M/s A Daga Royal Arts Vs. ITO (ITAT Jaipur)
It was submitted by the ld AR that in order to secure the deal, assessee had no other option but to make the payment in cash. Cash payments were made from the disclosed sources being the amount withdrawn from bank. It was for sheer insistence of the seller that the payments were made in cash. Had the assessee denied the cash payment looking to the provisions of sections 40A(3), the deal could not have been finalized. In such circumstances, in the business interest and to complete the deal, the assessee had chosen to make the payments in cash fortified through registered sale deed. The payment has been made out of the explained sources, through the registered document and as a disclosed transaction.
The transactions have been executed by the assessee within a span of one and half month and there are transactions where the payment has been made through cheque and there are transactions where the payment has been made through cash. The said contentions are supported by the fact that on the same day, there are cash and cheque payments as evidenced from the details of the transactions appearing at page 7 and 8 of the assessment order. It is therefore clear that the assessee was having sufficient bank balance and only at the insistence of the specific sellers, the assessee has withdrawn cash and made payment to them and wherever, the seller has insisted on cheque payments, the payment has been made by cheque. This makes out a case that the assessee has business expediency under which it has to make payment in cash and in absence of which, the transactions could not be completed. The second proviso to section 40A(3) refers to “the nature and extent of banking facility, consideration of business expediency and other relevant factors” which means that the object of the legislature is not to make disallowance of cash payments which have to be compulsory made by the assessee on account of business expediency. Further, the source of cash payments is clearly identifiable in form of the withdrawals from the assessee’s bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making the cash payments.
Identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee’s bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by the Hon’ble Rajasthan High Court in case of Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-1, Jaipur dated 28.10.2016 for Assessment Year 2013-14 wherein the assessee has taken the following ground of appeal:-
“In the facts and circumstances of the case and in law, the ld. CIT(A) has grossly erred in confirming the action of ld. AO in disallowing the claim o f expenditure of Rs. 1,71,67,000/- by applying section 40A(3) of Income Tax Act, 1961. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please may be granted by deleting the entire addition Rs. 1,71,67,000/- imposed under section 40A(3). ”
2. The facts of the case are that during the year under consideration, the assessee firm has purchased 26 pieces of plot of land in the month of April and May, 2012 from various persons for a total consideration of Rs. 2,46,28,425/-, Cout of which payment amounting to Rs. 1,71,67,000/- were made in cash to various persons, payment amounting to Rs. 59,48,920/- were made in cheque to various persons, and Rs. 8,15,700/- and Rs. 6,84,296/- were paid in cash towards stamp duty and Court fee respectively.
3. During the course of assessment proceedings, a show-cause notice was issued to the assessee as to why the purchases made in cash should not be disallowed u/s 40A(3) of the Act. In its submission filed vide letter dated 24.02.2016, the assessee submitted that it has purchased the plots of land in the month of April and May, 2012 as capital asset but later on, the same have been converted into stock-in-trade and the reflection and presentation in the annual accounts has been made accordingly. It was further submitted that the payment for purchase of land has been made in cash because the sellers were new to the assessee and refused to accept the cash. It was submitted that the delay in making the cash payment, it could have lost the land deals. In support, reliance was placed on the CBDT Circular No. 220 (F No. 206/17/76-IT (A-11)) dated 31.05.1977. Further, the assessee referred to the intention behind introduction of the provisions of section 40A(3) which is to check evasion of tax so that the payment is made from the disclosed source. Further reliance was placed on the various decisions including the decisions of Hon’ble Rajasthan High Court in case of CIT v. Mahendra & Co. Ltd, (1987) 163 ITR 316 (Raj), Badrilal Phool Chand Rodawat v. CIT (1987) 167 ITR 404 (Raj), Kanti Lal Purshottam & Co. vs. CIT (1985) 155 ITR 519 (Raj.) and CIT vs. Banswara Fabrics Ltd (2004) 267 ITR 398 (Raj.).
4. The submissions so filed by the assessee were considered but were not found acceptable to the Assessing Officer. The Assessing Officer observed that in all these cases which have been relied upon by the assessee, the emphasis was given on the fact that the seller has pressed to make cash payment and the identity of the seller is genuine. The AO, on perusal of the details of the properties purchased, as per copies of the sale deed furnished during the course of assessment proceedings, noticed that the assessee had made cash payments regularly, no specific circumstances have been brought to his knowledge that the cash payments were made due to some unavoidable circumstances.
5. The Assessing Officer further referred to the nature of business disclosed in the audit report as well as the fact that the assessee has sold plots of land amounting to Rs. 82 lacs during the year under consideration and held that the assessee is in the business of real estate and has purchased the subject properties for business purposes and the same were stock-in- trade and not investment as contended by the assessee.
