidelines to ensure uniformity of approach among the Income-tax Officers in this behalf.
4. All the circumstances in which the conditions laid down in rule 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are :
a. the purchaser is new to the seller, or
b. the transactions are made at a place where 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 purchased the goods; or
f. specific discount is given by the seller for payment to be made by way of cash.
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).
6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule 6DD(j).
Circular : No. 220 [F. No. 206/17/76-IT (A-II)], dated 31-5-1977EXPLAINED IN - The abovesaid circular was commented upon Girdharilal Goenka v. CIT [1989] 179 ITR 122 (Cal.) with the following observations :
“. . . The circular of the Board is not exhaustive but only illustrative. The Income-tax Officer has to take a pragmatic view of the matter. The Income-tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances.” (p. 128)
EXPLAINED IN - In CIT v. Trinity Traders [1987] 163 ITR 381 (Guj.), the above circular was referred to with the following observations :
“The circular makes it clear that these are merely illustrative instances of cases in which rule 6DD(j) would be applicable.
EXPLAINED IN - In Rajarajeswari Weaving Mills v. ITO [1978] 113 ITR 405 (Ker.), the above circular was referred to with the following observations :
“. . . We do not wish to get enmeshed in the intricacies as to the exact scope and purview of a circular under section 119 of the Income-tax Act, and as to whether, and, if so, to what extent, such a circular can fetter the judicial or quasi-judicial discretion of authorities functioning under the Act. In this particular case, the circular that we have noticed earlier is dated May 31, 1977, and the order of the Commissioner with respect to which the question has arisen in these appeals is dated June 21, 1976. It is obvious, therefore, that the circular in question can have no application to these cases. We are not impressed by the argument of the assessee that the circular is only clarificatory or declaratory.” (pp. 409-410)
See also CIT v. Union Agencies [1987] 166 ITR 529 (Delhi).
EXPLAINED IN - The above circular was explained in S. Venkata Subba Rao v. CIT [1988] 173 ITR 340 (AP), with the following observations :
“Mr. Y. Ratnakar relied upon a circular issued by the Central Board of Direct Taxes, being Circular No. 220, dated May 31, 1997 ([1997] 108 ITR (St.) 8). We have perused the said circular. It only elaborates and illustrates—though not exhaustively—the circumstances in which it is not practicable to comply with the requirements of section 40A(3). The circular nowhere says that it is not necessary for a person claiming the benefit of rule 6DD(j) to establish the genuineness of the payment and the identity of the payee. On the contrary, the said requirement is repeatedly reiterated. We are, therefore, of the opinion that the said circular cannot in any manner advance the case of the assessee.” (p. 345)
EXPLAINED IN - The above circular was explained in Paul Bros. v. CIT [1990] 186 ITR 356 (Gauhati), with the following observations :
“Pursuant to the provision in sub-section (3) of section 40A, rule 6DD was promulgated and Circular No. 220 was issued by the Central Board of Direct Taxes on May 31, 1977. Section 40A, rule 6DD and the Circular No. 220 recite that after March 31, 1969, any payments on account of expenditure of more than Rs. 2,500 will have to be made by a crossed cheque or by a crossed bank draft unless exempted by the revenue authorities. . . .
The Indian Parliament incorporated the above provisions to check evasion of taxes. Even in genuine cases where payments are shown to have been made in cash, the assessee is put to the necessity to prove that in the area of business, banking facilities are not adequate. Therefore, impelled by genuine difficulty, the assessee had to make payment in cash. The same idea is writ large in the Rules. The assessee will have to show that there was no way left for the assessee except to pay in cash. In the nature of things whether in the statute, rules or circulars, all the contingencies cannot be enumerated exhaustively. Parliament referred to the inadequacy of facilities in section 40A. The rule-making authorities illustrated some of the circumstances in the Rules. The Revenue supplemented the further circumstances when exemption can be claimed and allowed. (pp. 357-358)
RELIED ON IN - The above circular was relied on in CIT v. Meghdoot Sales [1993] 200 ITR 490 (Delhi), with the following observations :
“In our opinion, the answer to the said question which has been referred is self-evident. The Income-tax Tribunal has found as a fact that cash payments were made only under exceptional and unavoidable circumstances. This conclusion has been arrived at by the Tribunal after examining the entire material which was placed before it. It has further observed that the genuineness of the transaction was not in dispute. This being so, on the facts found by the Tribunal, the case not only fell within the provisions of rule 6DD(j), but the assessee was also entitled to claim the benefit of Circular No. 220, dated May 31, 1997, issued by the Central Board of Direct Taxes. In the said circular, it is, inter alia, stated that, if a seller refuses to accept payment by way of crossed cheque or crossed draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from the particular seller, then even if the payment is made by cash, the same would be allowable as a deduction.” (pp. 492-493)
EXPLAINED IN - Janambhumi v. CIT [1998] 99 Taxman 451/225 ITR 517 (Gau.) with the following observations :
“The circular itself indicates that these are not the only circumstances which can be said to be exceptional and unavoidable. There may be some other exceptional and unavoidable circumstances which may not be put in writing. The Commissioner (Appeals) upheld the order of the ITO on the ground that the assessee failed to establish exceptional and unavoidable circumstances under which payment had to be made in cash exceeding Rs. 2,500. While considering the exceptional circumstances the business exigencies, convenience and security should also be looked into.”
EXPLAINED IN - Shri Mahabir Industries v. CIT [1996] 220 ITR 459 (Gau.) with the following observations :
“Circular No. 220, dated May 31, 1977, specifies some of the circumstances in which rule 6DD(j) of the Income-tax Rules, 1962, would apply. The circular itself indicates that these are not the only circumstances which can be said to be exceptional and unavoidable. Exceptional and unavoidable circumstances may vary depending on the facts of each case. Merely because the parties have bank accounts and there is a long gap between submission of the bill and making payment, the conclusion cannot be arrived at that the assessee failed to show exceptional and unavoidable circumstances. Before coming to a decision regarding failure to establish exceptional and unavoidable circumstances, the authority must give reasons why it came to such conclusions.”
COMMISSIONER OF INCOME –TAX V. RAJA PAL AUTOMOBILES (2010) 320 ITR 185 (ALL) PRAKASH KRISHNA & RITU RAJ AWASTHI J J (DECIDED ON 30-06-2009)
Income-tax Act, 1961 – section 40A(3) read with rule 6DD of the Income-tax Rules, 1962 – business expenditure – disallowance – payments made otherwise than by crossed cheques or bank drafts – nature of business and evidence in form of bills and cash memos – exceptional circumstances explained by the assessee – whether cash payments to be allowed – held, yes.
If Director is an Agent then Payment is covered under rule 6DD
In the case of BSNL it is already decided that any payment made to agent is not disallowed u/s 40A(3).
Now we analyze that the Reimbursement Payment made to Mr A Kumar ( Director ) will be treated as a payment to Agent or not . Actually Directors are agents of the Company in transactions they enter into on behalf of the Company, though they are not agents for individual shareholders or members. A director may be an employee, a servant or even a "worker" of the Company. He occupies the position of a trustee, though he is not a trustee in the strict sense in respect of the Company’s properties and funds.
Director’s liability arises because of their position as agents or officers of the Company as also for being in the position of trustees or having fiduciary relation with the Company or its shareholders.
Some of these liabilities are in contract, some are in tort, some are under the criminal law and others are statutory, i.e., under the Companies Act, 1956 and other laws. The courts have, in deciding the liability of Directors, taken into consideration a director’s position as a whole.
Contractual Liability: -
Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly, and act with such care as is reasonably expected from him, having regard to his knowledge and experience.
In R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company."
Express liability will usually arise only when a director has personally guaranteed the performance of a contract. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word "limited" or its abbreviation. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose v. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber.
As far as fiduciary duties/obligations are concerned, any breach by any director would visit them with liability. Our Supreme Court has considered this issue of fiduciary liability. It has been observed in Official Liquidator vs. PA Tendulkar.
Director As An Agent - Liabilities Under Contracts Act - 1872
Sec 182.of the Indian Contract Act, 1872 says that "An 'agent' is a person employed to do an act for another or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the principal"
Where one employs another to do an act for him or to represent him in dealings with third parties, the person so employed is called an agent. In the theory of the English law, the agent is a connecting line between the principal & third parties. He is an intermediary who has the power to create legal relationships between the principal and the third parties.
Sec. 2(13) of the Companies Act, 1956 defines that "'director' includes any person occupying the position of a director by whatever name called"
Thus, director is an individual lawfully appointed to the Board of Directors of a company which is duly constituted to direct, control and supervise the activities and affairs of a company. Directors of a company are in the eye of law agents of the company for which they act and the general principles of the law of principal and agent regulate in most respects the relationship of the company and its directors. (Somayazula vs. Hope Prodhome & Co. (1963) 2 An W.R. 112.)
The test of agency is whether the person is purporting to enter into transaction on behalf of the principal or not. In order to constitute an agency, it is not necessary to have a formal agreement.
Director as an agent: The Madras High Court observed that normally a director is not an agent of the Company but where he acts as a director- in- charge and corresponds with another party to bring about a contract he will act as an agent. As such the liability is of the company and not the agent personally. (Puddokottah Textiles Ltd. vs. B.R. Adityan (1975) 88 Mad. L. W. 688, 790)
The Supreme Court has described the office of a Director thus,
"The Director of a Company is not a servant but an agent inasmuch as a company cannot act in its own person but only through its directors, who qua the Company have a relationship of an agent to the principal." (Ramprasad Vs. Commissioner of Income Tax (1973) A. Sc. 637, 640; Commissioner of Income Tax Vs. Man Mohandas (1966) A. Sc. 743; 59, I.T.R. - 699)
A managing Director may have a dual capacity. He may both be a director and an employee. He has not only the persona of a director but also the persona of an employee or an agent depending on terms of his employment and the Company's Articles Association. The term 'employee' is facile enough to cover both these relationships.
An agent though bound to exercise his authority in accordance with lawful instructions given to him is not subject to the direct control and supervision of the principal. A Managing Director of a Company if he is to act under the directions of a board of Directors is a servant.
As a company is an artificial person and can only contract through its agents, the normal mode of signing is to use the words "on behalf of" so and so company before the signature of the agent signing, and if an agent so signs, no personal liability will attach to him. Directors are agents of the company to the extent of the authority delegated to them. Hence, where directors make a contract in the name of, or purporting to bind the company, it is the company- the principal- which is liable on it and not the directors. The directors are not personally liable unless it appears that they took personal liability.
Directors are not personally liable under a contract which is lawful and which they have made in the proper exercise of their authority. Directors purchased goods for their company and agreed with the supplier to allot him debentures for the price. Before the debentures could be issued, the company went into liquidation. The supplier was held not liable to make the directors personally liable under the contract (Elkington & Co. vs. Hurter, (1982) 2 Ch 452) .
Relevant Case of Section 40A ( 3 )
SRI RENUKESWARA RICE MILLS vs. INCOME TAX OFFICER
ITAT, BANGALORE ‘B’ BENCH
Deepak R. Shah, A.M. & Joginder Singh, J.M.
ITA No. 1102/Bang/2002
27th August, 2004
(2005) 93 TTJ (Bang) 912 : (2005) 93 ITD 263 (Bang)
Section 40A(3), 208, 234B, Rule 6DD(f), Rule 6DD(l),
Asst. Year 1998-99
Decision in favour of Assessee
Counsel appeared :
A. Shankar, for the Appellant : K.N. Shyam Sundar, for the Respondent
Order
deepak r. shah, A.M. :
Relevant Case of Section 40A ( 3 )
SRI RENUKESWARA RICE MILLS vs. INCOME TAX OFFICER
ITAT, BANGALORE ‘B’ BENCH
Deepak R. Shah, A.M. & Joginder Singh, J.M.
ITA No. 1102/Bang/2002
27th August, 2004
(2005) 93 TTJ (Bang) 912 : (2005) 93 ITD 263 (Bang)
Section 40A(3), 208, 234B, Rule 6DD(f), Rule 6DD(l),
Asst. Year 1998-99
Decision in favour of Assessee
Counsel appeared :
A. Shankar, for the Appellant : K.N. Shyam Sundar, for the Respondent
Order
deepak r. shah, A.M. :
This appeal by the assessee is arising out of the order of learned CIT(A), Davangere, dt. 2nd Jan., 2002 pertaining to asst. yr. 1998-99. The only issues in appeal is regarding disallowance of Rs. 2.04 lakhs, being 20 per cent of the sum paid to M/s K.Parameswarappa & Co. (KP) invoking provision of s. 40A(3) and charging of interest under ss. 234A and 234B.
The assessee is carrying on business of rice mill at Bhadravathi, a small town in Shimoga District of Karnataka. The assessee for the purpose of purchase of rice approached the regional market yard at Davangere. It is stated that purchase and sale of rice being agricultural commodity is regulated under the RMC Act and transaction takes place at market yard only. The Assessee instead of paying cash/cheque/draft to KP prepares a challan and deposits the cash to the account of KP. Such receipted challan is produced to KP and goods are purchased. The AO on the basis of accounting entries in the books of KP noted that they have recorded the receipt by way of cash. Thus the assessee is said to have purchased the goods by paying cash and not by way of crossed cheque/draft. He, therefore, invoking the provision of s. 40A(3) disallowed a sum of Rs. 2,04,000 being 20 per cent of the sum of Rs. 10.20 lakhs paid to KP. The AO did not entertain the argument of the assessee as to the exception provided in cl. (f) and cl. (l) of r. 6DD. He noted that KP is not agent of assessee. He also held that the assessee has not purchased the goods from agriculturists but KP who is a full-fledged dealer and not merely a commission agent. Even the contention that amount is remitted into the bank account of KP was turned down. Learned CIT(A) held that payment to the party by way of DD/cheque only has to be considered and if the payment is made otherwise than by cheque/draft it is in contravention of provision of s. 40(A)(3). The assessee is in further appeal before us. Learned counsel for the assessee, Shri. A. Shankar, submitted that the assessee has dealt with M/s K. Parameswarapa & Co., (KP) as an agent, who is required to make payment in cash to the agriculturists for procurement of paddy and hence, on account of exigencies of business, payments were deposited directly into the bank accounts of the agents by cash. The payment to KP is also covered under the exceptions granted under r.6DD(f) of the IT Rules, inasmuch as they constitute payment made for purchase of agricultural produce, through their agent.
The payments made to KP are to an agent only as KP is registered as an agent under the Karnataka
APMC Act and further, the nature of bills issued by them indicates that they are charging commission separately on the assessee. Further, the price of the goods is passed on to the agriculturists and the commission is retained by KP which clearly indicates that KP is acting as an agent of the assessee. In the end, he submitted that the spirit and intent of the entire provision of s. 40A(3) of the Act, is to ensure monies are routed through banking channels, which has been complied in all respects inasmuch as the amounts were deposited into the bank accounts of the supplier in a place other than where the assessee is carrying on the business and the entire proof of the same has been furnished to the AO which has not been disputed and hence, ought not to have invoked the provision of s.40A(3) of the Act.
Learned Departmental Representative, on the other hand, strongly supported the orders of authorities below. He submitted that the assessee is purchasing the goods from open market at market yard. KP has issued total bill for the goods sold and not merely commission. Thus KP has sold goods not as an agent but as a trader. Clause (l) of r.6DD will apply provided the payment is made by the assessee to his agent and not agent of somebody else. In this case KP is agent of farmers and not that of the assessee. Hence, cl. (l) of r. 6DD will not apply. Similarly, cl. (f) of r. 6DD will also not apply as the payment is not made by the assessee to the cultivator or grower of the product.
Since the payment is made in cash though to the bank account of KP, the same is not in accordance with s. 40A(3) and hence, the disallowance is to be upheld.
We have carefully considered rival submissions and relevant facts of the case. Hon’ble Supreme Court while interpreting the provision of s. 40A(3) in the case of Attar Singh Gurmukh Singh, etc.vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC) at pp. 672 and 673 held thus : "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 restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AO 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 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 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 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. [See Mudiam Oil Co. & Ors. vs. ITO & Ors. (1973) 92 ITR 519 (AP)]. If the payment is made by a crossed cheque drawn on a bank or 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." (emphasis, italicized in print, supplied)
The Hon’ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted that s. 40A(3) is intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of black money for business transactions.
Relevant Case of Section 40A ( 3 )
INCOME TAX OFFICER vs. KENARAM SAHA & SUBHASH SAHA*
ITAT, KOLKATA SPECIAL BENCH
Vimal Gandhi, President; G.D. Agrawal, Vice President & D.K. Tyagi, J.M.
ITA No. 1545/Kol/2007; Asst. yr. 2004-05
7th March, 2008
(2008) 116 TTJ (Kol)(SB) 289 : (2009) 116 ITD 1 : (2008) 8 DTR 124
Section 40A(3), 80HHC, Expln. (baa), RULE 6DD(b), RULE 6DD(f), RULE 6DD(h), RULE 6DD(k), RULE
6DD(l)
Asst. Year 2004-05
Decision in favour of Revenue
Counsel appeared :
Sushil Kumar & S. Guha, for the Revenue : S.K. Tulsiyan, Gautam Banerjee & S.C. Sarkar, for the Assessee : S.
Bandyopadhyay & Somnath Ghosh, for the Interveners
ORDER
by the bench :
Relevant Case of Section 40A ( 3 )
INCOME TAX OFFICER vs. KENARAM SAHA & SUBHASH SAHA*
ITAT, KOLKATA SPECIAL BENCH
Vimal Gandhi, President; G.D. Agrawal, Vice President & D.K. Tyagi, J.M.
ITA No. 1545/Kol/2007; Asst. yr. 2004-05
7th March, 2008
(2008) 116 TTJ (Kol)(SB) 289 : (2009) 116 ITD 1 : (2008) 8 DTR 124
Section 40A(3), 80HHC, Expln. (baa), RULE 6DD(b), RULE 6DD(f), RULE 6DD(h), RULE 6DD(k), RULE
6DD(l)
Asst. Year 2004-05
Decision in favour of Revenue
Counsel appeared :
Sushil Kumar & S. Guha, for the Revenue : S.K. Tulsiyan, Gautam Banerjee & S.C. Sarkar, for the Assessee : S.
Bandyopadhyay & Somnath Ghosh, for the Interveners
ORDER
by the bench :
In the above mentioned 5 cases, the Hon’ble President, Tribunal constituted a Special Bench under s. 255(3) of the IT Act, 1961. The common issue involved in all these appeals is with regard to disallowance under s. 40A(3) of the Act.
2. Sri S.K. Tulsiyan, advocate, appearing on behalf of (i) M/s Kenaram Saha & Subhash Saha and (ii) Nadeem Iqbal led the arguments from assessees’ side. He argued the matter at great length. His arguments/submissions can
be summarized as follows :
2.1 That s. 40A(3) was introduced by Finance Act, 1968 w.e.f. 1st April, 1968. In the Memorandum Explaining the Provisions in the Finance Bill, 1968, it was explained that the purpose behind the enactment of provisions of s.40A(3) was to curb wasteful and lavish expenditure and to counter tax evasion. It was felt by the Government that the assessees claim expenditure incurred in cash which frustrate proper investigation by the Department as to identity of payee and reasonableness of payment. Sec. 40A(3) was designed to counter tax evasion through such claims or expenditure in cash.
Therefore, obviously the provisions of s. 40A(3) are attracted only in cases where the genuineness of the expenditure incurred in cash is in doubt. He stated that right at the time of insertion of s. 40A(3) in the Act, there was apprehension that the provisions may cause undue hardship and inconvenience to certain assessees in respect of cases where payment by cheque is not feasible due to some genuine reasons. So powers were given to the CBDT to notify in the IT Rules exceptions to the provisions of s. 40A(3) having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. Accordingly, the nature and circumstances under which provisions of s. 40A(3) will not be operative were specified in the IT Rules vide r. 6DD under Notification No. SO-624, dt. 14th Feb., 1969. Apart from the specific exceptions incorporated in the Rules, there was also a residuary exception, i.e. r. 6DD(j),which stated that where the taxpayer establishes that the payment could not be made by crossed cheque or draft due to exceptional or unavoidable circumstances, no disallowance under s. 40A(3) was to be made. The CBDT also issued Circular No.
220, dt. 31st May, 1977 [1977 CTR (Jour) 259 : (1977) 108 ITR (St) 8], wherein CBDT spelt out some of the circumstances which meet the requirement of r. 6DD(j). In the said circular itself the CBDT has mentioned that all the circumstances in which the conditions laid down in r. 6DD(j) would be applicable, cannot be spelt out. Thus it is clear that the circumstances spelt out in Circular No. 220 were inclusive by way of examples and not exhaustive.
2.2 That Finance Act, 1995 amended s. 40A(3) w.e.f. 1st April, 1996 by which disallowance under s. 40A(3) was reduced to 20 per cent of the expenditure claimed. Clause (j) of r. 6DD was also omitted w.e.f. 25th July, 1995.
The reasons behind these twin changes have been spelt out in the Memorandum Explaining the Provisions in the Finance Bill, 1995 [(1995) 124 CTR (St) 225 : (1995) 212 ITR (St) 356]. As per the above Explanation, cl. (j) was introduced at a time when banking facilities had yet to take routes in rural areas. Now banks have established themselves in rural areas and a vast branch network is available. Therefore, it was felt that cl. (j) of r. 6DD has outlived its purposes.
2.3 That second proviso to s. 40A(3) has directed the rule making authority to provide exception where s. 40A(3) would not be applicable considering (i) banking facilities, (ii) consideration of business expediency and (iii) other relevant factors. Clause (j) of r. 6DD was a residuary clause which took care of all the cases where payment by crossed cheque or bank draft was not practicable considering the banking facilities or business expediency or other relevant factors. The legislature while deleting r. 6DD(j) has only considered the availability of banking facilities in the rural areas and having satisfied about the banking facilities available in the rural areas, omitted r.6DD(j). However, no other rule is inserted in place of r. 6DD(j) so as to take care of the cases where the payment by account payee cheque/draft was not practicable due to business expediency and other relevant factors.
Therefore, the moot question is whether by omission of r. 6DD(j) the intention of the legislature is to disallow 20 per cent of the genuine and legitimate claim of bona fide business expenditure merely because the payment is made in cash exceeding Rs. 20,000 ? Whether the business necessity or commercial expediency recognized all along for the purpose of allowance of any expenditure now no longer to be a recognized reason while considering the disallowance of such expenditure ? He submitted that if the interpretation made by the AO is accepted, it would amount that 20 per cent of the genuine and bona fide expenditure incurred by an honest taxpayer would be disallowed merely because the payment was made in cash exceeding Rs. 20,000 even if there was business necessity or commercial expediency making the payment by account payee cheque/draft impracticable. At the same time, 80 per cent of the bogus expenditure by unscrupulous taxpayer would be allowed because of disallowance of just 20 per cent provided in s. 40A(3). He, therefore, submitted that s. 40A(3) and rules framed there under should be interpreted keeping in view the object of introduction of s. 40A(3). He stated that Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667
(SC) while considering the constitutional validity of s. 40A(3) has also explained the reasons behind introduction of this provision. Various High Courts in the following cases have also taken the view that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in s. 40A(3) : (a) CIT vs. Rhydburg Pharmaceuticals Ltd. (2004)
187 CTR (Del) 485 : (2004) 269 ITR 561 (Del); (b) Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140 : (1989)
179 ITR 122 (Cal); (c) CIT vs. Chaudhary & Co. (1995) 129 CTR (All) 101 : (1996) 217 ITR 431 (All); (d) Shri
Mahabir Industries vs. CIT (1996) 136 CTR (Gau) 107 : (1996) 220 ITR 459 (Gau); (e) CIT vs. Chrome Leather
Co. (P) Ltd. (1999) 235 ITR 708 (Mad); (f) CIT vs. Mrinalini V. Sarabhai (2003) 184 CTR (Guj) 122 : (2004) 265
ITR 64 (Guj); (g) Walford Transport (Eastern India) Ltd. vs. CIT (1999) 240 ITR 902 (Gau).
2.4 It is further contended by Sri Tulsiyan, learned counsel, that under the IT Act, what is chargeable to tax is the "income" of the assessee. Sec. 2(24) of the IT Act defines the word "income" which includes, inter alia, profits and gains. The word "profit" has not been defined in the Act. But Black’s Law Dictionary, Eighth Edition gives the meaning of the word "profit" as under : "The excess of revenues over expenditures in a business transaction."
It is needless to point out that bona fide business expenditure cannot but form part of the profits and gains of business or profession. A legitimate and genuine business expenditure cannot even be deemed to be income which can be said to be received or accrued or arose to the assessee. He further submitted that as per Art. 265 of the Constitution of India, no tax shall be levied or collected except by authority of law. Such dictum of the Constitution would necessarily exclude any interpretation of the statute that would result in denial of deduction of genuine business expenditure and consequent undue enrichment of the exchequer. He further relied upon the decision of Hon’ble apex Court in the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) in support of his contention that the onus of establishing that the conditions of taxability are fulfilled is always on the Revenue and the statutory provisions must be construed so that absurdity and mischief may be avoided.
2.5 He fairly pointed out that Hon’ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma vs. Union of India (2000) 158 CTR (AP) 35 : (1999) 239 ITR 687 (AP) and the Kerala High Court in the case of Kamath Marbles vs. ITO (2003) 182 CTR (Ker) 319 : (2003) 260 ITR 470 (Ker) have upheld the constitutional validity of s. 40A(3) and of r. 6DD after amendment by the Finance Act, 1995 and the IT (Fourth Amendment) Rules, 1995 respectively.
2.6 He further submitted that while upholding the constitutional validity of amendment in s. 40A (3), the Andhra Pradesh High Court in the case of Mangayamma Ch. vs. Union of India (supra) mentioned the exceptions provided in the second proviso of s. 40A(3). Therefore, even after the deletion of cl. (j) of r. 6DD, the exceptions mentioned in second proviso of s. 40A(3) would still continue to apply in view of the substantive provisions, i.e.,second proviso to s. 40A(3). He also relied upon the decision of Hon’ble apex Court in the case of Union of India vs. A. Sanyasi Rao (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC) in support of his argument that the heads of legislation in the lists should not be construed in a narrow and pedantic sense, but should be given a large and liberal interpretation.
2.7 He submitted that s. 295 of the Act empowers the CBDT to make rules by notification in the Gazette of India for carrying out the purposes of the IT Act. 1961. The rules are the delegated legislation empowering the Government to specify measures for fulfilling the intended purpose of the primary or principal legislation. Therefore, the rules cannot, in any way, restrict the general powers of the substantive legislation. In this view of the matter, even after the omission of r. 6DD (j), not only the purpose for which s. 40A(3) was enacted but the principles on which such law is to be administered remained unaltered. The sanctity of the legislation, i.e. s. 40A(3) including second proviso thereto, has not been affected by the amendment of r. 6DD(j).
2.8 He further submitted that as per second proviso to s. 40A(3), consideration of business expediency is a necessary consideration. The expression "commercial expediency" has been explained by their Lordships of Hon’ble apex Court in the case of S.A. Builders Ltd. vs. CIT (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC) in which it was held that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business.
2.9 That the Tribunal, Kolkata ‘C’ Bench in the case of Kumardev Seth vs. ITO vide ITA No. 1460/Kol/2006 for asst. yr. 2003-04 has allowed the relief on the considerations of business expediency and the Hon’ble jurisdictional High Court has upheld the order of the Tribunal in ITA No. 386/Kol/2007 vide order dt. 21st June, 2007. Copies of the aforesaid orders were furnished before us.
2.10 Coming to the specific facts of the case, Sri Tulsiyan submitted that the assessee M/s Kenaram Saha & Subhash Saha is an AOP. It is appointed by the Government of West Bengal as a big dealer in the public distribution system for distribution of kerosene oil in the State of West Bengal. In the State of West Bengal there is a chain, i.e. agent—big dealer—M.R. dealer for efficient running of public distribution system (PDS) of kerosene oil. The assessee is a big dealer in such chain. The Department of Food and Supplies issues allotment memo to the assessee for purchase of kerosene oil of a specified quantity from a specified agent. Similarly, allotment memos are issued to the assessee for supply of kerosene oil to the specified M.R. dealers in specified quantities. The purchase price to be paid to the agent as also the sale price to be charged from M.R. dealer is periodically determined by the Department of Food and Supplies. As per the allotment memo issued to the assessee by the Department of Food and Supplies for the purchase of kerosene oil, the assessee is required to make the payment in cash. In support of this contention, he produced before us the copies of allotment letters issued by Sub-divisional Controller, Food and Supplies, Jangipur. He stated that the assessee has only given a few
allotment letters as an example and in all other allotment letters similar directions are given. In the allotment letter, there is clear direction to the agent to deliver the specified quantity of kerosene oil to the assessee on cash payment. He, therefore, stated that when the assessee is working as a licensee being a part of the public distribution system of the Government of West Bengal, it is bound to make the payment as directed by the Government of West Bengal. The assessee cannot unilaterally decide the mode of payment to the agent. He,therefore, submitted that in the case of the assessee neither the identity of the seller nor the genuineness of the purchase is doubtful. Moreover, the payment has been made as per the rate fixed by the Government of West Bengal. Therefore, in the case of the assessee, provisions of s. 40A(3) are not applicable. In any case, the assessee’s case would squarely fall within the exception provided in second proviso to s. 40A(3). He further contended that the assessee’s case would also fall under cls. (b) and (l) of r. 6DD. He stated that the agent to whom the payment was made by the assessee was the agent of the Government of West Bengal and as per the direction of the Government of West Bengal through the office of the Sub-divisional Controller, Food and Supplies, Jangipur, the assessee was directed to make the payment in cash to such agent and, therefore, the condition of r. 6DD(b) would be squarely applicable. The payment to the agent of Government of West Bengal is
payment to the Government of West Bengal. He submitted that the rule should be interpreted liberally so as to serve the object of second proviso to s. 40A(3) and to avoid undue hardship to the bona fide and honest taxpayers. In view of the above, it was contended by the learned counsel that the CIT(A) has rightly allowed the appeal of the assessee. The order of the CIT(A) should, therefore, be sustained.
2.11 Coming to the facts in the case of Nadeem Iqbal vide ITA No. 664/Kol/2007, it is stated by the learned counsel that the assessee is an individual who derives income from trading business in electronic items on wholesale-cum-retail basis. He carried on the business with a meager capital. The appellant was new in this line of trade and had a small capital. Therefore he had to employ the services of an agent for the purchases. It is submitted that it is the prevalent practice in Asansol and nearby region that the agents procure orders from traders at Asansol and obtain supplies from sellers in Kolkata. The agents also collect cash from the buyer to make the payments to the sellers at Kolkata. Since the assessee was new to the trade, cash payment was insisted. Moreover, the assessee had a limited capital and if cheque payments had been made, the parties would have received their
credit after a substantial period, which would have affected the business of the assessee very badly. He submitted that the CIT(A) has rightly appreciated the facts of the case and allowed relief to the assessee. The order of the CIT(A) should be sustained.
2.12 Sri Tulsiyan speaking on behalf of the assessees who are engaged in the business of manufacture and export of leather goods submitted that such assessees purchase hides from the producers thereof. Hides and skins obtained from slaughtered and dead animals would easily rot and decay unless proper precautions are taken. Tanneries are not often located very near to the source of raw hides and skins. So preservation of these articles assumes great importance. The sellers process these raw hides with wet or dry salting or drying, which process is called ‘curing’. So the sellers actually ‘cure’ the raw hides for converting them into saleable commodities. In that view, the sellers are not mere merchants, but at the same time producers of saleable hides. He referred to definition of ‘producer’ from the Bakshi’s The Law Lexicon, Vol. 2 and submitted that the word ‘producer’ has a very wide meaning and will include the person who trades or deals in such production. He, therefore, submitted that the purchase of hides and skins is squarely covered under r. 6DD(f)(ii). It is further submitted by him that the sellers produced the hides and skins in a cottage industry and, therefore, payment made to them would also be covered by r. 6DD(g).
3. Shri Gautam Banerjee, chartered accountant, appeared for and on behalf of Chong Hing Tannery vide ITA No. 2114/Kol/2006 and Li Chong Tannery vide ITA No. 1696/Kol/2007. He adopted the arguments advanced by Sri S.K. Tulsiyan, advocate and in addition stated that both the assessees, i.e. Chong Hing Tannery and Li Chong Tannery derived income from the business of tanning of hides to finished leather. The assessee purchased hides from the suppliers. The raw hide in its original stage is of perishable nature and cannot be brought to market. The suppliers of the assessee buy raw hides on piece-meal basis from villagers. Then they carry out various processes upon such raw hides. After those processes, the hides are sorted out according to size and thickness and then sell them in bulk. Since the suppliers process the raw hides so as to make fit for the purpose of commercial use, they are the producers of hides within the meaning of r. 6DD(f) of the IT Rules. He also referred to the certificate issued by Central Leather Research Institute, stating the processes which are carried out by the small suppliers/collectors of raw hides and skins so as to make them marketable. Copy of such certificate is produced before us. On the above basis, it is claimed by him that the suppliers from whom the assessees purchased the hides are the producers of such hides and, therefore, the payment made to them is duly covered by r. 6DD(f). He, therefore, contended that the disallowance made by the AO and sustained by the CIT(A) under s. 40A(3) was not justified.
Sri S. Bandyopadhyay, advocate, appeared as an intervener in the case of Paramount Leathers vide ITA No. 826/Kol/2007. He relied upon the arguments advanced by Sri S.K. Tulsiyan, advocate and stated that the producer can be a small concern, it can be a big concern also which may engage in the business of producing as well as trading of hides and skins. He submitted that considering the facts of the assessee’s case, r. 6DD(f) as well as r.6DD(g) both would be applicable in the case of the assessee. Sri Somenath Ghosh, advocate appeared as an intervener in the case of Mrinal Ghosh vide ITA No. 2375/Kol/2007. His arguments were twofolds. Firstly, that out of two payments disallowed by the AO, one payment was made on Sunday and, therefore, the same would be squarely covered by r. 6DD(k). Secondly, that the other payment was made to the decorator, who did not have the bank account at the relevant time and, therefore, payment is made to a person who did not have the banking facility at the relevant time. Therefore, his case would be covered under r. 6DD(h). He further submitted that even otherwise the decorators do not accept the cheque and they insist on cash payment as soon as their work as a decorator is over. Therefore, the assessee’s case would also fall within the second proviso to s. 40A(3) itself. In view of the above, it is submitted by the learned counsel that the disallowance made by the AO may be directed to be deleted.
7. The learned Departmental Representative, on the other hand, stated that s. 40A(3) is a computation provision for determination of profits and gains of business. Sec. 40A overrides the other provisions for computing the profits and gains of business. Therefore, sub-s. (3) of s. 40A would also be applicable while determining profits and gains of business in supersession to other provisions. The constitutional validity of s. 40A(3) has been upheld by the Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra). After the amendment by Finance Act, 1995, again the validity of s. 40A(3) was challenged and the Hon’ble High Courts have upheld its constitutional validity in the following cases : (a) Kamath Marbles vs. ITO (supra); (b) Smt. Ch. Mangayamma vs. Union of India (supra). He also stated that the Tribunal cannot adjudicate upon the constitutional validity of any provisions of the IT Act or Rules.
7.1 As per second proviso to s. 40A(3), the exception has been provided in such cases and under such
circumstances as may be prescribed. Sec. 295 of the IT Act empowers the CBDT subject to control of Central Government, to make rules for carrying out the purpose of the IT Act. Sub-s. (2) of s. 295 provides for the specific matters in which the rules can be framed by the Central Government. Clause (p) of s. 295 is a residuary clause which provides as under : "Any other matter which by this Act is to be or may be prescribed." Thus, in view of s. 295(2)(p), the CBDT is the rule making authority which has to prescribe the cases and the circumstances under which the provision of s. 40A(3) would not be applicable. The CBDT has already prescribed r. 6DD in pursuance to the powers conferred upon it by second proviso to s. 40A(3). These rules are part and parcel of the statute and s.40A(3) cannot be read in isolation. Sec. 40A(3) and r. 6DD should be read together. He contended that once the rules are framed by the Government through CBDT, the authorities are bound to follow such rules. In support of this contention, he relied upon the decision of Hon’ble apex Court in the case of Bharat Hari Singhania vs. CWT (1994) 118 CTR (SC) 125 : (1994) 207 ITR 1 (SC).
7.2 It is contended by the learned Departmental Representative that there is no equity in the income-tax. No relief can be given which is not permissible as per law/rules under the garb of substantial justice. When the language of statute is clear and unambiguous, there is no necessity to go into the intention of the legislature for which the provision was introduced. The intention of the legislature is to be gathered from the language of the statute. He submitted that the language of s. 40A(3) is clear and unambiguous and, therefore, the full effect is to be given to the language used in s. 40A(3) without going into the object behind introduction of s. 40A(3). In support of this contention, he has relied upon the decision of Hon’ble apex Court in the case of CIT vs. Tara Agencies (2007) 210 CTR (SC) 454 : (2007) 292 ITR 444 (SC).
7.3 Coming to the various provisions of the IT Rules, he stated that the rules are to be strictly interpreted and the burden is upon the assessee to prove in which particular sub-rule his case falls. Referring to the facts in the case of Kenaram Saha & Subhash Saha, he submitted that the contention of the learned counsel that his case falls under r. 6DD(l) is not correct, because the assessee has made the payment to the person who is not his agent. He may be agent of the Government of West Bengal, but r. 6DD(l) would be applicable where assessee makes payment to his agent who is required to make payment in cash for goods or services rendered, on behalf of the assessee. The assessee has not proved that the person to whom the payment is made is the assessee’s agent and he has also not proved that such person in turn is required to make the payment in cash. With regard to the assessee’s claim that
its case also falls under r. 6DD(b), he stated that this claim was not made earlier and the relevant facts are also not on record. He also referred to the copies of allotment memos issued by the Sub-divisional Controller, Food and Supplies, Government of West Bengal, which is enclosed by the assessee’s learned counsel with his written submission, and contended that such allotment letters are of 2007 and therefore, not relevant to the year under appeal. In view of the above, it is submitted by the learned Departmental Representative that the order of the CIT(A) should be reversed and that of AO should be restored.
8. In the rejoinder, it is stated by Sri S.K. Tulsiyan, advocate that as per second proviso to s. 40A (3), the
exceptions are to be provided, which will exempt the applicability of s. 40A(3), considering the (i) banking facility; (ii) business expediency; and (iii) other relevant factors. Rule 6DD takes care of banking facility only and no specific rule remains on statute book after deletion of r. 6DD(j) so as to take care of business expediency and other relevant factors. In such circumstances, the Courts have power to interpret s. 40A(3) in a manner so as to allow the deduction for genuine business expenditure where the identity of the payee is not in dispute and the payment by crossed cheque/bank draft could not be made due to business expediency or other relevant factors.
The Courts should do the justice considering the substantive provisions of the Act which include proviso to s. 40A(3). He also stated that if there are two opinions about the interpretation of a particular provision, the interpretation which is favourable to the assessee should be adopted. In support of this contention, he relied upon the decision of Hon’ble apex Court in the case of CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC).
11. We have carefully considered the arguments of both the sides and perused the material placed before us. First we will deal with the arguments of Sri S.K. Tulsiyan, advocate with regard to general applicability and scope of s.40A(3). At the outset we agree with the contention of Mr. Tulsiyan that income-tax is a charge on the "income" as defined under s. 2(24) of the IT Act. The definition of ‘income’ under the IT Act is an inclusive definition; cl. (i) of sub-s. (24) of s. 2 is "profits and gains". Thus, income includes profits and gains. Sec. 28 of the IT Act provides various types of income which are chargeable to income-tax under the head "Profits and gains of business or profession". It is not in dispute that all the assessees in the appeals under consideration before us have income which is chargeable under the head "Profits and gains of business or profession". Sec. 29 of the IT Act provides how the income under the head "Profits and gains of business or profession" is to be computed. It reads as under : "29. The income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D."
From the above it is evident that the income under the head "Profits and gains of business or profession" is to be computed in accordance with the provisions contained in ss. 30 to 43D of the IT Act. Sec. 40A of the Act provides expenses or payments which are not deductible in computing the profits and gains of business or profession. Subs. (1) of s. 40A reads as under : "(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ‘Profits and gains of business or profession’." Thus, the provisions of s. 40A have been given overriding effect upon the other provisions of this Act relating to the computation of income under the head "Profits and gains of business or profession". Sub-s. (3) of s. 40A, with which we are directly concerned in these appeals, reads as under : "(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), (twenty per cent of such expenditure shall not be allowed as a deduction) : Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding twenty thousand rupees otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), the allowance originally made shall be deemed to have been wrongly made and the AO may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of s. 154 shall, so far as may be, apply thereto,
the period of four years specified in sub-s. (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made : Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), 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 relevant factors." Thus, sub-s. (3) of s. 40A is a part of the computation provision while determining the profits and gains of business or profession. In view of the above, we are unable to accept the contention of the learned counsel for the assessee that disallowance of expenditure under
s. 40A(3) would be in violation of Art. 265 of the Constitution of India which states "no tax shall be levied or collected except by authority of law". Admittedly, Central Government enjoys the constitutional right to levy tax on income. The IT Act also provides the levy of tax upon the income of the assessee. However, such income has to be computed in accordance with the provisions prescribed under the IT Act which includes the disallowance under certain circumstances. The issue of constitutional validity of s. 40A(3) has been settled long back by the Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra). In this case, their Lordships held as under : "Sec. 40A(3) of the IT Act, 1961, which provides that expenditure in excess of Rs. 2,500 (Rs. 10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with r. 6DD of the IT Rules, 1962, it will be clear that the provisions are not
intended to restrict business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AO 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 upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of s. 40A(3) are not absolute. Consideration 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 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." 12. After the amendment in s. 40A(3) by Finance Act, 1995 w.e.f. 1st April, 1996 and the amendment in r. 6DD of the IT Rules by the IT (Fourteenth Amendment) Rules, 1995, again the constitutional validity of s. 40A(3) was challenged. However, the Hon’ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma vs. Union of India (supra) upheld the constitutional validity of s. 40A(3) and held as under : "The main object of s. 40A(3) of the IT Act, 1961, is to regulate financial transactions and to prevent the use of unaccounted money or reduce the chances of use of black money for business transactions. Under r. 6DD(j) of the IT Rules, 1962, prior to its amendment, the rule making authority by virtue of the powers conferred, made provision for unavailable circumstances and genuine difficulties as permissible grounds for waiving the requirement. The said rule was in force for quite some time and it was left to the discretion of the assessing authorities to test such transactions onthe touchstones of the said limitations. The rule making authority, in the light of experience and in its wisdom, sought to take away the said permissible factors. It is not as if the section itself does not provide for exceptions to be prescribed by the rule making authority in appropriate cases having due regard to the factors set out in the proviso to sub-s. (3). The mere fact that the rule making authority did not retain the old rule, does not make the main section itself unconstitutional. Any changes made in the subordinate legislation would not in any way affect the substantive provision."
