1. These two appeals by the assessee are directed against the separate orders of CIT (A), Bareilly, dt. 18th Jan., 2005 relating to asst. yrs.
1991-92 and 1992-93.
2. Firstly, we will take up ITA No. 203/Luck/2005 relating to asst. yr.
92-93. In this appeal, the assessee has challenged the addition of Rs. 1,67,245 made under Section 40A(3) of the IT. Act, 1961. The AO disallowed following payments by invoking the provisions of Section 40A(3) of the IT Act, 1961:5. Jai Bharat Oil Mills Rs. 15,000 ____________ 3. The AO found that the above parties had supplied goods to the assessee on credit and payment had been made to them number of days after purchase of goods and that no exceptional circumstances compelled the assessee to make the payment in violation of provisions of Section 40A(3) of the IT Act, 1961.
4. On appeal, the CIT (A) confirmed the addition stating that in my view no exceptional circumstances have been brought out for payment by cash/bearer cheques. Hence, the assessee is in appeal before this Bench of the Tribunal.
5. Shri Yogesh Agarwal, learned Counsel for the assessee, submitted that Section 40(A3) of the Act provides for disallowance of expenditure incurred in cash exceeding the limits prescribed therein. But, certain exceptions have been provided in the Act. The proviso to Section 40A(3) as well as Rule 4DD were such exceptions to such normal rules.
According to learned Counsel for the assessee, the exceptions provided that if the payment has been made under exceptional circumstances, the provision of Section 40A(3) will not be applicable. The Board, vide Circular No. 220, dt. 31st May, 1997 has clarified that if the transactions are made at a place where either the purchaser or seller does not have a bank account, the payment will be deemed to have been made under exceptional circumstances. In the said circular, it is also stated that the transactions and payments made on a bank holiday are also covered by exceptional circumstances. Learned Counsel for the assessee submitted that in the instant case, all these parties at SI.Nos. 1 to 4 mentioned above did not have bank accounts at Baheri and had insisted to make the payment either by cash or bearer cheques as the outstation cheques would have taken almost 20 to 30 days for clearing. He further submitted that the assessee made payment to Janta Food Grain Agency, Baheri, after banking hours. He, therefore, submitted that all the above payments have been made under exceptional circumstances.
6. Shri Anadi Verma, senior Departmental Representative, submitted that all the conditions laid down under Rule 4DD(j) were not satisfied in the case of the assessee and, therefore, there was no justification to accept the explanation of the assessee.
7. We have carefully considered the rival submissions and have also perused the orders of the authorities below. Clause (j) of Rule 4DD of IT Rules, 1962 provides that no disallowance under Section 40A(3) shall be made where the assessee satisfies the ITO that the payment could not be made by way of crossed cheque drawn on a bank or by a crossed bank draft- (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 ITO regarding the genuineness of the payment and the identity of the payee.
The CBDT issued a Circular No. 220, dt. 31st May, 1977 and para 4 of the said circular reads as under: 4. All the circumstances in which the conditions laid down in Rule 4DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are: (b) the transactions are made at a place where either the purchaser or the seller does not have a bank account; 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.
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 4DD(j).
In the instant case, the parties mentioned at SI. Nos. 1 to 4 (supra) belong to different places and the AO has nowhere doubted the genuineness of the transactions of these parties. It is relevant to state that the payments to parties at SI. Nos. 1 to 3, as mentioned above, were made by the assessee by cash whereas payment to party No. 4 i.e. Radhey Shyam Praveen Kumar was made by bearer cheque. Learned Counsel for the assessee submitted that the parties at SI. Nos. 1 to 4 mentioned above did not have bank account at Baheri and had insisted payment either by cash or bearer cheque as the outstation cheques would have taken almost 20 to 30 days for clearing. In support of the above contention, the assessee had filed certificates/letters from the above parties mentioning the fact that they did not have their bank accounts at the place of the assessee. These certificates/letters were filed before the lower authorities also. As regards payment made to Janta Food Grain Agency, Baheri, it was submitted that this party is the sister concern of the assessee firm with same partners and has its bank account in the same branch in which the assessee concern maintains its own bank account. All the payments made to this party are by account payee/crossed cheques except this payment of Rs. 85,000. It is stated that the above payment to Janta Food Grain Agency, Baheri, was made after banking hours. It is also claimed that the payment made to Janta Food Grain Agency, Baheri, is genuine and that too to the concern with similar partner and not to any third party or agency. We find that the AO has nowhere doubted the genuineness of this transaction, rather he has mentioned this fact in his assessment order. Moreover, the credit entry of the amount appears in the bank account of the payee i.e. Janta Food Grain Agency, Baheri. In our view, the case is fully covered under Rule 46DD(j) of the IT Rules, 1962 and also by CBDT Circular No. 220, dt. 31st May, 1977.
