K.K. Construction Co. Vs. ACIT (ITAT Jaipur)
Conclusion: Dis allowance under section 40A(3) could not be made as identity of persons from whom purchases had been made was established; source of cash payments was clearly identifiable in form of withdrawals from assessee’s bank accounts and the said details were submitted before AO, thus, the genuineness of the transaction had been established as purchase of construction material for road construction and the test of business expediency had been met.
Held: Assessee was engaged in the business of civil construction. During the course of assessment proceedings, AO observed that assessee had made payment of Rs. 2,38,67,250/- in cash exceeding prescribed threshold in contravention of Section 40A(3) towards purchase of grit and other items for construction to various persons. In responseJ, assessee submitted that the contract work was executed in rural area and the payments were made in cash for purchase of raw material due to non-availability of banking facility in the village area. It was further submitted that there was complete ban on the mining in the State of Haryana since 2010 and the assessee had to purchase the grit, stone & dust from the State of Rajasthan and the business of assessee’s firm is mainly in the state of Haryana and the suppliers do not accept payment through cheque hence the assessee firm was under business compulsion to complete the work in a time bound manner and therefore, had to make the purchases in cash. AO made addition on the ground that since certain payments had been made through RTGS, the argument of banking facility not available did not arise because recipient had got the bank account for receiving payment. In the instant case, it was found that the identity of the persons from whom the purchases had been made has been established and the source of cash payments was clearly identifiable in form of the withdrawals from the assessee’s bank accounts and the said details were submitted before the lower authorities and had not been disputed by them. The genuineness of the transaction had been established as purchase of construction material for road construction and lastly, the test of business expediency had been met as it was the admitted position that the mining activities had been banned in the State of Haryana and assessee had no other option but to buy construction material from State of Rajasthan where the suppliers and stone crushing units had insisted on cash payments at the time of delivery of material. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax was relevant consideration for which section 40A(3) had been brought on the statute books and which had been satisfied in the instant case.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-3, Jaipur dated 10.11.2017 for Assessment Year 2012-13 wherein the assessee has taken following grounds of appeal:-
“1. On the facts and circumstances of the case and in law also Ld Lower authorities grossly erred in making the addition of Rs. 2,38,67,250/- by making disallowances u/s 40A(3) of the income tax act 1961.
2. On the facts and circumstances of the case Ld Lower authorities grossly erred in making the addition of Rs. 18,00,000/-u/s 68 of the Income Tax Act.
2. Regarding ground no. 1, briefly the facts of the case are that the assessee is engaged in the business of civil construction. During the course of assessment proceedings, the Assessing Officer observed that the assessee has made payment of Rs. 2,38,67,250/- in cash exceeding prescribed threshold in contravention of Section 40A(3) of the Act towards purchase of grit and other items for construction to various persons as detailed at pages 5-7 of the assessment order. A show cause notice was issued to the assessee as to why the cash payment made in contravention of Section 40A(3) of the IT Act may not be added to the total income of the assessee. In response, the assessee submitted that the contract work was executed in rural area and the payments were made in cash for purchase of raw material due to non-availability of banking facility in the village area. It was further submitted that the stone crushers are located in the remote hilly areas where there is no banking facility and the suppliers do not accept the cheque payments and the assessee has to make payment in cash due to compelling circumstances. It was further submitted that there was complete ban on the mining in the State of Haryana since 2010 and the assessee had to purchase the grit, stone & dust from the State of Rajasthan and the business of assessee’s firm is mainly in the state of Haryana and the suppliers do not accept payment through cheque hence the assessee firm was under business compulsion to complete the work in a time bound manner and therefore, had to make the purchases in cash. The submissions so filed by the assessee were considered however, not found acceptable to the Assessing Officer. Firstly, the Assessing Officer observed that on various dates, the assessee has made payment through RTGS therefore, the payment so made by the assessee in cash could have been made through RTGS. Further, the Assessing Officer observed that on perusal of the photocopies of the cheques issued by the assessee firm, it reveals that the cheques so issued were self cheque without any mention of name of the party and the account number of the party and therefore, these are self cheques and not account payee cheque drawn by the assessee firm. Further, Assessing Officer observed that the assessee has made payment to renowned parties and they were operating widely in their areas and therefore, the assessee’s contention that the parties to whom such payment were made in cash were operating in the rural and remote areas was wrong and baseless. It was accordingly held by the Assessing officer that the assessee’s case is not covered under clause (a) to (I) of Rule 6DD of the IT Rules hence, the amount of Rs. 2,38,67,250/- was disallowed as per provisions of Section 40A(3) of the IT Act.
3. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and during the course of appellate proceedings, the assessee filed additional evidence in the form of certificates from ‘Sarpanch’ of the Gram Panchayats stating therein that no bank branches are available in the area of business of the assessee where the assessee has purchase grits for the requirement of the civil construction. The said additional evidences were forwarded to the Assessing Officer for examination and seeking the remand report.
4. In the remand report dated 15.09.2017, the Assessing Officer has stated in para 3 as under:-
“However, clause (g) of Rule 6DD of Income Tax Rules, 1962 states that—’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’. The provisions of the Income Tax Act were available to the assessee ab-initio. The assessee was given sufficient time to submit such evidences during the course of assessment proceedings and it was not prevented by any cause or reason. In this regard, vide show cause notice dated 27/02/2015 & 11/03/2015, the assessee firm was asked as to why the cash payment made in the areas falling under the Gram Panchyats as submitted by the assessee during the appellate proceedings may not be added u/s 40A(3) o f the Act. In response to that showcause, the assessee filed written submission stating therein that the contract work has been executed in Rural Area and the payment have to be made in cash for purchase of raw material due to non banking facility nearby but the assessee did not submit the certificates despite adequate opportunity was accorded to it.
Without prejudice to the above, additional evidences in the form of certificates from the Sarpanch of Gram Panchayats have been verified by the Inspector of this office. The Inspector of this office has submitted his report stating that the Gram Panchyats under consideration does not have any bank branch within the geographical territory of the Panchayats. Therefore, the additional evidences submitted by the assessee during the appellate proceedings may be entertained on merits. ”
Further, the Assessing officer has issued another remand report on 28.09.2017 and in the said remand report has stated in para 3 as under:–
“3. However, clause (g) of Rule 6DD of Income Tax Rules, 1962 states that —’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’. The provisions of the Income Tax Act were available to the assessee ab-initio. The assessee was given sufficient time to submit such evidences during the course of assessment proceedings and it was not prevented by any cause or reason. In this regard, vide show cause notice dated 27/02/2015 & 11/03/2015, the assessee firm was asked as to why the cash payment made in the areas hilling under the Gram Panchyats as submitted by the assessee during the appellate proceedings may not be added u/s 40A(3) of the Act. In response to that showcause, the assessee filed written submission stating therein that the contract work has been executed in Rural Area and the payment have to be made in cash for purchase of raw materia l due to non banking facility nearby but the assessee did not submit the certificates despite adequate opportunity was accorded to it.
Without prejudice to the above, additional evidences in the form of certificates from the Sarpanch of Gram Panchayats have been verified by the Inspector of this office. The Inspector of this office has submitted his report stating that the Gram Panchyats under consideration does not have any bank branch within the geographical territory of the Panchayats. However, it is further submitted that the Gram Panchayats under consideration have banking facility in nearby area as described below:
