Case Law Details
Prime Infra Developers (P) Ltd. Vs ITO (ITAT Delhi)
Conclusion: Disallowance under section 40A(3) with respect to cash payment made by assessee to farmers on Sunday for purchase of agricultural land could not be disallowed as Sunday was bank holiday and rule 6D(J) was clearly attracted in assessee’s case as payment was made due to commercial expediency.
Held: Assessee-company had made advance payment for purchase of various lands to farmers as a token money for the execution of the deal on Sunday i.e. the day which was public holiday for Banks. AO observed that payment in cash made on Sunday was not bona fide. Assessee however contended that it was covered by rule 6DD(j). It was held payment was made on ‘Sunday’ which was not disputed by AO as well as CIT (A) and Rule 6DD(j) specifically provides exception for disallowance under section 40A(3) on the day on, which banks were closed. Payments were made to farmers for purchase of their agricultural land and payments were duly supported by various documentation in form of conveyance deed etc., therefore, disallowance under section 40A(3) was unjustified.
FULL TEXT OF THE ITAT JUDGEMENT
The Assessee has filed this Appeal against the Order dated 22.09.2017 of the Ld. CIT(A)-38, New Delhi relating to assessment year 2013-14 on the following grounds:-
1. On the facts and circumstances of the case, tile order passed by the learned Commissioner of Income Tax (Appeals) is bad both in the eyes of law and on facts.
2(i) On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law in passing the order without giving assessee an opportunity of being heard in violation of principle of natural justice.
(ii) That the non appearance before the CIT(A) was an account of reasons beyond the control of the assessee.
3. On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law in confirming the disallowance of Rs.1 ,54,97,974/- made by AO an account of cash payments invoking the provision of section 40A(3) of the Act.
4. On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law in confirming the disallowance despite the fact that the reason for cash payment was an account of one of the reasons provided in exceptional circumstances for these payments under Rule 6DD of the Act.
5. On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law, in confirming the disallowance despite the payments having been made out of business expediency.
6. On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law, in confirming the disallowance despite the fact that there being no doubt as to the genuineness of transactions and thus no disallowance u/s 40A(3) can be made.
7. That the appellant craves leave to add, amend or alter any of the grounds of appeal.
2. The brief facts of the case are that the assessee company is stated to be engaged in the business of real estate. The case of the assessee was selected under scrutiny through CASS. Accordingly, notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred as the Act). The assessee company has purchased various lands during the relevant period for residential project in Gurgaon. From the perusal of the details submitted by the assessee, AO observed that the assessee company has purchased various land. From the sale deed it has been noticed that substantial cash amount has been utilized for purchase of inventory. Total cash amount that has been paid for the purchase of inventory of Rs. 1,54,97,974/-. The assessee vide order sheet entry dated 02.3.2016 was asked to explain the reason for payment made in cash and it has also been asked to explain the same. The assessee vide submission dated 14.3.2016 has submitted that assessee company is engaged in real estate and property development business and major activity of the company to launch the new residential and commercial projects. During the year company had been purchased the land in bulk from farmers to launch a residential project. It was further submitted that advance was paid as a token money for the execution of deal on Sunday i.e. the day which was public holiday for banks. The fact that the advance payment was made on Sunday i.e. 05.08.2012 is also mentioned to the registry itself and at that time of advance payment no banking facility was available due to bank holiday and the assessee company had no alternative option to make the payment immediately. Thereafter, AO observed that it may not be out of place to mention that payments in cash to persons who are holding land in and around Delhi are not out of purview of taxation. There is substantial possibility that the persons selling the land are not filing their return of income or not disclosing the full income. Thus the act of the assessee by making payment in cash cannot be assumed to be bonafide, even though it is in blatant violation of the provisions of section 40A(3) of the Income Tax Act. Accordingly, an amount of Rs. 1,54,97,974/- was disallowed under section 40A(3) of the Act and income of the assessee was assesseed at Rs. 1,54,97,970/- u/s. 143(4) of the Act vide order dated 30.03.2016. Against the assessment order, the assessee appealed before the Ld. CIT(A), who vide his impugned exparte order 22.09.2017 has dismissed the appeal of the assessee by observing that there was sufficient application of mind by AO while framing the assessment and the factual findings regarding violation of clause (j) of Rule 6DD have not been controverted by the assessee during appeal proceedings and in view of the continued non-compliance and non-prosecution of appeal by the assessee, he upheld the assessment order. Aggrieved with the impugned order dated 22.09.2017, Assessee is in appeal before the Tribunal.