6. Further, the AO referred to the Rule 6DD of the Income Tax Rules and stated that the case of the assessee does not fall in any of the sub-clauses of Rule 6DD. Regarding the Circular No. 220 (F No. 206/17/76-IT(A-11) dated 31.05.1977 relied upon by the assessee, it was observed by the AO that the said circular is very old and no reliance can be placed on the said circular.
7. The AO further held that the word ‘expenditure’ has not been defined in the Act. It is a word of wide importance. Section 40A(3) refers to expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word ‘expenditure’ for the purpose of the section. The expenditure for purchasing the stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits u/s 28 on principles of commercial accounting. It was accordingly held by the AO that the payment made for purchase of stock-in-trade would be covered by the term “expenditure” and which would be subject matter of disallowance u/s 40A(3) of the Act.
8. It was further observed by the AO that the maximum purchases were made from the persons who are residing in Jaipur city and there are banking facilities in the city. It was further observed by the AO that in single family, repeated cash payments were made which shows that there were no unavoidable circumstances to make cash payment to the sellers and the AO accordingly made disallowance of Rs. 1,71,67,000/- in respect of purchase of property in cash invoking the provisions of section 40A(3) of the Act. However no disallowance was made in respect of cash payment for stamp duties and court fees paid by the assessee.
9. Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A). It was contended before the ld. CIT(A) that the pieces of land were purchased as investment in the month of April, May 2012 with an intention to hold these for longer period as investments. However, on the basis of the lucrative market and repetitive enquiries about the various plots of land in which it had invested, the assessee decided to convert the said plots of land into its stock-in-trade in the month of June 2012. The assessee further submitted that whether a particular asset is held as ‘capital asset’ or ‘stock-in-trade’ is a matter of intention of the assessee, which is known only to the assessee and the intention is best reflected through the entries passed in the books of accounts. At the time of purchase, the entries passed in the books of accounts of accounts reflected these transactions as investments.
10. It was further submitted that in the real estate business, businessman does not transfer the purchased property/land in his own name as registration charges and stamp duty on transfer is required to be paid which makes it a costly affair. Alternatively, they obtain Power of Attorney from the seller and pay advance on the basis of ‘Agreement to Sell’ and after identification of the customer, the registry is being done in the name of final buyer/customer only, through the valid Power of Attorney. Whereas in the instant case under consideration, all the lands were transferred in the name of assessee firm through registered sale deeds and it incurred a sum of Rs. 14,99,996/-towards registration charges and stamp duty thereon, which support the assessee’s intention of holding the purchased lands for longer term as investments.
11. It was further submitted that cash payments for the purpose of acquiring capital asset, being investments, are not covered by the provisions of section 40A(3) of Act. Regarding AO’s observation that the auditors have mentioned that the assessee is engaged in the real estate business, it was submitted that the auditors have rightly mentioned their real estate business and nothing adverse could have been inferred by the AO because the investments in land were converted into stock-in-trade on 1stJune, 2012 by passing appropriate entries in books of accounts and during assessment proceedings, this factual aspect was also conveyed. Further, there was a real estate business turnover to the tune of Rs. 82,00,000/- and accordingly the audit report contained this factual aspect. It was submitted that the same can have no adverse effect on the fact of cash being paid for acquiring investment in the form of land.
12. It was further submitted that even if the purchases are treated as stock-in-trade, section 40A(3) does not in blanket manner mandate disallowance in respect of all situations where cash payment has been made. It was submitted that the cash payments were made on the specific condition put up by the seller and they being resident of Jaipur or belonging to the same family does not make any difference. In this regard, it was further submitted that CBDT Circular No. 220(F No. 206/17/76-IT (A-II) dated 31.05.1977 was brought to the notice of the AO and which was binding on the AO and his action of ignoring the said circular is illegal.
13. It was further submitted that the lands were purchased through registered sale deeds, identity of the sellers and genuineness of the transactions is fully established and the AO has not raised any doubt over the genuineness of the payments and it was accordingly submitted that where the genuineness of the payments which are as per the registered sale deeds are not doubted by the AO, no disallowance could be made. In support, reliance was placed on the decision of Hon’ble Punjab and Haryana High Court in case of Gurdas Garg vs. CIT [2015] 63 com289.
14. The ld AR further placed reliance on the decision of Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh vs. ITO 59 com11, the decision of Hon’ble Rajasthan High Court in case of Harshila Chordia vs. ITO 298 ITR 349, and decision of Hon’ble Gujarat High Court in Anupam Tele Services (2014) 362 ITR 92 (Guj), besides various other decisions.
