Case Law Details
Rajesh Kumar Vs ITO (ITAT Delhi)
ITAT Delhi held that violation of section 40A(3) sustained as the reply provided by the assessee is hypothetical and non-satisfying.
Facts- It was found by Ld. AO that during the financial year in respect of purchases, aggregate payments of Rs. 2,77,13,513/- was made otherwise than by an account payee cheque. Thus, considering it to be violation of Section 40A(3) of the Income Tax Act, 1961 r.w.s 40A(3A) of the Act show cause notice was issued for which the assessee had replied that the bearer cheques were issued to the supplier parties on demand as assessee was new in the business so the assessee had to accept the demand of the suppliers. The Ld. AO found that in regard to one of the parties Dolphine Sales Corporation amount of Rs. 24,25,000/- were also transferred by RTGS/NEFT and thus, considering the reply of assessee to be hypothetical made addition of Rs. 2,77,13,513/- and Ld. CIT(A) has sustained that same.
Conclusion- Held that Ld. CIT(A) has rightly observed that a bearer cheque can bounce as well, for insufficient balances therefore giving bearer cheque to parties as the surety of being encashed is not sustainable explanation of business expediency. The bench finds no error in the findings of the Ld. CIT(A) because if the intention was to secure the payments to the parties by bearer cheques to be as good as cash then there are other banking instruments like Banker’s cheque or RTGS/NEFT facilities which would have ensured prompt and secured payments. It is admitted case of assessee that to one of the parties even payments were made by RTGS/NEFT. So there is no question of lack of banking facilities available with the assessee or that when the payments were made such facility was not accessible.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal has been preferred by the Assessee against the order dated 29.09.2017 of CIT(A)-12, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 177/16-17 arising out of an appeal before it against the order dated 9.03.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ITO, Ward-35(1), New Delhi (hereinafter referred as the Ld. AO).
2. The facts in brief are that return of income declaring the total income of Rs. 2,23,140/- was filed by the assessee which was taken up for scrutiny through CASS. The assessee during the year under consideration derived income from Trading in Iron and Steels and other items and deriving profit under the head Profit and gain from business and profession. The assessee was asked to submit the party wise sale and purchase details and their ledger accounts. It was found by Ld. AO that during the financial year in respect of purchases, aggregate payments of Rs. 2,77,13,513/- was made otherwise than by an account payee cheque. Thus, considering it to be violation of Section 40A(3) of the Income Tax Act, 1961 r.w.s 40A(3A) of the Act show cause notice was issued for which the assessee had replied that the bearer cheques were issued to the supplier parties on demand as assessee was new in the business so the assessee had to accept the demand of the suppliers. The Ld. AO found that in regard to one of the parties Dolphine Sales Corporation amount of Rs. 24,25,000/- were also transferred by RTGS/NEFT and thus, considering the reply of assessee to be hypothetical made addition of Rs. 2,77,13,513/- and Ld. CIT(A) has sustained that same with following relevant findings in para no. 6.3.4 to 6.3.5 as follows :-
“6.3.4 In the written submission, the Appellant has stated that he is in the business and nobody was allowing him to give the materials without accepting bearer cheque or cash. These creditors have confirmed their receipts and declared in their final accounts. The creditors were insisting for cash or payments through bearer cheques. There are circumstances where RTGS is not possible for some reasons. The creditors, have confirmed the receipts and transactions are fully recorded. The intention was to run the business and not to avoid taxes. The Circular issued by the CBDT is binding on the department. The Appellant has quoted two conditions to allow any Assessee to make the payments otherwise than by account payee cheque or draft.
a. due to exceptional or unavoidable circumstances; or
b. becausepayment-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 Income-tax Officer as to the genuineness of the payment and the identity of the payee.
6.3.5 It is claimed that circumstances of the Assessee were exceptional as the parties were not accepting payments through account payee cheques. There are conditions when payment through RTGS are not practical. Before me, the Assessee has submitted certificates from M/s Dolphine Sales Corporation (Prop. Satish Sharma), Varun Verma (Prop. M/s Balaji Trading Co.) and Vikas Pathak for M/s Salasar Enterprises. It is claimed that these certificates were submitted before the Assessing Officer. But it is seen that the Assessing Officer has not mentioned the submission of certificates in the assessment order. Secondly, the certificates are not the copy of any original certificate but actually original certificates on the letter heads of the parties without putting the date. The certificates carry the same content that Assessee was new entrant, in the business of hardware and Iron & Steel Trading. In the certificates it is written that they insisted not to accept the payments through account payee cheques.
6.3.6 Even if it is presumed that the certificates were submitted before the Assessing Officer in some other form, it is not understood as to why the parties refused to accept the payment through account payee cheques. The only difference between an account payee cheque and bearer cheque is that the bearer cheque can be encashed by the bearer of the cheque, who may be any person be it the seller of the goods or any other person. The payments through account payee cheques are directly credited to the bank account of the payee. A bearer cheque cannot be equal to cash in order to ensure the payments and avoid any default on the part of the payer. The bearer cheque can bounce for number of reasons including insufficient balance. Therefore, the preference of the parties to accept bearer cheques over the account payee cheque is not understandable. In certain circumstances the receipt of payments through bearer cheque may be more uncertain than an account payee cheque or account payee draft. The provisions of law in the case of bouncing the cheque are the same. The Appellant has not submitted before me the evidences that the parties declared the payments in their books of account and paid the taxes thereon. I also find force in the observation of the Assessing Officer that payments amounting to Rs.24,25,000/- were made by the Assessee to M/s Dolphine Sales Corporation to RTGS and NEFT. On the above facts, it can be stated here that the reasons submitted by the Assessee through the certificates from the parties to the effect that they were not ready to accept the payments through account payee cheque or account payee draft is not convincing for the reasons discussed above. Moreover, the Assessee’s case may not fall under ‘exceptional or unavoidable circumstances’ because the payments are huge, so much so that out of total purchase of Rs.2,30,94,494/-, payment amounting to Rs.2,16,63,000/- was made to M/s Balaji Trading Co. through bearer cheque only. The exceptional circumstances may be a few during a particular financial year. The reasons explained for-practicability has not been found convincing at all. On the above facts and in the circumstances, I hold that the Assessing Officer was justified in disallowing the payments u/s 40A(3) of the l.T. Act. Accordingly, the grounds are dismissed.”
3. The Assessee is in appeal raising following grounds :-
“1. On the facts and in the circumstances of the case and in law the Hon’ble Commissioner of Income-tax (Appeals) erred in rejecting that CBDT circular 220 (F No. 206/17/76-IT (A-II) dated 31/05/1977 and ignored that the creditors have duly confirmed the receipt of these bearer cheques.
2. On the facts and in the circumstances of the case and in law the Hon’ble Commissioner of Income-tax (Appeals) erred in rejecting the addition of Rs. 27,713,513/- on account of bearer cheques issued to creditors with their consent for non-acceptance of account payee cheque as not an abnormal situation. The assessee had no option if he wanted to survive in the market.
3. On the facts and in the circumstances of the case and in law the Hon’ble Commissioner of Income-tax (Appeals)’ erred in rejecting that issuing payment through RTGS or NEFT is not possible under peculiar circumstances and various case laws mentioned by the assessee.
4. On the facts and in the circumstances of the case and in law the Hon’ble Commissioner of Income-tax (Appeals)’ erred in not accepting that the market will accept his credibility over a period of time not in the first year of the business.
5. On the facts and in the circumstances of the case and in law the Hon’ble Commissioner of Income-tax (Appeals)’ erred in not accepting that the assessee had filed letter dated 26.02.2016.
6. The appellant prays that the addition/ disallowance of Rs. 27,713,513/- made in respect of issued mentioned in ground 1 to 5 be deleted.