3. Ld. Counsel of the assessee has filed a Paper Book containing pages 1-68 having the copy of acknowledgement return of income alongwith computation of income; copy of Audited Financial Statements; copy of reply filed with the AO dated 18.2.2016 alongwith the copy of sale deeds of the property purchased; copy of reply filed by the assessee before AO on 22.2.2016 and copy of letter filed before AO dated 23.3.2016 enclosing affidavit from Real Estate Broker. He submitted that learned CIT(A) has passing the exparte order without giving assessee an opportunity of being heard in violation of principle of natural justice, despite the fact that non appearance before the CIT(A) was an account of reasons beyond the control of the assessee. It was further submitted that Ld. CIT(A) wrongly confirmed the disallowance of Rs.1,54,97,974/- made by AO an account of cash payments invoking the provision of section 40A(3) of the Act despite the fact that the reason for cash payment was an account of one of the reasons provided in exceptional circumstances for these payments under Rule 6DD of the Act. It was the further contention that learned CIT(A) has wrongly confirmed the disallowance despite the payments having been made out of business expediency and also wrong in confirming the disallowance despite the fact that there being no doubt as to the genuineness of transactions and thus no disallowance u/s 40A(3) can be made. In the last, it was also submitted that the payment was made on 05.08.2012 i.e. Sunday is not disputed by the authorities below and Rule 6DD(j) specifically provides exception for disallowance under section 40A(3) on the day on which banks are closed. The payment were made to farmers for purchase of their agricultural land and the payments were duly supported by the various documentation in form of conveyance deed etc. Therefore, he stated that disallowance under section 40A(3) is uncalled for. To support his contention he filed another Paper Book containing pages 1-72 having the copies of following case laws on the issue when payment is made on the day on which banks are closed and the exception is covered under Rule 6DD and on the issue when genuineness of the transaction is not doubted by the AO, then no disallowance u/s. 40A(3) is called for.
– Hon’ble High Court of Madras decision in the case of Hotel Nagas (P) Ltd. vs. CIT, Salem (2016) 69 Taxmann.com 438 ( Madras)
– Hon’ble High Court of Andhra Pradesh decision in the case of Sri Laxmi Satyanarayana Oil Mill vs. CIT, AP, Hyderabad (2014) 49 taxmann.com 263 (Andhra Pradesh)
– Hon’ble High Court of Punjab and Haryana decision in the case of Gurdas Garg vs. CIT(A), Bathinda (2015) 63 taxmann.com 289 (P&H).
– ITAT, Jaipur decision passed in ITA No. 5170/Del/2014 in the case of ITO vs. Shyam Apparels Pvt. Ltd. and Viceversa.
– ITAT, Delhi decision dated 31.8.2016 passed in ITA No. 504/2016 in the case of ACIT, Faridabad vs. M/s Marigold Merchandies (P) Ltd.
– ITAT, Delhi decision in the case of Galaxy Dwellers P ltd. vs. CIT 2017 (11) TMI 112.
– Hon’ble Rajasthan High Court decision in the case of CIT vs. ACE India Abodes Ltd. 2017 (11) TMI 620.
– Hon’ble Rajasthan High Court decision in the case of Smt. Harshila Chordia vs. ITO 2006 (11) TMI 117.
4. On the other hand, Ld. Sr. DR relied upon the orders of the authorities below. He submitted that assessee company has purchased various land. From the sale deed it is revealed that that substantial cash amount has been utilized for purchase of inventory. Total cash amount that has been paid for the purchase of inventory of Rs. 1,54,97,974/-. He further submitted that that payments in cash to persons who are holding land in and around Delhi are not out of purview of taxation. There is substantial possibility that the persons selling the land are not filing their return of income or not disclosing the full income. Thus the act of the assessee by making payment in cash cannot be assumed to be bonafide, even though it is a complete violation of the provisions of section 40A(3) of the Income Tax Act. However, there was sufficient application of mind by AO while framing the assessment and the factual findings regarding violation of clause (j) of Rule 6DD have not been controverted by the assessee during appeal proceedings and in view of the continued non-compliance and non-prosecution of appeal by the assessee, Ld. CIT(A) has rightly upheld the assessment order, which does not need any interference on our part. In view of above, Ld. Sr. DR requested that the order of the Ld. CIT(A) may be upheld and appeal of the assessee may be dismissed.