8. In the case of Allar Singh Gurmukh Singh v. ITO , the Hon'ble Supreme Court made following important observation: Section 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 Rule 4DD 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. Section 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 Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors is 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 Section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment.
Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of Section 40A(3) and Rule 46DD 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.
9. In the above judgement, Hon'ble Supreme Court has categorically held that consideration of business expediency and other relevant factors are not excluded. The Hon'ble Supreme Court further observed that genuine and bona fide transactions are not taken out of the sweep of the section. From the above, it is clear that the AO has not doubted the genuineness of the payments, identity of the payee and genuineness of the transactions and, therefore, payments otherwise than through crossed cheques were justified in business expediency and under exceptional circumstances. Accordingly, we delete the addition of Rs. 1,68,245 made by the AO and confirmed by CIT (A).
10. Now, we will take up ITA No. 202/Luck/2005 relating to asst. yr.
1991-92. In this appeal, the assessee has challenged the action of CIT (A) in confirming the addition of Rs. 4,40,181 made under Section 40A(3) of the IT Act, 1961. The assessee firm manufactures rice, common rice and superfine Basmati. While framing the assessment, the AO made two separate additions of Rs. 1,71,631 and Rs. 2,66,550 under Section 40A(3) of the Act. The AO made an addition of Rs. 1,73,631 in respect of four parties with whom the assessee had regular dealing and to whom payments by cheques have been made earlier. These parties along with the payments made in cash which were disallowed by the AO are as under: 1. Janta Food Grain Agency 28/11/90 40,000 30/11/90 15,000 2. Jai Bajrangbali, Gautra 28/11/90 15,000 29/11/90 14,651 The AO observed that all the above parties had supplied goods to the assessee on credit and payment had been made to them a number of days after purchase of goods and that no exceptional circumstances compelled the assessee to make the payment in violation of provisions of Section 40A(3) of the IT Act, 1961.
11. On appeal, the CIT(A) confirmed the addition of Rs. 1,71,631.
Hence, the assessee is in appeal before this Bench of the Tribunal.
12. We have carefully considered the rival submissions and have also perused the orders of the authorities below. Learned Counsel for the assessee submitted that the assessee had filed written submissions before the CIT(A) which are reproduced hereinbelow: Regarding other payments party-wise position with reference to Rule 4DD(j) is enclosed herewith for your kind perusal: Party-wise position with reference to Rule 4DD(j)(1) Cheda Lal Sita Ram, Shahjahanpur 27-11-90 26,980(2) Jai Bajrang Wali Trading Co., Badaun 28-11-90 15,000 29-11-90 14,651(3) Insaf Trading Co., Bareilly 28-11-90 12,000 Total 68,631(4) Janta Food Grain Agency, Baheri 28-11-90 40,000 30-12-90 15,000 All the parties mentioned at point Nos. 1 to 3 belong to different places as mentioned above and learned AO has nowhere doubted the genuineness of the transactions with these parties. The payments aggregating Rs. 68,631 to parties at point Nos. 1 to 3 as mentioned above were made by the assessee concern (Janta Rice Mill) through bearer cheques. All these parties at point Nos. 1 to 3 mentioned above do not have bank accounts at Baheri and had insisted payments either vide cash or bearer cheques as the outstation cheques would have taken almost 20 to 30 days for clearing. In support of this contention, certificates from all the parties mentioning the fact that they did not have their bank accounts at the, place of the assessee concern (M/s Janta Rice Mill, Baheri) are enclosed herewith for your kind reference.
Regarding payments made to party mentioned at point No. 4 i.e., M/s Janta Food Grain Agency, Baheri, it is hereby submitted that this party is the sister concern of the assessee firm with same partners.
All the payments made to this party are technically speaking cash transfers to self-firm. During this year as per the instructions of the Mandi Samiti, Baheri, assessee had to open a shop at Mandi Samiti Sthal, Baheri. Assessee opened the shop consisting of same partners under the name and style of Janta Food Grain Agency.
Previously, the paddy was purchased directly from the paddy growers but now assessee has to purchase the paddy through this self-concern. Despite this fact our humble submission is that these payments are genuine and the learned AO has nowhere doubted the genuineness of these transactions. Moreover, the payment is being made to the firm with same partners meaning thereby that the payment is not made to any third person or agency, rather it is in the nature of self-transfer. The payments are made on consideration of business exigencies and exceptional circumstances and that too to the self-concern with similar partners.
Keeping in view the above facts, the case is fully covered under Rule 4DD(j) of the IT Rules, 1962 and also by CBDT Circular No. 220, dt. 31st May, 1977. Recently, Delhi High Court has held that when the assessee has reflected these in the cash book submitted to the ITO and he has also provided letters from the concerned parties confirming the transactions. These parties were identifiable and their letters of confirmation were on record. In other words, the genuineness of these transactions is not doubted or called for in question. Nor is it anybody's case that any steps were taken by the Revenue to go to the genuineness or otherwise of these. Therefore, the Tribunal could not hold that there was no material or evidence on record to show that the appellant's case was covered by the relevant exception. Ramaditya Investments v. CIT (2004) 138 Taxman 231 (Del) (copy enclosed for kind reference).
In view of the above it is hereby requested that maximum benefits may kindly be granted to the assessee concern.
Learned Counsel for the assessee reiterated the submissions made before the lower authorities and, on the other hand, learned Departmental Representative relied on the orders of the authorities below. It is apparent from the record that all the parties mentioned at SI. Nos. 1 to 3 (supra) belong to different places and the AO nowhere doubted the genuineness of the transactions with these parties. There is no dispute that the payments aggregating to Rs. 68,631 to parties mentioned at SI.Nos. 1 to 3 above were made by the assessee concern through bearer cheques. All three parties did not have bank accounts at Baheri and had insisted payments either by cash or bearer cheque as the outstation cheques would have taken almost 20 to 30 days for clearing. In support of the above contention, the assessee had filed certificates/letters from the above parties mentioning the fact that they did not have their bank accounts at the place of the assessee concerned. As regards payment made to party No. 4 i.e. M/s Janta Food Grain Agency, Baheri, it is submitted that this party is the sister concern of the assessee firm with same partners. Thus, all the payments made to this party are cash transfers to self-firm. Learned Counsel for the assessee contended that the payment to this party was made after banking hours. It is not a case of the AO that the payment made to this party was not genuine.
In other words, the AO has not doubted the genuineness of the transactions. In the case of Gindharilal Goenka v. CIT (1989) 80 CTR (Cal) 140 : (1988) 179 ITR 122 (Cal), the Hon'ble Calcutta High Court held as under: The object of Section 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.
13. In the above case, the Hon'ble High Court has held that if the transaction is genuine, the AO should allow the deduction. It is also relevant to state that we have decided a similar issue in ITA No.203/Luck/2005 relating to asst. yr. 1992-93 (supra) and findings given therein shall apply to the facts of the this case also with equal force. Accordingly, we hold that there was no justification in making the disallowance of Rs. 1,73,631 under Section 40A(3) of the IT Act, 1961.
