S. 40A(3) No disallowance for cash payments made to ‘Broker’ who makes cash payments on behalf of the assessee
In the instant case, the AO observed that the assessee has made cash payments for freight charges to brokers, which was in excess of the limit prescribed under section 40A(3) of the Act. He, therefore, by invoking the provisions of section 40A(3) of the Act, made disallowance of Rs. 9,286/- for A.Y.2007-2008, Rs. 5,34,973/- for A.Y.2008-2009 Rs. 11,96,342/- for A.Y.2009- 2010 and for A.Y. 2010-2001 Rs. 1,23,044/-. On appeal, the learned CIT(A) has confirmed the action of the AO, on the ground that the entire freight charges from customers have been included in the books of accounts of the assessee, as the turnover and freight payments have been made to the drivers are part of the business expenses, and therefore, the provisions of section 40A(3) are applicable to the assessee. The learned CIT(A) has also observed that the arguments of the assessee that the payments were made to truck drivers, who insisted for payment in cash was not exceptional case, because the assessee has not made payments to individual truck owners but to various brokers through whom the trucks were engaged, and therefore, the case of the assessee was not covered by the exceptions mentioned in Rule 6DD. The alternative arguments of the assessee that if the disallowance is made under section 40A(3), the GP will go abnormally high, was also not accepted by the learned CIT(A) on the ground that the disallowance under section 40A(3) of the Act was a technical disallowance for violation of specific provisions of Income Tax Act. Before us, the learned AR of the assessee has relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Vijaykumar P. Desai (Individual & HUF) (supra), wherein the Tribunal has held as under:
“6. We find that on this aspect, it is noted by the learned CIT(A) that as per the remand report of the AO, the AO had issued notices u/s 133(6) of the Act to all eighteen persons whose names were available in the seized materials regarding cash payments exceeding Rs.20,000/- and all of them had confirmed that they were acting as agents on behalf of these two assessees for making purchases on their behalf and they were getting commission in the range of 0.75% to 1 %, They had also confirmed that they were receiving cash payment from these two assessees and were in turn making cash payment to the raddiwalas from whom they were making purchases on behalf of these two assessees. These facts are noted by the learned CIT(A) from the remand report In the remand report, it was also reported by the AO that the AO had also issued notice u/s 131 of the Act to three such agents on random basis out of total eighteen agents and out of these three persons, two appeared before the AO and confirmed that they were acting as agent for these two assessees for making purchases on behalf of these two assessees. It was also confirmed by them that they were taking payment in cash from these two assessees and payment was made in cash to the suppliers of the goods. It was also confirmed that they were taking commission ranging from 0.5% to 0.75% on supply of waste papers to the assessee. In the light of these facts, it is seen that the provisions of clause (k) of Rule 6DD of the IT Rules are squarely applicable and hence, in the facts of the present case, no disallowance u/s 40A (3) of the Act is justified. Hence, on this aspect, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we confirm his order on this aspect, we do not find any reason to interfere in the order of the learned CIT(A). Accordingly, we confirm his order on this aspect.”
9. We find that in the instant case also, it is not in dispute that the payments were made by the assessee to the brokers from whom the trucks were hired on payment, and in turn was required to make the payment in cash to the truck-drivers in each. As per Oxford Dictionary & Thesaurus-II Page no.15, an agent is:
i) person acting for another in business etc.
ii) person or thing producing effect
iii) broker, delegate, envoy, executor, functionary, go-between, intermediary, mediator, middleman, negotiator, proxy, representative, surrogate, trustee.
Therefore, a broker is akin to an agent. Thus, the facts of the case are identical to the facts, which were in the case of Vijaykumar P. Desai (supra), and therefore, the decision in that case is squarely applicable to the facts of the assessee’ s case. Hence, respectfully following the above-cited decision of the Tribunal, we set aside the orders of the lower authorities, and delete the disallowance under section 40A(3) of the Act, and this ground of the appeal of the assessee is allowed.
Download Full Text of the case :-ACIT vs. Gyanchand Gandhi HUF (ITAT Ahemdabad) – IT(SS)A Nos.41 to 44, 111 to 114/Ahd/2013