5. We have heard both the parties and perused the records, especially the orders of the authorities below, Paper Book filed by the Assessee containing pages 1-68 having the copy of acknowledgement return of income alongwith computation of income; copy of Audited Financial Statements; copy of reply filed with the AO dated 18.2.2016 alongwith the copy of sale deeds of the property purchased; copy of reply filed by the assessee before AO on 22.2.2016 and copy of letter filed before AO dated 23.3.2016 enclosing affidavit from Real Estate Broker and the case laws cited by the Ld. Counsel of the assessee in shape of Paper Book and the copy of Calendar for the Year 2012. We find that assessee company is a real estate developer and major activities of the company is to launch new residential & commercial projects and during the year under consideration, Assessee Company had purchased various lands in Gurgaon from farmers for a residential project. Details of which are as under:
| S.No. | Property | Details of advance payment in cash (as advance being made on 05.08.2012 i.e. Sunday) & PB Pg. where date is appearing. |
Details of payment in cash at the time of registry |
| 1 | Dhankot 33Kanal 11Marla 5.5S (Sale Deed at PB Pg. 15-25) |
Rs. 38,60,730/- (PB Pg. 21) & date 5.8.2012 is appearing at PB Pg. 19 | 9,65,179.00 (Pb. Pg. 23) |
| 2 | Dhankot 26K 8M ( Sale Deed at PB Pg. 26- 33) | Rs. 33,33,000/- (PB Pg. 30) and dated 05.08.2012 is appearing at PB Pg. 30 | – |
| 3 | Dhankot 26K 8M (PB Pg. 34- 44) | 56,62,600/- (PB Pg. 40) & date 05.08.2012 is appearing at PB Pg. 38 | 14,15,600 (PB Pg. 42) |
| 4 | Dhankot 1K 0M 3.5S (Pb. Pg. 45-52) | 1,28,691/- (PB Pg. 49) & date – 5.08.2012 is appearing at PB Pg. 49. | 32,174/- (PB Pg. 51) |
| 5 | Dhankot 0K 6M 4S (PB Pg. 53-59) | 1,00,000 (PB Pg. 55) | |
| Total | 1,29,84,421/- | 25,12,953/- |
5.1 After perusing the aforesaid table, we note that the assessee company has made advance payment of Rs.1,29,84,421/- for the purchase of various lands to the farmers as a token money for the execution of the deal on Sunday i.e. the day which was public holiday for Banks. It is undisputed fact that the payment is made on 05.08.2012 which is mentioned in the registered document i.e. sale deed itself. The date on which the advance payment was made was 05.08.2012 and on that date banking facility was not available due to Bank Holiday and the assessee company has no alternative option and had to make payment in cash and the same is not disallowed under section 40A(3) of the Income Tax Act and expressly provided in the exceptions provided in Rule 6DD(j) which reads as under:
“(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;” 5.2
5.2 We further note that on the date of registry assessee went to farmers’ home to take them for registration of land. However, farmers changed their mind and demanded more money than what they had earlier agreed into. Then the assessee company had no option but to make immediate payment due to the following reasons on account of business expediency:
I. There was no time to avail banking facility at it would have resulted into lapse of time for registry.
II. Assessee company has already made the substantial payments to farmers any further delay in registry would have made their advance payment at risk. Moreover, the time of registry was going to be lapsed.
5.3 Thus, assessee had no option at the time of registry but to make these payments of Rs. 25,12,953/- in cash due to its business expediency and thus covered by the proviso to section 40A(3) which reads as under:
“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 subsection 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, 34 [or use of electronic clearing system through a bank account, exceeds ten 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.]”
5.4 Thereafter, the case of the company was selected for scrutiny and statutory notice u/s 143(2) of the I.T. Act, 1961 was issued to the assessee. During the assessment proceedings, assessee was asked to explain the reason for payment in cash with respect to the aforesaid deals. ln response to the same, the assessee filed its detailed reply dated 14.03.2016 (PB Pg. 60-65, the Copy of which is reproduced in the Assessment Order itself) and submitted that:
I. The fact that advance payment is made on Sunday i.e. on 05.08.2012 is mentioned in registry itself.
II. Assessee company has also explained the reason for making payment in cash at the time of registry.
iii. Genuineness of the payments made by the assessee was not doubted by the AO.
iv. Business expediency was not challenged by the AO. No adverse commented by the AO.
5.5 We observe that during the assessment proceedings, the assessee also submitted the copy of sale deeds (PB Page 13-59) as well as affidavit from the Real Estate broker (PB Page 66-68). The AO however not being satisfied by all the claims and arguments advanced by the assessee made a disallowance of Rs. 1,54,97,974/- by invoking provisions of Section 40(A)(3). Aggrieved with the same, the assessee went into appeal before the Ld. CIT(A), who vide his impugned order sustained the addition made by the AO.