14. Vide para 18 of the assessment order, the AO has mentioned that in the case of seven parties, the assessee has shown payments through cheques. Further, on enquiry from the banks, the AO found that the payment was actually through bearer cheques i.e. for all practical purposes in cash. The details of such payments are as under:Name of party Date of Dt. of payment Amount purchase through bearerJute Traders Co.
21/10/90 8/11/90 26,550Prem Enterprises 25/10/90 8/11/90 40,000 03/11/90 28/11/90 20,000Gupta Trading Co.
20/10/90 8/11/90 01/11/90 20/11/90 25,000Faruqi Ahmad & Co.
06/11/90 7/12/90 20,000 02/12/90Nasir Enterprises 06/11/90 30/11/90 20,000 to 7/11/90Jagdish Baboo 07/11/90 26/11/90 30,000 15/11/90 5/12/1990 40,000 The AO disallowed Rs. 2,66,550 under Section 40A(3) of the IT Act, 1961. On appeal, the CIT(A) confirmed the addition.
15. Before us, Shri Yogesh Agrawal, learned Counsel for the assessee, reiterated the submissions made before the lower authorities. It is seen that the assessee had submitted written submissions before the CIT(A) which are reproduced hereinbelow: Party-wise position with reference to Rule 4DD(j) Jute Traders Co.
8/11/90 26,550 All the parties mentioned above belong to different places as mentioned above and the learned AO has nowhere doubted the genuineness of transactions with these parties. The payments regarding purchases aggregating Rs. 2,66,550 were made to these parties by the assessee concern (Janta Rice Mill) through bearer cheques. All the parties mentioned above do not have bank accounts at Baheri and had insisted payments either vide cash or bearer cheques as the outstation cheques would have taken almost 20 to 30 days for clearing. In support of this contention certificates from all the parties mentioning the fact that they did not have their bank accounts at the place of the assessee concern (M/s Janta Rice Mill, Baheri) are enclosed herewith for your kind reference. Only certificates from Nasir Enterprises, Pilibhit, and Jai Durga Trading Co. Sitapur, could not be obtained regarding payment of Rs. 20,000 on 30th Nov., 1990 and Rs. 20,000 on 5th Dec, 1990 respectively as the parties could not be contacted at present. Despite of this we are trying our level best to locate the parties and as soon as the confirmation is received the same will be filed. Keeping in view the above facts the case is duly covered under Rule 46DD(j) of the IT Rules, 1962 and also by CBDT Circular No. 220, dt. 31st May, 1977.
Kindly also find enclosed herewith the copy of order made by the learned Members of the Tribunal in a similar matter ITO, Ward (2), Bareilly v. Janta Armoury, Bareilly, in support of our contention.
16. Shri Anil Kumar, senior Departmental Representative, relied on the orders of the authorities below.
17. It is apparent from the record that all the parties mentioned above belong to different places and the AO has nowhere doubted the genuineness of the transactions with these parties. All the parties mentioned above did not have bank accounts at Baheri and had insisted payment either by cash or bearer cheques. The assessee also filed certificates from all the parties mentioning the fact that they did not have their bank accounts at the places of the assessee concerned. The assessee, vide letter dt. 28th Dec, 2004, also filed certificates from M/s Nasir Enterprises, Pilibhit (payment against purchase of Rs. 20,000 on 30th Nov., 90) and M/s Jaidurga Trading Co., Sitapur (payment of Rs. 20,000 on 5th Dec, 1990) to whom the payments were made vide bearer cheques. It is relevant to state that we have decided a similar issue in assessee's case for asst. yr. 1992-93 in ITA No. 203/Luck/2005 (supra). The facts and circumstances of the present case are similar to that of asst. yr. 1992-93. For the detailed reasons given therein, we hold that there was no justification in making the disallowance under Section 40A(3) of the IT Act. In the instant case the AO has not doubted the genuineness of the transactions and, therefore, in view of the decision of Hon'ble Calcutta High Court in the case of Giridharilal (supra), the AO should have allowed the deduction.
18. In view of the above, we delete additions of Rs. 1,73,631 and Rs. 2,66,550.