12.1 Hon’ble Kerala High Court in the case of Kamath Marbles (supra) also upheld the constitutional validity of s. 40A(3) after the amendment therein in the year 1995 and held as under : "Parliament is absolutely competent to fix ceiling on expenditure and lay down conditions for allowance. In Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC), the Supreme Court upheld the constitutional validity of s. 40A(3) of the IT Act, 1961. The Supreme Court was dealing with s. 40A(3) prior to its amendment by Finance (No. 2) Act,1966, wherein the provision was for complete disallowance of expenditure if the same was in excess of the limit provided than under s. 40A(3) which was Rs. 10,000. While considering the validity of s. 40A(3), the Supreme Court has also strongly relied on r. 6DD(j) of the IT Rules, 1962, as it stood then. In principle, the Supreme Court held that s. 40A(3) does not violate Arts. 14 and 19(1)(g) of the Constitution. Any restriction in the IT Act on expenditure cannot be said to be violative of the right to carry on business and therefore, there is no violation of Arts. 14 and 19(1)(g) of the Constitution. Even after the amendment there is a provision for complete deduction of expenditure over Rs. 20,000 incurred in cash. Clause (h) of r. 6DD r/w cl. (k) itself provides sufficient
liberalization of the rigor of s. 40A(3) which entitles the parties to claim full deduction on cash payments over Rs. 20,000 where banking services are not available in the place where the expenditure is incurred or on the day the expenditure is incurred. In other words, the statute and the rules insist on payment through account payee cheques or demand drafts only in cases where banking services are available to the parties. It cannot be said that insistence on money transactions being carried out through the bank where the facilities are available which is to ensure transparency in transactions any way affects the rights of the parties to carry on any trade or business; the amendment to the rule does not affect the validity of the statute sustained by the Supreme Court."
13. Now we come to interpretation of s. 40A(3). It has been contended by the learned counsel Sri S.K. Tulsiyan that s. 40A(3) was introduced by Finance Act, 1968 w.e.f. 1st April, 1968. He referred to the Memorandum Explaining the Provisions in the Finance Bill, 1968 and pointed out that the purpose of introduction of s. 40A(3)was to curb wasteful or lavish expenditure in the business or profession and to counter tax evasion. He also referred to Circular No. 6P dt. 6th July, 1968 and specifically drew our attention to the following portion of the said circular : "This provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and reasonableness of the payment."
In the light of above submission it was claimed by him that section should be interpreted in a manner which fulfills the object for which s. 40A(3) was introduced and should not be interpreted in a manner by which a genuine business expenditure, where the identity of the payee is also established, can be disallowed. In contrast, it was claimed by the Revenue that the language of s. 40A(3) is clear and unambiguous and, therefore, the same should be interpreted literally.
13.1 We have carefully considered the rival submissions of the parties. We find that the Hon’ble apex Court in the case of CIT vs. Tara Agencies (supra), relied upon by the learned Departmental Representative, has laid down the rules of interpretation. Their Lordships held as under : "The intention of the legislature has to be gathered from the language used in the statute which means that attention should be paid to what has been said as also to what has not been said. It is the bounden duty and obligation of the Court to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the legislature in its wisdom has deliberately not incorporated."
13.2 Similarly, their Lordships of Hon’ble apex Court in the case of CIT vs. Anjum M.H. Ghaswala & Ors. (2001) 171 CTR (SC) 1 : (2001) 252 ITR 1 (SC) held as under : "The exercise of purposive interpretation by looking into the object and scheme of the Act and legislative intendment would arise only if the language of the statute is either ambiguous or conflicting or gives a meaning leading to absurdity."
13.3 In the light of the above guidelines laid down by Hon’ble apex Court, let us examine the provisions of s. 40A(3). From the plain reading of the section itself it is evident that it would be applicable where the assessee incurs any. expenditure exceeding Rs. 20,000 otherwise than by a crossed cheque or by a crossed bank draft. In such circumstances, 20 per cent of such expenditure shall be disallowed. In our opinion, there is no ambiguity in the language of s. 40A(3) and, therefore, relying upon the abovereferred decisions of Hon’ble apex Court in the cases of Tara Agencies (supra) and Anjum M.H. Ghaswala (supra), we hold that the section is to be interpreted by giving literal meaning to the language used in the section itself. In view of the above, the purpose behind the enactment of s. 40A(3) is not relevant. What is relevant is the enactment itself, i.e. s. 40A(3).
The IT authorities have to give effect to the section as enacted by the Parliament.
13.4 Both the parties have relied upon catena of judgments in support of their respective claims. It would be relevant to refer to those decisions. Sri S.K. Tulsiyan, advocate has relied upon the following decisions : (i) CIT vs. Rhydburg Pharmaceuticals Ltd. (supra). In this case, their Lordships held as under : "Dismissing the appeal, that, in the present case, the Tribunal was of the opinion that the payee insisted on cash payment as observed by the CIT(A) and further that the transactions were found to be genuine. The Tribunal was justified in allowing the expenditure. No substantial question of law arose from its order."
We have gone through the entire decision and we find that the assessment year for which the above decision has been delivered has not been given. However, we find that in the first part of the decision of Hon’ble High Court, there is reference to r. 6DD(j) and the Board’s circular. From the above it appears that this decision is relevant to the period when r. 6DD(j) was applicable. We may point out that before its omission by the IT (Fourteenth Amendment) Rules, 1995 w.e.f. 25th July, 1995, r. 6DD(j) reads as under : "(j) in any other case, where the assessee satisfies the AO that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft— (1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof; and also furnishes evidence to the satisfaction of the AO as to the genuineness of the payment and the identity of the payee." The CBDT had also issued a circular i.e. Circular No. 220, dt. 31st May, 1977 in which the circumstances are spelt out in which r. 6DD(j) would be said to be applicable. However, in the appeals for consideration before us, assessment years involved are asst. yrs. 2002-03 to 2004-05. All these assessment years are after the omission of r.6DD(j). Therefore, the above decision of Hon’ble Delhi High Court will not be applicable. (ii) CIT vs. K.K.S.K.
Leather Processor (P) Ltd. (2007) 292 ITR 669 (Mad). In this case it was held as under : "That the assessee had produced necessary grounds for making cash payment. The Tribunal noted that these payments were made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power. The Tribunal also noted from the order of the CIT, that considering the fact that the purchases were made from the unorganized sector, cash
payments were indispensable. The order of the Tribunal with regard to the cash payments was justified." In that case assessment year involved was asst. yr. 2001-02 and therefore, the ratio of the above decision would be applicable to the appeals under consideration before us. However, we find that in the above case, the Tribunal has found as a matter of fact that the above payments were made to small time vendors who came from the surrounding villages and carried out the process of dressing of skin without the aid of power. The Hon’ble High Court taking note of the abovementioned finding of fact by the Tribunal dismissed the Revenue’s appeal in limine.
Therefore, it would be necessary to examine the facts of the case under consideration before us whether they are identical to the facts before the Hon’ble High Court. We will revert to the facts of the case subsequently after considering all the decisions relied upon by the parties. (iii) CIT vs. Chaudhary & Co. (supra). In this case it has been held as under : "That the Tribunal had found that the seller had been insisting on cash payment. The identity of the seller had been disclosed by the assessee. The assessee had furnished the certificates from the sellers stating that they had insisted on cash payment and as to the genuineness of the payments. Hence, the Tribunal was justified in holding that the payments in question were not hit by s. 40A (3) and in deleting the addition of Rs. 65,537." However, we find that the assessment year involved in the above case was asst. yr. 1972-73, i.e. prior to omission of r. 6DD(j). Therefore, the above decision would not be applicable to the appeal under consideration before us. (iv) Shri Mahabir Industries vs. CIT (supra). In this case, their Lordships of Hon’ble Gauhati High Court held as under : "The ITO and the CIT(A) had not taken into consideration the Circular No. 220, dt. 31st May, 1977. The Tribunal reached the conclusion without giving any reason whatsoever as to the non-existence of exceptional and unavoidable circumstances. The Tribunal was not justified in law in holding that the disallowances by the ITO in respect of cash payment of Rs. 61,200 made on various dates to S was proper." This decision is also for asst. yr. 1985-86, i.e. prior to omission of r. 6DD(j). (v) CIT vs. Chrome Leather Co. (P) Ltd. (supra).
In this case, their Lordships held as under : "That the Tribunal took into account the commercial need in keeping cash and referred to the need for keeping cash for making purchase of raw skins from shandies. The Tribunal found that the issue of crossed cheques was not practicable and having regard to the nature of the transaction and necessity for expeditious settlement and nature of the relationship between the payer and payee, it found that the issue of payment by crossed cheques would have caused genuine difficulty to the payee. The Tribunal also found that the identity of the payee was established and the genuineness of the payment was established beyond doubt.
The payments made by the assessee were not liable to be disallowed while computing its business income." This decision is for asst. yr. 1974-75, i.e. prior to omission of r. 6DD(j) and hence not applicable to the assessment years under appeal before us. (vi) CIT vs. Mrinalini V. Sarabhai (supra).
In this case their Lordships of Hon’ble Gujarat High Court held as under : "Held that the assessee had adopted a peculiar method of maintaining her books of account and having her business transactions and the entire work with regard to payment and collection of money was entrusted to the firm. In such a set of circumstances the firm made payment on behalf of the assessee by account payee cheques. Hence it could not be said that there was any cash or there was any possibility of having chances and opportunities to use or create black money. The amount, which was paid on behalf of the assessee by the firm, was paid in cash but was paid by way of account payee cheques. This factual position could not be denied on behalf of the Revenue. Such transactions could not be hit by the provisions of s. 40A(3) of the Act. The ITO made a mistake in understanding the term ‘pay order’ and the manner in which the payments were made on behalf of the assessee by the firm. It was nothing but an instruction by the assessee to the firm with regard to making payment on behalf of the assessee. Therefore, the Tribunal was justified in confirming the order passed by the CIT(A), whereby the disallowance made by the ITO had been deleted."
From the above it is evident that in this case the payment was actually made by account payee cheque, though by the firm on behalf of the assessee. Thus in this case no cash payment was involved. Therefore, this decision was on altogether different facts than the facts in the cases under appeal before us. In none of the cases before us it was claimed by the assessee that the payment was made by cheque. (vii) Walford Transport (Eastern India) Ltd. vs. CIT (supra).In this case, their Lordships of Hon’ble Gauhati High Court held as under : "Held, that the reason indicated by the assessee regarding its financial stringency compelling it to make payment in cash, was accepted. The majority transactions in which payments were made for more than Rs. 2,500 was accepted. The circumstances in respect of
the transactions were obviously the same except the distinction which had been indicated by the AO to the effect that in some of the transactions the name of the payee was not indicated in the vouchers. The CIT(A) held in his appellate order that he had examined each and every voucher submitted by the assessee and it was found that each voucher disclosed the name of the payee. The Tribunal had not upset the finding of the CIT(A). Hence the payments made by the assessee in cash exceeding Rs. 2,500 could not be disallowed."
This decision is for asst. yrs. 1987-88 and 1988-89, i.e. prior to omission of r. 6DD(j) and hence not applicable to the assessment years under appeal before us. (viii) Girdharilal Goenka vs. CIT (supra). "The object of s. 40A(3) is to check evasion of tax and not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the AO has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the CBDT (No. 220, dt. 31st May 1977) is illustrative and not exhaustive and. the AO has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. Where the Tribunal had found that the assessee’s business was new and the transactions were genuine but there was a time-lag between the dates of the bills and the
dates of the payments : Held, that the disallowance of the payments in terms of s. 40A(3) of the IT Act, 1961 was not justified."
This decision of Hon’ble Calcutta High Court is also for asst. yr. 1975-76, i.e. prior to omission of r. 6DD(j) and, therefore, the same is not applicable to the assessment years involved in the appeals before us. (ix) CIT vs. Kumardev Seth (IT Appeal No. 386 of 2007) In this case, their Lordships of Hon’ble Calcutta High Court held as under : "We have heard learned counsel for the appellant. Perused the order passed by the Tribunal. We find that no substantial question of law is involved in this matter. Hence this appeal being IT Appeal No. 386 of 2007 is dismissed." Thus the Hon’ble jurisdictional High Court has approved the order of the Tribunal by dismissing the Revenue’s appeal, holding that no substantial question of law arises. Therefore, it would be relevant to refer the decision of the Tribunal, which is approved by their Lordships. The Tribunal in the said case, i.e. Kumardev Seth vs. ITO vide ITA No. 1460/Kol/2006 held as
under : "Heard both the parties, perused the record and find force in the contention of the assessee that he has to make this cash payment to M/s B.S.K.B.S Ltd. out of business expediency in view of the fact that there was no branch of United Bank of India at the place where the business of the assessee is located. The assessee’s case also finds support from the above mentioned decision in the case of ITO vs. Binod Kr. Agarwala (supra) decided by the Hon’ble Tribunal, Kolkata. We are therefore, of the opinion that the addition made by the AO under s. 40A(3) of the IT Act, 1961 was not justified in the instant case."
From the above it is evident that the Tribunal arrived at the conclusion that s. 40A(3) is not applicable because there was no branch of United Bank of India at the place where the business of the assessee is located. Though in the order it is not mentioned which specific clause of r. 6DD was applicable, yet inference to cl. (h) which still exempt cash payment at a place not served by a bank can explain the decision. Rule 6DD(h) provides :"(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;"
Moreover in the abovementioned decision the Tribunal has not held that the assessee would be entitled to relief even if assessee’s case does not fall in any of the clauses of r. 6DD by virtue of the second proviso to s. 40A(3). On the facts of the particular case, the Tribunal held that s. 40A(3) is not applicable. The facts in all the cases under appeal before us are different, because the payment is made in Kolkata where there are sufficient banking facilities. Therefore, the above decision of Tribunal, Kolkata ‘C’ Bench, which is approved by Hon’ble jurisdictional High Court, would not be applicable to the facts of the cases under appeal before us.
14. The cases relied upon by the learned Departmental Representative before us are as under : (i) Bagmari Tea Co. Ltd. vs. CIT (supra). Their Lordships of Hon’ble Calcutta High Court in the aforesaid case held as under : "That cash payment of Rs. 65,000 had been made. The CIT(A) as well as the Tribunal had found that the assessee had not shown compelling circumstances under which he had made the payment in cash. Therefore, the amount had been rightly disallowed." (ii) Silk Fab Exports vs. CIT (supra).
In this case, it has been held by their Lordships of Hon’ble Kerala High Court as under : "Dismissing the appeal, that the order of the AO and the appellate authorities showed that in many cases details of payees and transactions were not furnished and in cases where payees addresses were furnished, notices were sent by the Department. But the notices were returned by the postal authorities stating that such parties did not exist or with endorsement that the addresses were not known. In fact there was no necessity for the Department to try and trace the addresses of the suppliers to whom payments were made. It was for the assessee to produce evidence including the addresses of the suppliers and to establish that the case fell under the exception clause. The findings by the authorities were purely on the facts. The claim of exception under r. 6DD(j) was not applicable as the suppliers to whom payments
were made were well established business concerns and the payments were worth lakhs of rupees. Therefore, the assessee was not entitled to benefit under r. 6DD(j)." (iii) Nahgi Lal vs. CIT (supra). Their Lordships of Rajasthan High Court in the said case held as under : "That the facts showed that the payments had been made six or seven days after the transactions. There was no evidence of any exceptional or unavoidable circumstance necessitating payments otherwise than by crossed cheques. The case of the assessee was not also covered by any of the circulars issued by the CBDT. Hence, the payments in sums exceeding Rs. 2,500 made for the purchases were hit by the provisions of sub-s. (3) of s. 40A of the Act and, as such, such amounts were rightly added to the total income of the assessee in terms of the said section. (iv) Hari Chand Virender Paul vs. CIT (supra). In the aforesaid case, it has been held as under : "That since the assessee had ample opportunity to make payment by crossed cheques or crossed bank draft and need not have waited till the demand was made for payment, there was no exceptional or unavoidable circumstance which justified a non-compliance with the provisions of s.
40A(3) and the disallowance of the sum of Rs. 28,231 was justified." We find that all the above four decisions relied upon by the learned Departmental Representative were prior to omission of r. 6DD(j). However, despite the existence of r. 6DD(j), their Lordships of various High Courts after considering the facts of the case in appeal before them have come to the conclusion that the conditions specified in
r. 6DD(j) have not been satisfied. However, in the appeals under consideration before us, assessment years involved are after the omission of r. 6DD (j). Therefore, these decisions cannot be said to be applicable. (v) CIT vs. Pehlaj Rai Daryanmal (supra).
In this case, their Lordships of Allahabad High Court held as under : "The idea in enacting cl. (f) of r. 6DD of the IT Rules, 1962, was that since the cultivators, growers or producers of agricultural or forest produce, produce of animal husbandry, fish or fish products are mostly residents of rural areas not used to banking systems or not having bank accounts, the requirement of sub-s. (3) of s. 40A would be impracticable and would lead to difficulties in its application. The idea could never have been to exempt all payments in respect of purchase of forest or other produce and products mentioned in sub-cls. (i) to (iii) of cl. (f) of r. 6DD from whomsoever they are purchased. The words ‘cultivator, grower or producer’, occurring at the end of r. 6DD(f) qualify the words occurring in all the preceding four sub-clauses and not only sub-cl. (iv). The exemption is confined to payment to grower or producer of forest produce." Though this decision is also for asst. yr. 1970-71. however, in this case, their Lordships of Hon’ble Allahabad High Court have considered the applicability of r. 6DD(f) which still exists and in some of the cases before us the parties have claimed that r. 6DD(f) is squarely applicable. Therefore, this decision would be directly applicable while dealing with the cases wherein r. 6DD(f) is claimed to be applicable.
We will revert back to this decision when we discuss the facts of the cases wherein applicability of r. 6DD(f) is claimed.
15. While referring to the second proviso to s. 40A(3), it has been claimed by the learned counsel that this proviso provides certain exceptions where s. 40A(3) is not applicable. The exemption from applicability of s. 40A(3) is to be allowed having regard to the (i) nature and extent of banking facilities available, (ii) consideration of business expediency, and (iii) other relevant factors. He stated that the second proviso to s. 40A(3) is a substantive provision of the law, full effect to which should be given. Therefore, even if the facts of the case of an assessee are not squarely covered by any of the clauses of r. 6DD, still the exemption from the rigor of s. 40A(3) can be allowed in view of the provisions of second proviso to s. 40A(3). We are unable to agree with the contention of the learned counsel. At the cost of repetition we reproduce the second proviso to s. 40A(3) hereinunder :"Providedfurther that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty
thousand rupees is made otherwise than by (an account payee cheque drawn on a bank or account payee bank draft), 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 relevant factors." (Emphasis, italicized in print, supplied)
From the above, it is evident that no disallowance under this sub-section shall be made where any payment in a sum exceeding Rs. 20,000 is made otherwise than by a crossed cheque/crossed bank draft in such cases and under such circumstances as may be prescribed. Thus, the mandate of the proviso is to exempt the payment in violation of provisions of s. 40A(3) in such cases and under such circumstances as may be prescribed. The last sentence of the proviso, i.e., "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors", is the guideline for the authority who has to prescribe the cases and circumstances under which the disallowance under s. 40A(3) will not be made despite the payment exceeding Rs. 20,000 other than by crossed cheque/bank draft. In pursuance to this proviso, r. 6DD has been brought into the statute vide Income-tax (Amendment) Rules, 1969 w.e.f. 1st April, 1969. Rule 6DD prescribes the cases and the circumstances in which ‘payment in a sum exceeding Rs. 20,000 may be made otherwise than by crossed cheque drawn on a bank or a crossed bank draft. Thereafter this rule has been amended from time to time. Rule 6DD, as applicable to the assessment years evolved in the appeals before us, reads as under : "Cases and circumstances in which payment in a sum exceeding (twenty thousand) rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. 6DD. No disallowance under sub-s. (3) of s. 40A shall be made where any payment in a sum exceeding (twenty thousand) rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely : (a) where the payment is made to— (i) the RBI or any banking company as defined in cl. (c) of s. 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) the State Bank of India or any subsidiary bank as defined in s. 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society as defined in cl. (cii) of s. 2 of the RBI Act, 1934 (2 of 1934), or any primary
credit society as defined in cl. (civ) of that section; (v) the LIC of India established under s. 3 of the Life
Insurance Corporation Act, 1956 (31 of 1956); (vi) the Industrial Finance Corporation of India established under s. 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948); (vii) the Industrial Credit and Investment Corporation of India Ltd.; (viii) the Industrial Development Bank of India established under s. 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964); (ix) the Unit Trust of India established under s. 3 of the Unit Trust of India Act, 1963 (52 of 1963); (x) the Madras Industrial Investment Corporation Ltd., Madras; (xi) the Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad; (xii) the Kerala State Industrial Development Corporation Ltd., Trivandrum; (xiii) the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay; (xiv) the Punjab State Industrial Development Corporation Ltd., Chandigarh; (xv) the National Industrial Development Corporation Ltd., New Delhi; (xvi) the Mysore State Industrial Investment and Development Corporation Ltd., Bangalore; (xvii) the Haryana State Industrial Development Corporation Ltd., Chandigarh; (xviii) any State Financial Corporation established under s. 3 of the State Financial Corporations Act, 1951 (63 of 1951); (b) where the payment is made to Government and under the rules framed by it, such payment
is required to be made in legal tender : (c) where under any contract entered into by the assessee before the 1st day of April, 1969, the payment is required to be made in legal tender; (d) where the payment is made by— (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank. Explanation : For the purposes of this clause and cl. (h), the term ‘bank’ means any bank, banking company or society referred to in sub-cls. (i) to (iv) of cl. (a) and includes any bank (not being a banking company as defined in cl. (c) of s. 5 of the Banking Regulation Act, 1949 (10 of 1949), whether incorporated or not, which is established outside India; (e) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; (f)
where the payment is made for the purchase of— (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (i) where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or the heirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the
income chargeable under the head ‘Salaries’ of the employee in respect of the financial year. In which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs. 7,500; (j) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of s. 192 of the IT Act, 1961, and when such employee— (A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (B) does not maintain any account in any bank at such place or ship; (k)where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (l) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (m) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.