5.6 In view of the aforesaid facts, it is crystal clear that the payment was made on Dt. 05.08.2012 i.e. ‘Sunday’ which is not disputed by the AO as well as Ld. CIT(A) and Rule 6DD(j) specifically provides exception for disallowance under section 40A(3) on the day on, which banks are closed. The payments were made to farmers for purchase of their agricultural land and the payments are duly supported by the various documentation in form of conveyance deed etc. Therefore, in the above circumstances, disallowance made under section 40A(3) is not justified. Our aforesaid view is fortified by the following decisions:-
I. When payment is made on the day on which Banks are closed and the exception is covered under Rule 6DD: a) Hotel Nagas Pvt. Ltd. vs. CIT [2016J 69 taxman.com 438 (Mad.)
a. “Therefore, if as rightly observed by the Tribunal in paragraph 4 of its order, the purpose of Section 40A(3) is to discourage cash transactions leading to circulation of unaccounted money, then, the same may not normally happen before the Sub Registrar at the time of registration of documents, as the payments made at that time get recorded officially.[Para 22].
b. All the three authorities have failed to appreciate that when a vast extent of agricultural lands is purchased from several persons, especially in villages, it is not possible to expect the villagers to accept the sale consideration by way of crossed account payee cheque or bank draft. Therefore, so long as the payees are identified and the genuineness of the transaction is not questioned and so long as the payments have been made at the time of registration in the presence of the Sub Registrar, the case would fall under the exceptions provided in Clause (j) of Rule 6DD. This position has also been clarified by Circular No. 220, dated 31-5-1977. [Para 23]”
b) Sri Laxmi Satyanarayana Oil Mills Vs CIT[2014] 367 ITR 200 (T&AP)
a. “Several High Courts followed this dictum and took the view that the provision must be interpreted liberally and the assessee cannot be subjected to undue rigor. The Rajasthan High Court in Smt. Harshila Chordia v. Income-tax Officer [2008] 298 ITR 0349 went a step further, and held that the circumstances mentioned in the circular of the CBDT cannot be said to be exhaustive, and that the Board clearly expressed the view that clause (j) of Rule 6DD must be liberally construed.
b. As observed by the Supreme Court, once an assessee furnishes the circumstances under which the payment in the manner prescribed in Section 40A (3) was not practicable or would have caused genuine problems, the proviso, and thereby the Rule 6DD, get attracted. The Parliament did not intend that payment of Rs. 2,500/-; or more, must be made only through the crossed cheque. This is evident from the proviso to Section 40A(3), Rule 6DD, and the circulars issued from time to time. Clause 6(j)(2) of Rule 6DD take in their fold, all the circumstances, under which an assessee faces in the course of his business. Paragraph 3(vi) of the circular of the CBDT has further widened the scope of ‘the rule, by mentioning that if the payment, otherwise than through cheque was made, on being promised and specific discount by the seller, the rigor of Section 40A(3) does not apply.
c. Coming to the facts of the case, the consistent plea of the applicant was that it had to make the payment for purchase of the ground-nut, in cash, because the seller not only insisted on that, but also gave incentives, such as facility of payment within one week, and discount. The certificate issued by M/s “Satyanarayana Trading Company supported this. The question as to whether there was justification on the part of the seller of the goods in imposing such conditions, is outside the scope of the enquiry. As a matter of fact, there existed some justification for the traders, at least at the relevant point of time, in insisting the payment of amounts, in cash. The reason is that the banking activity was not that prominent and popular, and instances of cheques issued by agencies or persons, in the course of business being bounced, were not infrequent. The delay in receiving the consideration for any material supplied by a trader would have its own cascading effect on the business activities. It is only when both the parties to the contract are known to each other so intimately, and the seller is very confident not only of the solvency of the purchaser, but also his business ethics, that he would be inclined to receive the consideration through cheque.
d. Obviously because the Parliament as well as the CBDT were live to these issues, the provisions, referred to above, were enacted or incorporated. The Assessing Authority has taken a hyper-technical view and failed to discern the spirit underlying the relevant provisions. Though the Appellate Authority exhibited an element of objectivity, it was only in a limited aspect. The Tribunal has ignored the purport of the relevant provisions of law and refused to grant any relief to the assessee.”
c) ITO WARD 3 (2) , JAIPUR Vs M/s SHYAM APPARELS LTD. AND VICE-VERSA [ITA No. 497-549/JP/2016 Dated: – 07 November 2017]
a. Addition made by the A.O. u/s. 40A(3) – payment to two sellers of the land in ‘cash under the business exigency – Held that:- The payment of Rs.1,82,40,000/- to Shri Ashok Agarwal, power of attorney holder of his daughter, the amount was paid on Sunday and also the seller has given the notice to release the payment by 25/3/2012, which was Sunday. Sunday was a bank holiday. Under these compelling situations, the assessee had to make payment in cash. The revenue has failed to controvert these facts, therefore, we find no merit in this ground of revenue’s appeal. The same is dismissed.
As far as the assessee’s appeal is concerned, we have noticed that the evidences have been filed which establishes that the documents for registration submitted after the banking hours in respect of land purchased from Hira Lal Khetan for Rs. 13,62,658/-and from Smt. Shanta Devi Mittal for Rs. 11,75,000/-. No such evidence is available on record in respect of other purchases. The assessee has also sold his property on 15/09/2011 for which a deed was also executed in favour of M/s Ocean Seven Buildtech (P) Ltd., Gurgaon on the same day after banking hours. It was submitted that Director of M/s Ocean Seven Buildtech (P) Ltd. reached to Jaipur on 15/9/2011 after the banking hours, therefore, the payments against the sale deed were received in cash due to closure of the banking hours and the same cash received from this party was further paid to these two parties from whom the land was purchased by the assessee. These facts are verifiable from these two purchase deeds, which were duly filed before the Assessing Officer. Therefore, it is established that the assessee has to make payment to these two sellers of the land in cash under the business exigency to safeguard the interest and also for genuine and bonafide needs of assessee’s business. It is also a fact that these purchases and sale deeds were put forth before the Registrar on the same day after banking hours which strengthen the contention of the assessee. The cash received on the sale of the land was utilized for making payment to two parties. These deeds were registered after 4.00 P.M., which is usually the banking hours. Therefore, considering all these facts and circumstances, we partly allow this ground of assessee’s appeal.”
d) ITO Faridabad Vs M/S Marigold Merchandise (P) Ltd. [ITA No. 5170/0el/2014 Dated: – 11 September 2017]
a. Addition made u/s. 40A(3) – purchase of land holding these cash payment falls under exceptional circumstances r.w.r. 6DD of Income Tax Rules – Held that:- CIT(A) has rightly held that the assessee’s case is found to be covered under the exceptional circumstances under rule 6DD of IT Rules. Accordingly, the addition made by the AO amounting to Rs. 60 lacs was rightly deleted by the Ld. CIT(A). – Decided in favour of assessee.
II. When Genuineness of the transaction is not doubted by the AO, no disallowance under section 40A(3) is called for:
5.7 We note that in the present case the genuineness of the transactions which were entered by the assessee have not been disputed by the authorities below. This fact is evident from the plain reading of the Orders of the authorities below. We further note that the authorities below have not raised any doubt about the genuineness of the transaction therefore there is no dispute regarding the identity of the payee or the veracity of the transaction. The only objection raised was the violation of provisions of Section 40(A)(3). Thus once the transaction are considered genuine and bona fide, then the same are taken out of the purview of the Section 40(A)(3). This view is fortified by the following case laws:-
– Decision of Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg Vs The Commissioner of Income Tax [2015 (8) TMI 569] the facts of which are parimateria to the present case. The Hon’ble Punjab & Haryana High Court has held as observed as under (Head Notes only):
“Section 40A(3) of the Income Tax Act, 1961 read with rule 6DD of the Income Tax Rules, 1962 – Business disallowance – Cash payments exceeding prescribed limits
(Genuineness of transactions) – During assessment proceedings AO noted that assessee, who was engaged in trading in properties, made certain transactions in cash in excess of Rs. 20,000 and disallowed same under section 40A(3) – Whether since genuineness of said transactions had not been disbelieved by authorities below, it made out a case of business expediency and could not be disallowed under section 40A(3).”
– Hon’ble Rajasthan High Court in the case of Harshila Chordia Vs ITO [2008] ITR 349 wherein the Court observed as under (Heads Note Only)
“Addition u/s 40A(3) – payments through bank only – held that requirement u/r 6DD(j) are deemed to have been satisfied if genuineness of transactions & payments & identity of receiver is established – additions are invalid – assessibility of amount of cash credits would be finalized after AO outcome.”
6. In the background of the aforesaid discussions and respectfully following the precedents, as cited above, the disallowance of Rs. 1,54,97,974/- u/s. 40A(3) of the Income Tax Act, 1961 made by the AO and sustained by the Ld. CIT(A) is not justified, hence, the same is deleted and accordingly the appeal of the assessee stands allowed.
7. In the result, the appeal of the assessee is allowed.