7. The appellant craves leave to add, amend, alter vary and / or withdraw any or all the above grounds of appeal.”
4. Heard and perused the record.
5. On behalf of the assessee it was submitted that as assessee was new in business therefore, assessee was compelled to give bearer cheques to the parties. It was submitted that the confirmations from respective parties who insisted for payment through bearer cheques was provided, however, the same have not been considered. In the light of CBDT Circular no. 220 it was submitted there was sufficient explanation of urgency yet Ld. Tax Authorities below have failed to acknowledge it.
5.1 On the other hand, Ld. DR defended the findings of Ld. Tax Authorities below.
6. In regard to the controversy, the settled proposition of law is that sub-rule (j) of Rule 6DD, which existed in its original form from 01.04.1970 to 27.07.1995, prior to its amendment, did provide that 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 due to exceptional or unavoidable circumstances or 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, then such payments could be allowed as exception to Section 40A(3) of the Act.
6.1 However, still on a reading of the first proviso to section 40A(3) with Rule 6DD(j), as considered above, it is very much clear that no disallowance under section 40A(3) can be made, if the transaction for which the payment is made is genuine and due to business expediency and other compelling factors payment was required in cash. There are judicial pronouncements, as also relied by Ld. AR, that even after amendment of Rule 6DD(j), the legal exposition propounded by the Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh Vs. ITO, 191 ITR 667 (SC), regarding consideration of expediency and other relevant factors cannot be considered to be diluted as the rules framed by way of delegated legislation cannot override the substantive legislation in form of section 40A(3) which has not changed its character.
6.2 The Boards Circular no 220 has been considered in various judicial pronouncements and a view is expressed by the Hon’ble High Court of Calcutta in Girdharilal Goenka v. CIT [1989] 179 ITR 122, where it was observed that (at p. 128):
“The circular of the Board is not exhaustive, it is only illustrative and the Assessing Officer 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’. It was also held that the Income-tax Officer should take a practical approach to the problem and strike a balance between the direction of law and hardship to the assessee.”
7. The bench has given thoughtful consideration to the aforesaid state of law and the matter on record and is of view that the question of expediency and other relevant factors is a question of fact and the burden is on the assessee to establish the same with cogent evidence, direct or circumstantial. In the case in hand Ld. CIT(A) has observed that the undated confirmations given by the parties were produced before it and not before the Ld. AO. He has examined the confirmations and found them to be doubtful on face. There seems to have been no effort on the part of the assessee to produce before the Ld. Tax Authorities below the evidence from bank showing that the bearer cheques were encashed by the said parties only. Same could have only corroborated the confirmations given by parties that in order to secure their payments they insisted for payments through bearer cheques.
8. Ld. CIT(A) has rightly observed that a bearer cheque can bounce as well, for insufficient balances therefore giving bearer cheque to parties as the surety of being encashed is not sustainable explanation of business expediency. The bench finds no error in the findings of the Ld. CIT(A) because if the intention was to secure the payments to the parties by bearer cheques to be as good as cash then there are other banking instruments like Banker’s cheque or RTGS/NEFT facilities which would have ensured prompt and secured payments. It is admitted case of assessee that to one of the parties even payments were made by RTGS/NEFT. So there is no question of lack of banking facilities available with the assessee or that when the payments were made such facility was not accessible.
8.1 When the provision of Section 40A(3) is made in the Act with specific intention to discourage colourable payments then the Ld. Tax Authorities below cannot be expected to accept such casual explanations. There should be a justification in the refusal of a party to not accept payment by way of a crossed cheque/draft to defeat a provision made under Act to discourage cash payments. There is nothing on record to show that the nature of purchases was such that the parties were having decisive role to lay the terms and conditions of mode of payment to be with cash or bearer cheques only and that the assessee’s business interest would have suffered due to non-availability of goods otherwise than from this particular party. The law relied, including the Boards’s circular, is thus not applicable on facts and evidence.
9. Thus, the Bench is inclined to sustain the order of Ld. CIT(A). The grounds are rejected and appeal of assessee is dismissed.
Order pronounced in the open court on 26th April, 2023.
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