Explanation : For the purpose of this clause, the expression ‘authorised dealer’ or ‘money changer’ means a person authorised as an authorised dealer or money changer to deal in foreign currency or foreign exchange under any law for the time being in force."
In view of the above, in our opinion, the assessee will get the exemption from the rigors of s. 40A (3) if he is able to establish that his case falls within any of the clauses of (a) to (m) of r. 6DD. Burden would be upon the assessee to establish under which particular clause his case falls.
16. Now we revert back to the facts of each case. First we will take up ITA No. 1545/Kol/2007 i.e., ITO vs.
Kenaram Saha & Subhash Saha.
16.1 The assessee is an AOP which is a big dealer in the chain of agents involved in the public distribution system for supply of kerosene oil within the State of West Bengal. During the year under consideration the assessee made the payment of Rs. 1,34,58,430 for purchase of kerosene oil in cash exceeding Rs. 20,000. As per AO, the payment was in violation of the provisions of s. 40A(3). He, therefore, disallowed 20 per cent of the payment made by the assessee. Accordingly, the disallowance was worked out at Rs. 26,91,680. On appeal, the CIT(A) deleted the disallowance holding that the assessee’s case is covered under r. 6DD(k) as well as r. 6DD(l) of IT Rules. Before us the assessee’s learned counsel further claimed that the case of the assessee is also covered by r. 6DD(b). However on perusal of the orders of the authorities below we find that before the AO the assessee did not make a specific claim under which clause of r. 6DD its case falls. The claim was that the purchase was made
from the Government. The assessee’s explanation before the AO was of general nature explaining the manner in which the business is being carried on by it. The CIT(A) has mentioned that the assessee’s case falls within r. 6DD(k) and also alternatively under r. 6DD (l). We find that r. 6DD(k) would be applicable where the payment was required to be made on a date on which the banks were closed either on account of holiday or strike.
Therefore, it would be a matter of factual verification with reference to each payment whether the payment was made on bank holiday or not. The date-wise details of the payments and whether on those dates it was bank holiday or not has not been placed before us. Therefore, we are unable to give any finding whether r. 6DD(k) is applicable in the case of the assessee.
16.2 Rule 6DD(l) would be applicable where the payment is made by any person to his agent, who is required to make the payment in cash for goods or services on behalf of such person. Whereas r. 6DD(b) would be applicable "where the payment is made to Government and. under the rules framed by it. such payment is required to be made in legal tender". It was claimed by the assessee that as per the public distribution system in the State of West Bengal, there is a chain of persons as follows—"Agent—Big dealer—M.R. dealers." The assessee purchases kerosene oil from the agent appointed by the Government of West Bengal and the assessee supplies kerosene oil to the M.R. dealers. However, whether the "agent" to whom the payment is made by the assessee can be said to be agent of the assessee within the meaning of cl. (l) of r. 6DD is an important question, because r. 6DD(l) would be
applicable only where the payment is made by the assessee to his agent. While claiming exemption under r. 6DD(b), it was claimed by the assessee that the agent is the representative of Government of West Bengal and, therefore, payment made to the agent being representative of Government of West Bengal is a payment to the Government of West Bengal. However, as we have noted, no such claim was made by the assessee before the AO.
It was also stated by the learned Departmental Representative that the necessary facts are not available on record to examine the contention of the assessee that its case falls in cls. (k), (l) or (b) of r. 6DD. We agree with the learned Departmental Representative. The claim of the assessee would require examination of the facts with reference to the books of account so as to ascertain on which particular date payment was made and whether such date was bank holiday or not so as to ascertain the applicability of r. 6DD(k). With regard to applicability of r.6DD(l) and r. 6DD(b) also further facts are required to be examined. The learned counsel for the assessee has given the copy of the supply order issued by Sub-divisional Controller, Food and Supplies, Jangipur giving direction to the assessee to make the payment in cash. However, it was pointed out by the learned Departmental Representative that these supply orders are dated 2007 and, therefore, will not be applicable to the year under consideration. What was the exact direction of the supply order in the accounting year relevant to assessment year under consideration would require to be examined. In view of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the AO with the direction that he will examine the facts of the case afresh and will adjudicate upon the assessee’s contention that its case falls under cls. (b), (k) and (l) of r. 6DD. Needless to mention that he will allow adequate opportunity of being heard to the assessee. Cross-objection, i.e., CO No. 58/Kol/2007 filed by the assessee is only in support of the order of the CIT(A), In view of our finding while disposing of the Revenue’s appeal, the cross-objection filed by the assessee is also simultaneously disposed of. Now we will take up ITA No. 664/Kol/2007 i.e., ITO vs. Nadeem Iqbal. The assessee is an individual who derives income from trading business in electronic items on wholesale-cum-retail
basis. During the accounting year relevant to assessment year under consideration, the assessee made total cash payment of Rs. 1,09,56,190 exceeding Rs. 20,000. The AO applying the provisions of s. 40A(3) disallowed 20 per cent of the cash payment. Accordingly, the AO disallowed the expenditure of Rs. 21,91,238 under s. 40A(3). On appeal, the CIT(A) deleted the same. Hence, this appeal by the Revenue.
18.1 We have considered the rival submissions and perused the material placed before us. After hearing both the parties and perusing the order of the CIT(A), we find that the CIT(A) deleted the disallowance without giving any finding with regard to any specific clause of r. 6DD in which the assessee’s case falls. As we have already discussed that once there is payment of any expenditure in violation of s. 40A(3), the assessee can escape the disallowance under the said section only if assessee’s case falls within the ambit of any of the clauses of r. 6DD. The matter was required to be examined whether assessee’s case falls under any specific clause. In this case we find that neither the assessee properly claimed nor the AO examined the case with reference to the relevant rule.
Even before the CIT(A) the position did not change. But the arguments of the assessee’s counsel were having regard to business expediency, smallness of assessee’s capital, assessee being new to the business, etc. payment in cash was made. At the time of hearing before us, the assessee made a specific claim that the cash payment was made to the agent who in turn was required to make the payment in cash to the sellers of such goods. Therefore, assessee’s case falls within the ambit of cl. (l) of r. 6DD and this was the claim before the Revenue authorities.
However, this claim has to be examined in accordance with law. In the above circumstances, in our opinion, it would meet the ends of justice if the orders of the authorities below on this point are set aside and the matter is restored back to the file of the AO with the direction that he will allow adequate opportunity to the assessee to produce the necessary evidence in support of his claim. Thereafter the AO will readjudicate the matter in accordance with law and in the light of our observations/findings in this order. (1) ITA No. 2114/Kol/2006—
Chang Hing Tannery vs. Asstt. CIT; (2) ITA No. 1696/Kol/2007—Li Chang Tannery vs. Asstt. CIT.
The facts of the case and, the arguments of the parties in both these cases were identical and, therefore, they are being considered together. Both these assessees derived income from the business of tanning of raw hides to finished leather. During the accounting year relevant to assessment year under consideration, the assessees made the payments for purchase of raw hides by bearer cheques. Since as per s. 40A(3) payment is required to be made by account payee cheque or account payee bank draft, the AO treated the payment by bearer cheques to be in violation of s. 40A(3) and disallowed 20 per cent of such payment. On appeal, the CIT(A) sustained the same.
Hence these two appeals by the assessees. At the time of hearing before us, it was claimed by the learned counsel that the payments made by the assessees are covered by r. 6DD(f) as well as by r. 6DD(g). Rule 6DD(f) reads as under : "(f) where the payment is made for the purchase of— (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or products;" The payment for purchase of hides and skins would be covered by sub-cl. (ii) of cl. (f) being the produce of animal husbandry. However, as per cl. (f), the payment is to be made to the producer. At this juncture it would be relevant to again refer the decision of Hon’ble Allahabad High Court in the case of CIT vs. Pehlaj Rai Daryanmal (supra) relied upon by the learned Departmental Representative. In the said case, the Hon’ble High Court has considered the applicability of cl. (f) of r. 6DD and held that the words "cultivator, grower or producer", occurring at the end of r. 6DD(f) qualify the words occurring in all the preceding clauses and not only sub-cl. (iv). In view of this decision of Hon’ble Allahabad High Court, to satisfy the test of r. 6DD(f), not only the payment should be made for purchase of produce of animal husbandry but payment is to be made to the producer of such produce. Though it has been claimed by the learned counsels that the payment has been made to the producer, but no evidence in support of such claim has been brought on record by the assessees. On the other hand, the learned Departmental Representative referred to the copy of the sale bills issued by the sellers and pointed out that from the sale bill it is evident that all the sellers are the merchants, i.e. the traders. However, in our opinion, merely because the sellers are the traders or the merchants of hides and skins’, that does not mean that they cannot be producer thereof. A person may produce the hide and skin and sell the same. Thus he can have the twin capacities of producer as well as trader thereof. There can be another situation that a person purchases hides and skins produced by others and trade those items, then he will be a trader of hides and skins and will not be covered within r. 6DD(f)(ii). It was contended by the learned counsel for the assessee that as per the meaning of the term "producer" in Bakshi’s The Law Lexicon, Vol. 2, the word "producer" includes any person who trades or deals in such production. We are unable to accept this contention of the learned counsel. If the word "producer" is to be given such a wide meaning, then there was no necessity of providing the words "to the producer of such article" after r. 6DD(f), because when
the payment is made for purchase of an article, the seller is necessarily trader thereof. He may or may not be a producer. Therefore, by providing the words "producer of such articles" in r. 6DD(f), the application of rule is being restricted in respect of payments made only to producer and not to any other person. The learned Departmental Representative has relied upon the decision of Hon’ble apex Court in the case of CIT vs. Tara Agencies (supra), wherein their Lordships considered the meaning of the words "manufacture", "production", "process", etc. In that case the assessee derived income from the business of export of tea. It purchased tea of diverse grades and brands and blended the same by mixing different kinds of tea. The assessee was having a small scale industrial undertaking for the above process of tea. It claimed weighted deduction under s. 35 of the IT Act, 1961. As per s. 35B, weighted deduction was available to a small scale exporter who exports goods manufactured or produced in any small scale industrial undertaking. In this context their Lordships of the apex Court examined the meaning of the word "produce". At p. 451 of 292 ITR, their Lordships referred the dictionary meaning of the word "produce" which is as under : "In Black’s Law Dictionary (5th Edn.), the term production has been defined as under : "Production, process or act of producing. That which is produced or made, i.e., goods. Fruit of labor, as the productions of the earth, comprehending all vegetables and fruits; the productions of intellect, or genius, as poems and prose compositions; the productions of art, as manufactures of every kind." The term "produce", as defined in the New Webster’s Dictionary of the English language (Deluxe Encyclopedic Edition), is as follows : "Produce, to bring forth into existence; to bring about; to cause or effect, esp. intellectually or creatively; to give birth to; to bear, furnish, yield; to make accrue; to bring about the performance of as a movie or play; to extend, as a line.—v.i. To bring forth or yield appropriate offspring, products, or consequences." At p. 452, again their Lordships dealt with the meaning of the word "produce" as under : The expression "produced" was given a wider meaning than the word. "manufacture" pointing out that the word "produced" will include an activity of
manufacturing the materials by applying human endeavour on some existing raw material, but the word "produce" may include securing certain produce from natural elements, for example, by growing plants on soil, or by operating mines and the like or for example, by milching the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk.
20.1 Whether the sellers to whom the assessees made the payments exceeding Rs. 20,000 by way of bearer cheques were producers or not would depend upon the facts of the case of each seller. Before us, the assessee has only produced the sales bills issued by the seller and the transport receipts for transportation of the goods to the assessee’s destination. From the sales bill itself it cannot be decided whether the sellers are producers or not. It has been claimed by the learned counsel for the assessee, Sri Gautam Banerjee, that the AO had raised the issue of applicability of s. 40A(3) at the fag end of the assessment proceedings in the month of March, 2006 and he did not allow any opportunity to the assessee to produce necessary evidence that the sellers from whom the assessee purchased hides and skins are producers thereof.
20.2 It was also contended by the learned counsel for the assessees in the above mentioned cases that the assessee’s case also falls within cl. (g) of r. 6DD. Clause (g) would be applicable where the payment is made for purchase of the products manufactured or processed without the aid of power in the cottage industry to the producer of such products.
20.3 To verify the contention of the learned counsel, we referred to the assessment orders in the cases of both the assessees. In the case of Li Chong Tannery the relevant finding at p. 2 of the assessment order reads as under : "In the course of hearing on 13th March, 2006, the Authorised Representative Shri Sumantra Guha was requested to show cause why the payments exceeding Rs. 20,000 otherwise than crossed or account payee cheques shall not be disallowed under s. 40A(3) of the Act. The Authorised Representative vide his written submission dt. 21st March, 2006 explained the nature of payments under s. 40A(3) which are as follows : ‘Rule 6DD(f)(ii) of the IT Rules stated that ‘No disallowance under s. 40A(3) shall be made when any payment exceeding Rs. 20,000 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft where the payment is made
for the purchase of the produce of animal husbandry (including hides and skins) to the cultivators, growers or producers of such articles, produces or products.’
In the instant case, the payments have been made for the purchase of raw hides and skins to the cultivators, growers or producers of such raw hides and skins (i.e., butchers) and hence the provisions of s. 40A(3) of the IT Act, 1961 will not be applicable for such payments.
The assessee’s contentions have been examined but it could not be proved that the parties from whom the purchases of raw hides were made during the year are either cultivators, growers or producers of raw hides and skins related to animal husbandry, dairy or poultry farming. As such, the above payments in excess of rupees twenty thousand to those dealers of skin/hide does not quality for exemption as per r. 6DD(f) of the IT Rules."
20.4 From the above it is evident that for the first time on 13th March, 2006, the AO asked the assessee to show cause why the payment exceeding Rs. 20,000 otherwise than by crossed or account payee cheque should not be disallowed under s. 40A(3). The assessee furnished its explanation on 21st March, 2006 claiming that its case falls within r. 6DD(f)(ii). The AO rejected the assessee’s contention on the ground that the assessee could not prove that the parties, to whom the payment had been made, were either cultivators, growers or producers of raw hides and skins. However, it is evident that the AO did not allow any opportunity whatsoever to the assessee to lead necessary evidence in support of its contention that the persons from whom hides and skins were purchased were the producers thereof. The CIT(A) has discussed the legal aspects of the issue at length, but the factual matrix of the case has not been examined even at his end. In view of the above, we set aside the orders of the authorities
below on this point and restore the matter back to the file of the AO and direct him to allow adequate opportunity to the assessee to produce necessary evidence in support of its contention. Thereafter he will readjudicate the issue in accordance with law and in the light of our observations/findings in this order.
20.5 We may further mention that the facts in the case of Chong Hing Tannery are more or less identical because in this case also the query was raised sometime in March, 2006 and the assessee furnished reply on 21st March, 2006 and 30th March, 2006. More or less similar explanation was given by the assessee and the AO rejected the assessee’s claim without allowing opportunity to the assessee to produce necessary evidence in support of its claim. Therefore, for the detailed discussions in the case of Li Chong Tannery, we set aside the orders of the authorities below in the case of Chong Hing Tannery also on this point and restore the matter back to the file of the AO to readjudicate the issue as per our direction above.
21. The learned counsel for the assessee had also raised an additional ground in both the above cases which was with regard to computation of deduction under s. 80HHC. The additional ground is admitted by us vide our finding in para 3.1 above. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that at the end of s. 80HHC, there is explanation which defines several terms used in s. 80HHC. Explanation (baa) defines the words "profits of the business" which reads as under : "(baa) ‘profits of the business’ means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by— (1) ninety per cent of any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;"
From the above it is evident that profits of business for the purpose of s. 80HHC means the profits of business as computed under the head "Profits and gains of business or profession". Sec. 29 of the IT Act provides that profits and gains of business shall be computed in accordance with the provisions contained in ss. 30 to 43D of the IT Act. Thus, whatever is the profits and gains of the business as computed by the AO under the head "Profits and gains of business or profession", should be taken as profits of the business for the purpose of computation of deduction under s. 80HHC. We, therefore, direct the AO to recompute the deduction under s. 80HHC as per our observation above.
22. Now coming to the case of Paramount Leathers vide ITA No. 826/Kol/2007, which is a Departmental appeal, Sri S. Bandyopadhyay appeared as an intervener. He submitted that considering the facts of the assessee’s case, r.6DD(f) as well as r. 6DD(g) both would be applicable in the case of the assessee. We find that the facts in the case of Paramount Leathers are also similar to the facts in the case of Li Chong Tannery discussed above. In the case of Paramount Leathers also, the AO vide letter dt. 13th March, 2006 asked the assessee to show cause as to why disallowance under s. 40A(3) should not be made. The assessee furnished the written submissions dt. 20th March, 2006 claiming that the payments were made to the producers of hides and skins and, therefore, r. 6DD was applicable. The AO rejected the assessee’s explanation without allowing any opportunity to the assessee to produce evidence in support of its contention. The facts being similar to Li Chong Tannery, for the detailed discussions in paras 20 to 20.3 above, we are of the opinion that the matter in this case also needs to be reexamined at the end of the AO as per our direction in the case of Li Chong Tannery. However, in the case of this
assessee, other issues are also involved and, therefore, this Departmental appeal will now be placed before the Division Bench for consideration and adjudication of the other issues. The issue with regard to disallowance under s. 40A(3) is to be restored back to the file of the AO to be readjudicated upon as per our observation/direction above.
23. Sri Somenath Ghosh appeared as an intervener in the case of Mrinal Ghosh, According to him the assessee’s case falls under r. 6DD(k) and r. 6DD(h). We find that during the accounting year relevant to assessment year under consideration, the assessee made two cash payments exceeding Rs. 20,000 at a time. The first payment was made on 30th April, 2000 amounting to Rs. 36,000 and the second payment on 16th June, 2000 amounting to Rs. 34,000. The assessee has produced before us the xerox copy of the calendar of the year 2000 and we find that 30th April, 2000 was Sunday, i.e. bank holiday. Therefore, the payment made on 30th April, 2000 will squarely fall within cl. (k) of r. 6DD. With regard to other payment made on 16th June, 2000, it was contended by the assessee that the payment was made to the decorator who did not have the bank account at the relevant time and, therefore, the assessee’s case would fall within the ambit of cl. (h) of r. 6DD. We find that cl. (h) of r. 6DD reads as under : "(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such
village or town;" From the above it is evident that where the payment is made in a village or town which is not served by any bank, then only the conditions of the above clause would be satisfied. In the case before us, the AO has recorded the finding that the decorator is of locality of Chinsurah, Dist. Hooghly having full banking facilities. The above finding of fact recorded by the AO has not been controverted before us by the learned counsel. He has not claimed that the place where the payment is made does not have the banking facility. But his claim is that the person to whom he made the payment did not have bank account at the relevant time. In our opinion, if the place where the recipient resides or carries on business is having banking facility, conditions of r. 6DD(h) would not be satisfied merely because the recipient has not opened his bank account. In view of the above, we reject the assessee’s claim with regard to applicability of r. 6DD(h) in respect of payment of Rs. 34,000 on 16th June, 2000. In this appeal, other issues are involved. Therefore, the matter will be placed before the Division Bench for consideration and adjudication of other issues.
24. Now coming to Departmental appeal in the case of Shyamal Kr. Dey, the AO has determined the income by applying a net profit rate of the turnover. The AO in addition to the determination of net profit as a percentage of turnover, made further disallowance under s. 40A(3). The CIT(A) deleted the disallowance made under s. 40A(3), Revenue aggrieved with the order of the CIT(A) is in appeal before us. It is contended by the learned counsel that once a net profit rate is applied, no further addition/disallowance can be made under s. 40A(3). In support of this contention, he has relied upon the decision of Hon’ble Allahabad High Court in the case of CIT vs. Banwarilal Banshidhar (supra) in which their Lordships held as under : "affirming the decision of the Tribunal, that no disallowance could be made in view of the provisions of s. 40A(3) r/w r. 6DD(j) of the IT Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the GP rate was applied, that would take care of
everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases made by the assessee." The above decision of Hon’ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of Hon’ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance under s. 40A (3) made by the AO. Accordingly, we uphold the order of the CIT(A) and dismiss the Revenue’s appeal.
25. The results of the aforesaid appeals are summed up as under : (i) ITA No. 1545/Kol/2007—ITO vs. Kenaram Saha & Subhash Saha; (ii) ITA No. 664/Kol/2007—ITO vs. Nadeem Iqbal; All the aforesaid Revenue’s appeals and cross-objection of the assessee are allowed for statistical purposes. (iii) ITA No. 2114/Kol/2006—Chong Hing Tannery vs. Asstt. CIT; (iv) ITA No. 1696/Kol/2007—Li Chong Tannery vs. Asstt. CIT. The aforesaid appeals of the assessees are allowed for statistical purposes. (v) ITA No. 1772/Kol/2007—Asstt. CIT vs. Shyamal Kr. Dey. The aforesaid Revenue’s appeal is dismissed.
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