15. The submissions and the contentions so made by the assessee were considered but were not found acceptable to the ld. CIT(A) and his findings are contained at paras 5 to 12 which we deem it appropriate to reproduce as under:-
“(v) I have duly considered the submissions of the appellant, assessment order and the material placed on record. The first contention of the appellant was that it has made investment in the 26 plots purchased by it in the months of April-May, 2012 and these were converted into stock in trade on 01.06.2012 by passing the journal entries in its books of accounts. It is noted from column no. 28 of the tax audit report relating to quantitative details of principal items of traded goods for the year under consideration that opening stock of land was shown at 2270.71 square yards, which was valued at Rs. 49,25,295/- in its profit and loss account. Further, in Column no. 8(a) of tax audit report, the auditor has mentioned the nature of business as manufacturing & trading of furniture, handicrafts, iron scrap and real estates and generation of wind power and in column no. 8(b), which is related to change in the nature of business during the year, it has been stated by the auditor that the assessee has undertaken the business of manufacturing of ballot boxes. Therefore, it is evident from these facts that the contention of the appellant that it made investments in 26 plots in the months of April-May 2012 do not match with its financial statements and tax audit report, which reveal that the appellant was engaged in the real estate business at least from the financial year 2011-12 preceding to the assessment year under consideration. Thus, this contention of the appellant deserves to be rejected and it is held that the AO was justified in treating the purchase of 26 plots as stock in trade and not as investment, as claimed by the appellant.
(vi) I have also examined the alternate contention of the appellant that the sellers of the plots insisted for cash payments and due to business exigencies, it made the cash payments in violation of provisions of section 40A(3) of the Act and these payments were genuine and the AO has also not raised any doubt about the genuineness of these payments and thus the provisions of section 40A(3) of the Act are not applicable. It would be relevant to reproduced the provisions of section 40A(3) of the Act as under:-
“(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.
(3A) Where 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 subsection (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 prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :
(vii) It may be mentioned here that Rule 6DD provides relief to the assessee from the rigour of section 40A(3) in the circumstances prescribed therein and thus Rule 6DD has taken into account, the circumstances having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
(viia) The relevant extract of Rule 6DD is reproduced as under:
“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 of profession under sub-section (3A) of section 40A 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 the cases and circumstances specified therein, namely: ”
(viii) It is evident from the above that the Rule 6DD has specified the circumstances in which payments exceeding the prescribed limits can be made in cash. It was the contention of the appellant that the payments were made in cash out of business expediency to safeguard its interest. It may be mentioned that it was the stand of the appellant that it purchased 26 plots as investment and now it is taking plea that due to business exigencies, it had to make cash payments which are contradictory to each other. The appellant has relied upon a number of judicial pronouncements, wherein it was held that the terms of section 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 appellant to furnish to the satisfaction of the assessing officer 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.
(ix) It may be mentioned here that Rule 6DD provides relief to the assessee from the rigour of section 40A(3) in the circumstances prescribed therein and thus Rule 6DD has taken into account, the circumstances having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. However, in the instant case under consideration, the appellant was not able to specify under which clause of Rule 6DD its case falls. It may be mentioned that the Rule 6DD has been amended by the Income Tax (7th Amendment Rules), 2008 w.e.f. AY 2009-10 and the most of the judicial pronouncements relied upon by the appellant pertained to pre amended Rule 6DD. Hence, these are distinguishable and are of no help to the appellant company.
(x) The appellant relied upon the decision of Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT (supra), wherein it was held that where the genuineness of payments is not disbelieved, the disallowance u/s 40A(3) cannot be made and the decision of Hon’ble ITAT, Amritsar Branch, Amritsar in ITA no 102(Asr)/2014 for A Y 2010-11 wherein Hon’ble ITAT, has held that disallowance u/s 40A(3) for cash payments cannot be made if genuineness is not doubted. It may be mentioned that in the case of Gurdas Garg Vs CIT (Supra), the appeal for the AY 2009-10 was before the Hon’ble Court, however the said decision was pronounced on the basis of pre amended Rule 6DD.
In view of the above, the decision of Gurdas Garg Vs CIT (Supra) is of no help to the appellant.
(xi) However, it may be mentioned that in the case of DCIT vs. A. Ramamurthy (2016) 46 CCH 0323 (Chen Trib), vide its order dated 18.03.2016, the Hon’ble ITAT held as under:
“We have heard both the parties and perused the material on record. The main plea of the assessee is that the payments were made in cash otherwise than cheque or demand draft in view of commercial expediency as well as insisted by the recipients. However, there is no material on record to show that those recipients have no bank account, banking facility is not available. Being so, in our opinion, the assessee has not shown any reasonable cause for making such payments in cash otherwise than by crossed cheque or demand draft.”
(xii) It is to be noted that in the instant case under consideration, the appellant has not brought on record any reasonable cause for making cash payments in violation of provisions of section 40A(3) of the Act and also not been able to specify under which clause of amended Rule 6DD its case falls to bring it out from the rigours of provisions of section 40A(3) of the Act. It was stated by the appellant that the sellers insisted on cash payment but no evidence has been brought on record to substantiate the claim and it has also failed to brought on record that if it did not made the cash payments, the sellers would cancel the deals. It is important to mention here that the sellers were residents of Jaipur and most of them belonged to the same family and more than 50% of the payments were accepted by them through cheques. Thus, in the absence of any documentary evidence, the contention of the appellant that the sellers insisted on cash payments deserves to be rejected.”
16. Now, the assessee is in appeal before us against the aforesaid findings of the ld CIT(A). The ld AR took us through the findings of the AO and the ld CIT(A) and reiterated the submissions made before the lower authorities. Further, the ld AR raised various contentions which find mention in the written submissions and which we deem it appropriate to reproduce as under:
“3.1 The submissions made before ld. CIT(A) appearing at CIT(A) order Pages 8 -14 may please be considered in correct perspective.
3.2 Ld. CIT(A) at page 18 of his order has rejected the appellants contention that said 26 plots purchased, in April, 2012, were part of investment. For this he referred to Tax Audit Report as well as Audited Financial Statement. It is submitted that the firm while in real estate business can purchase certain real estate for business purpose and can also purchase certain real estate for investment purpose. This aspect is also accepted by CBDT in its circular dated 31/05/1977 as per which there is no restriction under the law for a trader of a particular item like jewellery, diamond, real estate or share to hold the same as investment also. Further, the assessee firm before lower authorities have submitted that it had paid the registration charges and stamp duties of Rs. 14,99,996 for getting the land registered in its name, which is not a general practice of a real estate businessman. This fact was not controverted by ld. lower authorities.
3.3 Ld. CIT(A) also erred in holding that the contention of the assessee that the lands were purchased as investments and the alternate plea that due to business exigencies, payment was made in cash is contradictory to each other. In this regard it is submitted that the assessee firm is a business entity which aims at maximizing its profits. Therefore, even while purchasing investments, business exigencies are kept in mind. Otherwise also it is submitted that the assessee firm, without agreeing, has taken an alternate plea that if, it is not considered that the lands were purchased as investments and were subsequently converted into stock-in-trade, then, business expediency should be considered.
3.4 It is submitted that the ld. AO or ld. CIT(A), has not raised any doubt about the genuineness of the transaction and, therefore, there is no dispute regarding the identity of the payee and genuineness of the transactions. The only objection raised is that there is violation of provisions of section 40A(3).
3.5 To appreciate the facts in a better manner let us look into the history of section 40A(3). It was introduced by the Finance Act, 1968 w.e.f 1-4-1968.
The object of insertion was explained by Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO 59 taxmann.com 11 as under:
“It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use o f unaccounted money or reduce the chances to use black-money for business transactions.”
3.6 In view of above it will be apt to state that the provisions of section 40A(3) have been enacted as one of the measures for countering evasion of tax. The provisions were enacted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. Genuine and bona fide transactions are taken out of the sweep of Section 40A(3).
3.7 In the present case the assessee firm has not made use of black money for purchase of land in cash. It was just on the insistence of the sellers, cash was withdrawn from bank and the payment was made in cash keeping in mind the business exigencies. This fact is clear from perusal of working table submitted and appearing at CIT(A) order (Page 12) and from Bank Statements of the assessee firm.
3.8 Just after introduction of section 40A(3), certain exceptions were allowed to be provided by way of delegated legislations. Accordingly, Rule 6DD was notified in the year 1969 setting out the exceptions.
3.9 Attention is drawn towards the decisions of Hon’ble Jurisdictional Rajasthan High Court in the case of Harshila Chordia vs. ITO 298 ITR 349 wherein it was held that list of exceptions provided under rule 6DD is not exhaustive. Meaning thereby that more could be read into it, if the same does not violate the reason for which section 40A(3) was introduced. Thus, the contention of ld. CIT(A) that the appellant was unable to specify under which clause of Rule 6DD its case fall is baseless.
After introduction of Rule 6DD, in the year 1970, vide IT (Fourth Amdt.) Rules, 1970, clause (j) to Rule 6DD was introduced which provided as under.
“Rule 6DD:
(j) in any other case 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, ”
3.11 Thereafter, CBDT issued Circular No. 220 dated 31.05.1977 providing an illustrative list of exceptional cases wherein cash payment could not attract disallowance u/s 40A(3) by virtue of Rule 6DD(j).
3.12 The above Rule 6DD(j) was omitted w.e.f. 25.07.1995 vide IT(Fourteenth Amdt.) Rules, 1995. Thereafter, Rule 6DD was amended many a times.
3.13 The above series of events and related amendments is tabulated as under:
