Cash payments permissible if assessee can justify necessity & genuineness: ITAT Indore

ITO Vs Ishan Township Pvt. Ltd. (ITAT Indore)

The case of ITO Vs Ishan Township Pvt. Ltd. (ITAT Indore) focuses on the disallowance of cash payments exceeding a certain limit under Section 40A(3) of the Income Tax Act. Section 40A(3) generally disallows such payments unless they meet the conditions outlined in Rule 6DD, which considers business expediency and the absence of banking facilities. According to the Supreme Court ruling in Attar Singh Gurumukh Singh vs. ITO, Section 40A(3) should not be interpreted in isolation but in conjunction with Rule 6DD, ensuring the provision does not hinder legitimate business transactions. If a taxpayer can prove that the payment was genuine and unavoidable, the disallowance should not apply. The ITAT Indore followed the Madhya Pradesh High Court ruling in CIT vs. Achal Alloys (P) Ltd., which holds that no disallowance is necessary if the genuineness of the payment is not in doubt and the payees insisted on cash payments. While the revenue cited decisions from the Madras and Karnataka High Courts that support disallowance, the ITAT Indore adhered to the jurisdictional ruling, emphasizing that cash payments are permissible if the assessee can justify the necessity and genuineness of the payment. This ruling reaffirms that disallowance under Section 40A(3) can be avoided when business expediency and practical constraints are demonstrated.

Key Finding of the ITAT Are summarised as follows:

(i) Section 40A(3) prescribes disallowance for cash payment exceeding a particular limit. But then the proviso to section 40A(3) prescribes that no disallowance shall be made “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”.

(ii) In Attar Singh Gurumukh Singh Vs. ITO (1991) 59 taxmann 11 (SC), the Hon’ble Supreme Court has observed that section 40A(3) must not read in isolation or to the exclusion of Rule 6DD and co-joint reading of this section and rule 6DD makes it clear that the provisions are not intended to restrict the business activities. Further the payments by crossed cheque or bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or it was out of income from disclosed sources. Thus, the Hon’ble Supreme Court has observed that the consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of this section. It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty.

(iii) Rule 6DD prescribes the circumstances for the purpose of aforesaid 2nd proviso to section 40A(3). In Harshila Chordia vs. ITO (2008) 298 ITR 349 (Raj HC) and in Anupam Tele Services vs. ITO (2014) 366 ITR 122 (Guj HC), it is observed that the exceptions contained in rule 6DD are not exhaustive and that the said rule must be interpreted liberally.

(iv) In CIT vs. Achal Alloys (P) Ltd. 218 ITR 46, the jurisdictional High Court of M.P. has held that if the genuineness of the payment was not exposed to any doubt and cash payments were made on the fulcrum that the payees insisted for cash payment, the disallowance is not attracted.

(v) Even if Ld. DR has relied upon the judgment of Hon’ble Madras High court as well as Hon’ble Karnataka High court in revenue’s favour, the decision of Hon’ble jurisdictional High Court of M.P. in Achal Alloys (supra) is binding on the ITAT functioning at Indore.

(vi) The ultimate conclusion is such that if the assessee is able to explain the genuineness of payment as well as the commercial expediency for making cash-payment, there cannot be any disallowance.

FULL TEXT OF THE ORDER OF ITAT INDORE

Feeling aggrieved by appeal-order dated 20.02.2018 passed by learned Commissioner of Income-Tax (Appeals)-1, Indore [“Ld. CIT(A)”], which in turn arises out of assessment-order dated 27.12.2016 passed by learned ITO, Ward-2(5), Indore [“Ld. AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2014-15, the revenue has filed captioned Appeal and the assessee has filed captioned Cross-Objection.

2. When the case is called for hearing, none appeared on behalf of assessee nor any adjournment application is filed. On perusal of case-file, it is found that the Authorised Representative of assessee has withdrawn his authority to represent assessee’s case. Further, at the time of hearing on 15.05.2023, an application seeking adjournment was filed by assessee through Inward No. 159 dated 11.05.2023. Acceding to the request made by assessee, the case was adjourned to 08.06.2023 (today) granting last opportunity to assessee. Since none has appeared today and the Ld. DR for revenue is ready for arguments, it is not possible to grant any more opportunity. Therefore, the hearing is proceeded and the case is decided on the basis of available material and after hearing Ld. DR.

3. The assessee is a company engaged in the business of land development, sale of plots, etc. During scrutiny-assessment of relevant assessment-year framed u/s 143(3), the AO found that the assessee has made cash payments of Rs. 2,63,60,750/- against purchase of lands to be held as stock-in-trade and thereby attracted disallowance u/s 40A(3). Ultimately, while completing assessment, the AO made disallowance. The assessee carried matter in first-appeal whereupon the CIT(A) deleted disallowance. Now, the Revenue is aggrieved by action of CIT(A) and therefore in appeal before us. The assessee has also filed Cross-Objection. We would first take up Revenue’s appeal and thereafter Assessee’s Cross-Objection.

Revenue’s Appeal:

4. The Revenue has raised following ground:

“Whether in the facts and circumstances of the case and also in law, the Ld. CIT(A) is justified in deleting the addition amounting to Rs. 2,63,60,750/- on account of disallowance u/s 40A(3) without appreciating that assessee failed to prove exceptional or unavoidable circumstances necessitating payment in cash.”

5. Ld. DR carried us to Para No. 4.1 of assessment-order and submitted that the AO found that the assessee purchased lands under six (6) registered-deeds and made partly cheque-payments and partly cash-payments to the sellers. The AO has given the details of these six transactions in a tabular format with separate columns of cheque-payments and cash-payments which shows that a total cash payment of Rs. 2,63,60,750/- was made to sellers. The AO confronted assessee for violation of section 40A(3) and considered reply of assessee. In reply, the assessee’s submissions were like this : (i) the genuineness of payments is not in question because all cash-payments were clearly mentioned in registered-deeds executed before the office of sub-registrar; (ii) major portion of payments to sellers was made through cheque, only a minor portion was paid in cash and that too because of the reason that the sellers were farmers, new to the assessee with whom the assessee company had not carried out regular transactions and insisted on cash payments. The assessee had to make part payments in cash to lock the deal; and (iii) the purchased lands were held as stock-in-trade at the end of the year, therefore there was no expenditure claimed by assessee in P&L A/c, However, the AO was not satisfied with all three reasons given by assessee and rejected the same vide Para No. 4.2 of assessment-order, the said para is re-produced below:

6. Ld. DR then carried us to the order of CIT(A) who has deleted the addition made by AO. The order of CIT(A) is extracted below:

appellant the various grounds raised by the appellant are decided hereunder:-

4.1. Ground No.1: Through this ground of appeal, the appellant has challenged the addition of Rs.2,63,60,750/- on account of cash payment u/s 40A(3) of The Act.

4.1.1 The appellant during the year under consideration purchased lands vide six separate sale deeds. The total purchase cost including stamp charges and panchayat fees has been mentioned at Rs.13,72,13,786/-. After claiming local taxes & advocate fees of Rs3,99,300/- and development expenses of Rs.1,97,39,415/-, the assessee has debited total sum of Rs.15,73,52,501/- under the head’  Purchases of Stock-in-Trade’ in its profit & loss account. Thus it is clear that the lands purchased by the assessee were its stock- in- trade which is also evident from its nature of business. The appellant has furnished copies of title deeds of lands purchased during the year under consideration during the course of assessment proceedings. On perusal of the title deeds, it has been observed that the appellant had paid the sale consideration through cheques as well as in cash. The details of payments made by the appellant to the sellers are as under:-

From the above, it is clear that the assessee paid sum of Rs.2,63,60,750/- for purchases of lands to the sellers in cash on above said dates. The appellant is engaged in the business of development and sale of plots. The lands purchased are, in the form of stock-in-trade for the appellant.

4.1.7 ITAT Indore bench Indore in the case of ITO Vs Jitendra Kumar Mandlecha, 23 ITJ 644 In this case the facts of the case was as under:-

“Assessee made payment of business expenditure above Rs. 20000/- in cash, AO made disallowances of the same — ITAT Held that object behind the provisions is that persons are not allowed to show false expenditure for avoiding income tax and therefore, once the genuineness of payment and identity of the payee is established fully, the object is achieved and in such a situation, if the payment has been made looking to the necessity of settlement or difficulty of payee as payee was in need of money after banking hours. The same cannot be said to have been made in violation of object of the rules — Expenditure is therefore allowable in present case, as same is genuine and duly recorded and out of business exigencies. Therefore, respectfully following the same the addition made by the AO amounting to Rs.2,63,60,750/- is Deleted. Therefore, the appeal on this ground is Allowed.

5. As a result, the appeal is Allowed.

(H.P. Meena)
Commissioner of Income-tax (Appeals)-I,
Indore.

Copy to:

1. The Chief Commissioner of Income Tax, Indore.

2. The Pr. Commissioner of Income Tax-1, Indore.

3. The Addl. CIT/ JCIT, Range-2, Indore.

4. The AO ITO-2(5), Indore

5. The Appellant.

Commissioner of Income-tax (Appeals)-I,
Indore.

7. With this background, Ld. DR raised following contentions:

(i) That, the CIT(A) has given relief to assessee on the basis that the sellers of land insisted on cash payment and refused to accept payments in cash but this stand of assessee, accepted by CIT(A), is very much contradictory to the facts of case. Ld. DR submitted that the assessee has made both cheque-payments as well as cash-payments to sellers which itself shows that the sellers not only had bank accounts but also they must be ready to accept cheque-payments.

(ii) That, another reason accepted by CIT(A) for giving relief to assessee is such that the genuineness of payment has not been doubted by AO. Ld. DR submitted that the section 40A(3) prescribes statutory disallowance for cash-payment beyond a specified limit and the consideration of genuineness is not at all relevant for making or not making disallowance under that section. He raised a question – If genuineness would be the consideration, why the section would disallow only cash-payment and not cheque-payment? He referred to a decision of Hon’ble Madras High Court in Vaduganathan Talkies Vs. ITO, Chennai (2020) 120 com 25 where it was held thus:

“5. The learned Senior Counsel would contend that the assessees had produced a list containing the payments made by the assessees in cash to various parties, those payees were identifiable and the assessees also produced letters from the payees to show that the payees have received the money and accounted for the same in their books and the payees had also furnished their Permanent Account Numbers (PAN). Therefore, it is submitted that the genuineness of the transactions can never be doubted more particularly when, 75% of the payments effected by the assessees were through banking channel, that is, through cheques or bank drafts. This aspect was not even considered by the Assessing Officer or for that matter the CIT(A) or the Tribunal and therefore, it is submitted that genuineness of the transactions is a very relevant factor, which should be taken into consideration.

8. The learned Standing Counsel for the Revenue submitted that the assessees have not been able to bring their cases under any one of the exceptional circumstances in Rule 6DD and having failed to bring the same under the exceptional clauses, the authorities as well as the Tribunal rightly denied relief to the assessees. Further, it is submitted that the assessees did not furnish the full details in the relevant column in the return of income and these details were available only in the annual report, which will go to show the conduct of the assessees. It is further submitted that the assessees are established parties and therefore, to say that they effected cash payments due to certain circumstances is an unacceptable plea. That apart, both the assessees are based on Chennai and nothing prevented them to avoid payment through banking channels. Further, the assessees have failed to prove unavoidable circumstances, which necessitated payments by cash over and above a sum of Rs.20,000/-. Further, the genuineness of the transaction is not a factor to be considered while deciding a case under Section 40A(3) of the Act. Further, it is submitted that commercial expediency or business expediency depends on facts and, the authorities rightly concluded on facts against the assessees.

14. As rightly pointed out by the learned Standing Counsel for the respondent, the Commercial expediency or business expediency has to be decided on the facts of each case. From the decision of the Hon’ble Supreme Court, it appears that genuineness may be one of the factors to be taken note of, in our view, while considering as to whether the case would fall within any one of the circumstances set out in Rule 6DD of the Rules and not otherwise. We have seen the chart showing the payments effected by the assessees to various parties. The payments effected through the year under consideration is substantial.

15. It is the submission of the learned Senior Counsel for the appellants that only 25% of the payments effected by the assessees were by cash and the remaining 75% was through banking channels, that is, through cheque or demand draft. These factors will work against the assessees because the assessees are fully aware of the legal position that over and above Rs.20, 000/-, the assessees would not be entitled to effect payment in cash in a day. Thus, merely because the assessees were able to identify the payees, who were more than 20 in number, would not be a mitigating factor to grant relief to the assessees under the first proviso to Section 40A(3) of the Act.”

He also referred to the decision of Hon’ble Bombay High Court in Madhav Govind Dhulshete Vs. ITO (2018) 99 Taxmann.com 56 holding the same proposition and thereby approving the order of ITAT against assessee:

“10. Income tax discourages payment of money in cash and beyond a specified limit. That is to encourage cheque transactions and banking operations. It is in these circumstances that the Assessing Officer found that out of the total consideration of Rs. 39,00,960/-, a substantial sum has been paid in cash even though banking facilities are available to both, the Assessee as well as the stockist. In such circumstances the Tribunal upheld the concurrent findings against the Assessee.”

He also relied upon the decision of Hon’ble Karanataka High Court in Nam Estates (P) Ltd. Vs. ITO, Bangalore (2021) 123 Taxman.com 218:

“9. Thus, from the perusal of the relevant extract of the order passed by the assessing officer, it is evident that the assessee’s authorized representative in his written submission dated 18.12.2008 had disclosed the reason for payment in cash on the ground that the payments were made at place which was not served with any banking facility. The assessing officer has found that the place at which the payment was made had banking facility and therefore, has held that the assessee failed to prove that it was covered in the exception clause as provided under Section 40A(3) read with Rule 6DD. The aforesaid finding has been affirmed by Commissioner of Income Tax (appeals) vide order dated 23.02.2011. The relevant extract reads as under:

“Considering the various fats, I find that the appellant could not demonstrate with cogent evidences that there was business expediency or sufficient cause for such cash payments to various parties in the relevant assessment year. The explanation of the appellant that the transaction has taken place in Devenahalli Taluk which lacked the banking facilities in and around the place is not acceptable in the light of the fact that these transactions have taken place in the vicinity of Bangalore District, Devenahalli Taluk, which had umpteen number of banks and branches. Further, the contention of the appellant that the recipients had insisted on cash payment is not acceptable. Though the parties were identifiable and cash payments were genuine, these payments were squarely hit by the provisions of Section 40A(3).”

10. Thus, it is evident that the Commissioner of Income Tax (Appeals) have also found that the assessee has failed to prove the stand taken by him that the transaction took place at the place where there were no banking facilities. The aforesaid finding has been affirmed by the Income Tax Appellate Tribunal. Therefore, the contention of the appellant that it had taken a defence before the authorities that the parties were identifiable and the transactions were genuine cannot be accepted, as the aforesaid contention is being raised for the first time in this appeal, which even otherwise is contrary to the material on record, which has already been referred to supra. The aforesaid findings are findings of fact and this court as a general rule would not interfere except in cases where the parties have ignored material evidence or have acted on no evidence, or have drawn wrong inference from proved facts by applying the law erroneously. The assessee has not been able to show that its case falls in any of the aforesaid categories. In view of preceding analysis, the substantial question of law framed by bench of this court vide order dated 10.07.2013 is answered in the negative and against the assessee.”

(iii) Lastly, Ld. DR also relied upon a recent decision of ITAT, Indore (one of us, namely Accountant Member, was party to decision) in ITO Vs. M/s Simran Developers, ITA No. 796/Ind/2018 order dated 18.04.2023 in which the ITAT has upheld the disallowance.

8. Before delving into present case, we would first like to understand the provision of law. For this purpose, we would like to gainfully refer a recent decision of this very Bench of ITAT in M/s Essargee Construction Pvt. Ltd. Vs. ITO, ITA No. 10/Ind/2023 order dated 03.08.2023 (this decision is subsequent to hearing of present appeal but it has decided the interpretation of law), where it observed and held thus:

“4. Before Tribunal the Ld. AR of the Assessee has submitted that the assessee has purchased two parcel of land vide two sale deeds both dated 27.03.2014. He has referred to the details of the cash payment and submitted that the payment of Rs.25000/- each to seven co-owners in respect of the one land parcel was paid as token money out of the total sale consideration of Rs.4,05,30,000/- and balance was paid in cheque to each of the seven sellers. Similarly in case of second land parcel the assessee has paid sum of Rs.1 lac in cash out of the total consideration of Rs. 79,10,000/-. Thus, Ld. AR has submitted that the cash payment made by the assessee was only a token amount at the time of deal which is a tradition and practice in this business without which the parties are not bound by their promise to strict to the deal. He has further submitted that at the time of initial negotiation and deal it is not possible to make token payment in Cheque and therefore, a minor amount of cash payment as a token money has been paid due to business expediency and the same would not attract the provision of section 40A(3) of the Act.

5. He has further submitted that the AO has not disputed the genuineness of the transactions as it is duly recorded in the sale deeds and payment was made to the land owners who are parties to the registered sale deed. Thus, the transactions and genuineness of the payment of cash is not in dispute. The identity of the payee is also not disputed by the AO as it is recorded in the sale deed. Therefore, when the payment was made to the land owners as token money at the time of initial negotiation for purchase of land and the entire balance amount has been paid through Cheque and all particulars are recorded in the sale deed then the disallowance is not warranted u/s 40A(3) of the Act. He has relied upon the decision of Hon’ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO 298 ITR 349 and submitted that the Hon’ble High Court has observed that the assessee has proved the payment are made to the seller and identity of the payee have also been proved. Once the assessee produced all the details and record for the purpose of proper identification to enable the ITO to satisfy himself about the genuineness of the transactions then the disallowance u/s 40A(3) is not justified. The ld. AR relied upon the judgment of Hon’ble jurisdictional High Court in case of CIT vs. Achal Alloys (P) Ltd. 218 ITR 46 and submitted that the Hon’ble High Court has held that where the payments in cash were duly signed by the payee and the instance on making cash payments was founded on fulcrum that payees did not have any bank account. Further the genuineness of the payments was not exposed to any doubt then the disallowance u/s 40A(3) is not justified. Thus, Ld. AR has pleaded that when the transaction is genuine and identity of the payee is not in dispute then the disallowance is not justified. He has also relied upon the order of this tribunal date 11.04.2019 in assesse’s own case arising from original assessment order passed u/s 143(3) in ITA No. 900/Ind/2016 and submitted that the Tribunal has deleted the addition made by AO u/s 40A(3) of the Act in respect of the cash payment.

6. On the other hand, Ld. DR has submitted that the case law relied upon by the assessee are not applicable in the facts of the present case. He has further submitted that there was no business expediency as pleaded by the Ld. AR of the assessee when the subsequent payment was made in Cheque then the initial payment also could have been made in Cheque. The case of the assessee does not fall in any of the exceptions incorporated in Rule 6DD of the Income Tax Rules.

7. DR has referred to the finding of the Ld. CIT(A) and submitted that the genuineness of the transaction is not relevant for disallowance u/s 40A(3) of the Act. In support of his contention, he has relied upon the judgment of Hon’ble Madras High Court in case of Vaduganathan Talkies v. ITO 428 ITR 224 (Mad) and Hon’ble Karnataka High Court in case of Nam Estates Pvt. Ltd.  v. ITO (2020) 428 ITR 186. He has also relied upon the judgment of Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh vs. ITO 191 ITR 667. He has relied upon the orders of the authorities below.

8. We have considered the rival submission as well as relevant material on record. It is evident from the record that the assessee has paid cash of Rs.25000/- to seven persons and Rs.1 lac to another person the details of which are given by the AO in the assessment order as under:

XXX

9. The first seven payments of Rs.25,000/- each are made by the assessee in respect of the land purchased from these persons, vide sale deed dated 27.03.2014 for total consideration of Rs.4,05,30,000/-. It is evident from the sale deed that this amount of Rs.25000/- each paid by the assessee is also reflected in the sale deed to these seven persons and balance purchase consideration was paid through Cheques as per details given in the sale deed itself. Therefore, the payment was made as token amount at the time of initial negotiation which is almost three months prior to the date of sale deed and thus we find merit and substance in the explanation of the assessee that the token payment was made at the time of initial negotiation with the land owner and thereafter the sale deed was executed wherein the payment of total consideration of Rs. 4,05,30,000/- has been explained with full details including these payments of Rs. 25000/- each to these co-owners. Similarly a sum of Rs.1 lac was paid by the assessee to one Shri Sevaram and subsequently the sale deed dated 27.03.2014 was executed between the assessee and said Shri Sevaram wherein the total consideration of Rs.79,10,000/- has been shown including a sum of Rs.1 lac paid in cash. Therefore, the explanation of the assessee that these cash payments were made as token money at the time of initial negotiation of deal with land owners and thereafter the land were purchased by the assessee through registered sale deed. These facts as evident from the registered sale deed clearly shows that the payments made at the time of initial negotiation are due to business expediency of the assessee.

It is relevant to refer the first proviso to section 40A(3) and (3A) 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 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 or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds ten thousand rupees (twenty thousand in present case), 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:”

10. The above proviso carves out an exception in such cases and under such circumstances as may be prescribed (Rule 6DD), having regard to the nature and extent of banking facilities available consideration of business expediency and other relevant factors. The Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh vs. ITO as relied upon by the Ld. DR has also considered this aspect in para 7 as under:

“In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD. The Section must be read along with the Rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the Section. It is open to the assessee 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. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. 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 of unaccounted money or reduce the chances to use black-money for business transactions. See: Mudiam Oil Company v. ITO, [1973] 92 ITR 519 A.P. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black-money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black-money should not be regarded as curtailing the freedom of trade or business.”

11. Thus, the Hon’ble Supreme Court has observed that section 40A(3) must not read in isolation or to the exclusion of Rule 6DD and co-joint reading of this section and rule 6DD makes it clear that the provisions are not intended to restrict the business activities. Further the payments by crossed Cheque or bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or it was out of income from disclosed sources. Thus, the Hon’ble Supreme Court has observed that the consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of this section. It is open to the assessee to furnish to the satisfaction of the AO 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. By considering the judgment of Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra), the Hon’ble Gujarat High Court in case of Anupam Tele Services vs. ITO (supra) has analysed the provisions of section 40A(3) with Rule 6DD of Income Tax Rules 1962 as under:

“18. Rule 6DD of the IT Rules, 1962 provides for situations under which disallowance under s. 40A(3) shall not be made and no payment shall be deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, cl. (i) which is relevant, read as under:

(i) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike:

19. It could be appreciated that s. 40A and in particular sub-clause (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of account payee cheque drawn on a bank or account payee bank draft.

20. As held by the apex Court in case of Attar Singh Gurmukh Singh (supra). In our opinion, there is little merit in this contention. Sec. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AO to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of s. 40A(3) are not absolute. Considerations 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 assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in s. 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of s. 40A(3) and r. 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions.”

21. It was because of these considerations that this Court in case of Hynoup Foods (P) Ltd. (supra) observed that the genuineness of the payment and the identity of the payee are the first and foremost requirements to invoke the exceptions carved out in r. 6DD(g) of the IT Rules, 1962.

22. In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the CIT(A). The Tribunal also did not disturb such facts but relied solely on r. 6DD of the Rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of r. 6DD, consequences envisaged in s. 40A(3) of the Act must follow.

23. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons:

(a) The paramount consideration of s. 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), s. 40A(3) of the Act does not eliminate considerations of business expediencies.

(b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow-

(i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time;

(ii) the assessee was, therefore, required to make cash payments only.

(iii) Tata Tele Services Ltd. assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee;

(iv) It is not disputed that the Tata Tele Services Ltd. did not act on such promise

(v) if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations.

We would find that the payments between the assessee and the Tata Tele Services Ltd, were genuine. The Tata Tele Services Ltd. had insisted that such payments be made in cash, which Tata Tele Services Ltd, in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of s. 40A(3) of the Act must be lifted.

24. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007)208 CTR (Raj) 208 (2008) 298 ITR 349 (Rai) had observed that the exceptions contained in r. 6DD are not exhaustive and that the said rule must be interpreted liberally.”

12. The Hon’ble High Court has observed that if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. Considerations 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. The Hon’ble High Court further observed that provision of section 40A(3) and Rule 6DD are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the changes to use black money for business transactions. A similar view has been taken by Hon’ble Rajasthan High Court in case of Smt. Harsila Chordia vs. ITO (supra) in para 13 to 20 as under:

“13. Clause (j) of Rule 6DD of the Income-tax Rules, 1962, provides that no disallowance under Section 40A(3) of the Income-tax Act, 1961, shall be made 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, 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.

14. About this clause, many doubts were raised and enquiries were directed to the Board as to what shall constitute exceptional and unavoidable circumstances within the meaning of Clause (j). That led to issuance of Circular by the Board on May 31, 1977 ([1977] 108 ITR (St.) 8), which is published in Taxmann, Vol. 1, 1988 Edition. Significantly paragraph 4 of the aforesaid Circular shows very clearly that all the circumstances in which the conditions laid down in Rule 6DD(j) could be applicable cannot be spelt out. However, some of them which will seem to meet the requirements of the said rule are as follows:

a. the purchaser is new to the seller; or

b. the transactions are made at a place whether either the purchaser or the seller does not have a bank account; or

c. the transactions and payments are made on a bank holiday; or

d. the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from this particular seller; or

e. the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchase the goods; or

f. specific discount is given by the seller for payment to be made by way of cash.

15. It was further clarified in paragraph 6 that the above circumstances are not exhaustive but illustrative.

16. Therefore, in our opinion, the Tribunal was clearly in error in not travelling beyond the circumstances referred to in paragraph 4 of the Circular and to consider the explanation submitted by the assessee on its own merit.

17. Significantly paragraph 5 reproduced hereinbelow gives a clear indication that Rule 6DD(j) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and identity of the receiver is established, the requirement of Rule 6DD(j) must be deemed to have been satisfied. Paragraph 5 of the Circular reads as under [1977] 108 ITR (St.) 8, 9:

“5. It can be said that it would, generally, satisfy the requirements of Rule 6DD(j), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of Rule 6DD(j).”

18. It appears that fulfilment of the conditions of paragraph 5 of the circular has clearly escaped the attention of the Tribunal. The circular clearly indicates that ordinarily where the Income-tax Officer is satisfied about the genuineness of the transaction and payment and identification of the cash payment is established, the Income-tax Officer shall record his satisfaction about the fulfilment of the conditions for allowing the benefit of Rule 6DD(j). Apparently, Section 40A(3) was intended to penalize the tax evader and not the honest transactions and that is why after framing of Rule 6DD(j), the Board stepped in by issuing the aforesaid circular.

19. This clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO v. Swastik Roadways as noticed above.

20. In this case, there is no dispute about the genuineness of the transactions and the payment and identity of the receiver are established. Therefore, the case clearly fell within the parameters of paragraphs 4 and 5 of the aforesaid circular read together.”

13. Therefore, if the assessee has brought on record to establish genuineness of the transactions and payment as well as identity of the payee to the satisfaction of the AO then the benefit of Rule 6DD is available. Hon’ble High Court has observed that section 40A(3) was intended to penalize the tax evader and not honest transactions and that is why after framing Rule 6DD(j) the CBDT steps in by issuing the circular dated 31st May 1977 reported in 108 ITR (ST) 8.

The Hon’ble jurisdictional High Court in case of CIT vs. Achal Alloys (P) Ltd. (supra) has also considered this issue and held as under:

“7. Section 40A(3) provides an under:

“Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1965) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction.”

8. It contains the proviso as under:

“Provided further that no disallowance under this sub­section shall be made where my payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of having facilities available, considerations of business expediency and other relevant factors.”

9. The Appellate Tribunal found that the genuineness of the payee has not been doubted by the Assessing Officer. It was found that the payment of the exceeding the limit was made under exceptional and unavoidable circumstances. Placing reliance on Porwal Udyog (India) v. CIT (1982) 135 IIR.991 (MP) it was found that no disallowance was permissible.

10. Why should every exercise begin with mistrust or no trust? In 1979, Ireland abolished wealth-tax, Germany, substantially lowered it. The U.S.A. cut capital gains tax and the UK reduced its maximum rate of personal tax from 83 to 60 per cent. In 1982, Sweden reduced its marginal rate of personal income-tax from 85 to 50 per cent. In this country, the Government purports to simplify the income-tax law but pursues the course, may be due to compulsions, in the opposite direction. The provision on hand is intended to destroy intentions of dealing with unaccounted moneys, the purpose behind insistence on cross-cheque or cross-draft is to assure and ensure “genuineness” of dealing and proper assessment of taxable income. Even this provision has a proviso to mitigate the hardships.

11. We notice from the appellate order that the appellate authority found that all the purchases were duly entered in the register through inwards and the production has been accepted. It further found that the genuineness of the payment was not exposed to any doubt. Payments in cash were duly signed by the payees and the insistence on making the cash payments is founded on the fulcrum that the payees did not have any bank account and that, being illiterates, required the payment in cash.

12. The Tribunal was this satisfied that no disallowance ought to be made in view of the facts and features fully covered by the provision to the aforesaid section.

13. It is in the area of legislative ambiguities, yet not receding, that courts have to fill gaps, clear doubts and mitigate hardships. From the words of Judge Learned Hand, spoken in Cabell v. Markham 11245] 148 F 28 737, 739, we get enough light to locate the correct path.

“It is one of surest indexes of a mature and developed jurisprudence to remember that statutes always have some purpose or object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning.”

14. There is no doubt about the purpose or object of the relevant provision. To accomplish it, we cannot ignore the second proviso engrafted to fill gaps and mitigate hardships The Tribunal on appreciation of facts applied this proviso and held that disallowance of payments made to the sellers and consequent addition of equivalent amount to the income as returned were steps hostile to the purpose and object and that the assessee was required to be given the benefit of such payments made in exceptional circumstances. Law lives on logic and as such illogicality, resting on technical view, it to be spurned.

15. This finding of fact, not shown to be perverse or perishable, reached by the Tribunal did not give, as held in CIT Ashoka Marketing LA [1976] 103 ITR 543 (SC) and CIT Kotrika Venktaswamy and Sons (1971) 79 ITR 499 (SC), rise to any question of law.”

14. Therefore, the disallowance u/s 40A(3) cannot be made without considering the business expediency and other relevant factors falling in the exceptions given in Rule 6DD of I.T. Rules. The Coordinate Bench of this Tribunal in asessee’s own case for A.Y.2010-11 arising from the original assessment order passed u/s 143(3) (supra) has considered this issue in para 8 to 10 as under:

“8. We have heard rival contentions and perused the records placed before us and gone through the paper book filed by the assessee. The issue raised in this appeal by the assessee revolves around the disallowance of Rs.5,40,000/- u/s 40A(3) of the Act. We observe that the assessee is into the business of purchase and sale of land and civil construction business. It purchased land from Smt. Anar Bai for a total consideration of Rs.36,00,000/-. Out of the total purchase consideration of Rs.36,00,000/- assessee paid cash of Rs.6,20,000/- (verifiable from the Registered sale deed as well as affidavit placed in the paper book). Out of the cash payment of Rs.6,20,000/- Ld. A.O has disputed only sum of Rs. 5,40,000/- which in view of Ld. A.O was payment for expenditure in cash exceeding Rs.20,000/-. The total transaction of purchase of land for Rs.36,00,000/- is not disputed and the complete details of consideration paid in cash and cheque are mentioned in the registry sale deed which has been executed before the Registering Authority and therefore the genuineness of the transaction cannot be doubted.

9. It is pleaded before us that the seller Smt. Anar Bai was not having a bank account on the date of receiving cash and subsequently when the account was opened the consideration was paid in various instalments by account payee cheques. This fact that Smt. Anar Bai was not having the bank account at the initial date of receiving the consideration in cash has not been disputed by the revenue authorities. The said cash payment was made by assessee for business expediency in order to confirm the purchase deal.

10. Therefore looking to the given facts and circumstances of the case the alleged cash payment of Rs.5,40,000/- comes under the exceptions provided in Rule 6DD of the IT Rules and thus both the lower authorities were not justified in sustaining the disallowance u/s 40A(3) of the Act and the same deserves to be deleted. We accordingly order so and allow Ground No.1 & 2 raised by the assessee.

11. Apropos the second plea raised in Ground No.3 of the assessee’s appeal contending that the disallowance is not called for as the alleged amount was not claimed as an expenditure during the year becomes infructuous and merely academic as we have already deleted the disallowance u/s 40A(3) of the Act at Rs. 5,40,000/- while adjudicating Ground No.1 & 2 of instant appeal.”

15. Though the Ld. DR has relied upon the judgment of Hon’ble Madras High court as well as Hon’ble Karnataka High court however, the jurisdictional High Court is binding on the tribunal functioning at Indore. Accordingly, in the facts and circumstances as discussed above and relied upon the various decisions of Hon’ble jurisdictional High Court and Coordinate Bench of this Tribunal we decide this issue in favour of the assessee and consequently disallowance made by the AO u/s 40A(3) is deleted.”

[Emphasis supplied]

9. Thus, the broader conclusions drawn by this Bench in above decision can be summed up as follows:

(i) Section 40A(3) prescribes disallowance for cash payment exceeding a particular limit. But then the proviso to section 40A(3) prescribes that no disallowance shall be made “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”.

(ii) In Attar Singh Gurumukh Singh Vs. ITO (1991) 59 taxmann 11 (SC), the Hon’ble Supreme Court has observed that section 40A(3) must not read in isolation or to the exclusion of Rule 6DD and co-joint reading of this section and rule 6DD makes it clear that the provisions are not intended to restrict the business activities. Further the payments by crossed cheque or bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or it was out of income from disclosed sources. Thus, the Hon’ble Supreme Court has observed that the consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of this section. It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty.

(iii) Rule 6DD prescribes the circumstances for the purpose of aforesaid 2nd proviso to section 40A(3). In Harshila Chordia vs. ITO (2008) 298 ITR 349 (Raj HC) and in Anupam Tele Services vs. ITO (2014) 366 ITR 122 (Guj HC), it is observed that the exceptions contained in rule 6DD are not exhaustive and that the said rule must be interpreted liberally.

(iv) In CIT vs. Achal Alloys (P) Ltd. 218 ITR 46, the jurisdictional High Court of M.P. has held that if the genuineness of the payment was not exposed to any doubt and cash payments were made on the fulcrum that the payees insisted for cash payment, the disallowance is not attracted.

(v) Even if Ld. DR has relied upon the judgment of Hon’ble Madras High court as well as Hon’ble Karnataka High court in revenue’s favour, the decision of Hon’ble jurisdictional High Court of M.P. in Achal Alloys (supra) is binding on the ITAT functioning at Indore.

(vi) The ultimate conclusion is such that if the assessee is able to explain the genuineness of payment as well as the commercial expediency for making cash-payment, there cannot be any disallowance.

10. Now, we revert to present case before us. Firstly, we find that it is a case of purchase of land duly supported by registered deeds. The consideration for purchase and the mode of payment, namely cheque and cash, are clearly mentioned in registered-deeds. The identity of the payee is also mentioned in registered-deeds. Therefore, the genuineness of transaction is not having any question. In fact, the AO has not disputed the genuineness and the Ld. DR for revenue is also not having dispute on genuineness point. This way, the genuineness part is proved.

11. In so far as circumstance/commercial expediency is concerned, we find that the assessee has claimed before AO that the sellers of lands were farmers and new to assessee. The sellers required the assessee to make cash-payments and to lock the deals, the assessee had to make part-payment in cash. Before CIT(A), the assessee has submitted a detailed chart in a tabular format giving explanation of circumstance/commercial expediency of all six transactions. This chart, as re-produced by Ld. CIT(A) on Page No. 5 to 10 of his order, is scanned and re-produced below:

12. On scrutiny of above chart with reference to the registered sale-deeds filed in the Paper-Book submitted by assessee, we prima facie find worth in the explanation given by assessee in last column titled “Cash circumstance/Business expediency and remarks” except in case of Item No.  5 “Seller-Shri Nandkishore Patidar, Consent Giver-Shri Om Prakash Patidar,  Smt. Nandibai Patidar, Shri Harinarayan Patidar and Shri Krishna Patidar”. For this item, the assessee has made following explanation in last column of chart:

“It is informed and submitted that the said land is rural agricultural land situated in a village belonging to the owner/legal heir/relatives and (joint family property).

It can be verified from the records, the purchased land is a distinguished case, apart from the seller of land it also involves joint owner and 3 other family persons of seller. To materialize the effective and legal purchase of land & to avoid further litigations and disputes the assessee company the assessee company had to involve it under series of cash transaction in part for purchasing of the said land so that the joint owner and relatives of seller could give their individual consent, as each one had interest inland. It is also informed that since the seller/joint owner/relatives were villagers /farmers highly demanding major payment in cash to settle and clear the family consent but the assessee to extent possible paid the part money in cash and reaming payment through PDC’s of Rs. 100.00 Lacs on the direction of seller of land Shri Nandkishore Patidar. The appellant was highly under the circumstances to make some payments in cash for the concerned land and the complexity of the case cannot be denied as the registration of the purchase materialized in the end of next financial year. For your perusal the registry of the said land is on record and enclosed.”

[Emphasis supplied]

Thus, the assessee’s claim is such that apart from seller, there were 4 other persons interested in the land (joint owner and other relatives/family persons) and the assessee had to make cash payment so that the joint owner and relatives/family persons could give their consent, as each one had interest in land. They demanded cash payment to settle and clear their family consent. Now, when we examine the registered deed of purchase filed at Page No. 99 to 116 of Paper-Book, we find following clause clearly mentioned on Page No. 3 of the registered-deed (Page No. 101 of Paper-Book):

Therefore, there is a clear contradiction in the submission of assessee. While the assessee claims that the sellers insisted for cash payment in order to make payment for clearing consent from joint owner/family members; the joint owner/family members have mentioned a recital in the registered-deed that they have signed as consenting party without charging any money. This is certainly a contradiction as claimed by Ld. DR. Being so, we do not find credence in assessee’s explanation of commercial expediency with respect to this particular transaction involving cash-payment of Rs. 1,14,55,500/-. Therefore, the disallowance to that extent is sustainable.

13. In view of above discussions and for the reasons stated therein, we are inclined to uphold disallowance to the extent of Rs. 1,14,55,500/- out of total disallowance of Rs. 2,63,60,750/- made by AO. For remaining disallowance, we uphold the deletion made by CIT(A) in first-appeal. Consequently, the revenue succeeds partly in this appeal.

14. At this stage, we would also like to make a mention on the decision in ITO Vs. M/s Simran Developers, ITA No. 796/Ind/2018 order dated 18.04.2023 relied upon by Ld. DR. We have perused the concluding Para No. 18 of order and find that in that case, the assessee made a particular claim of exceptional circumstance before AO but could not establish. Thereafter, in first-appeal before CIT(A), the assessee made an altogether new and different type of exceptional claim to take the benefit of decided rulings. Further, the assessee was able to prove neither the claim made before AO nor the newer claim made before CIT(A). The CIT(A) simple recorded the newer stand of assessee in his order and granted relief based on judicial rulings. Therefore, in that peculiar situation, the ITAT reversed CIT(A)’s action and upheld the disallowance made by AO. In present case, there is no change in stand taken by assessee before AO and CIT(A). The assessee has been claiming same stand before AO as well as CIT(A). Therefore, the decision relied upon by Ld. DR is very much different on facts and does not apply to present appeal of assessee.

Assessee’s Cross-objection:

15. The assessee has come in cross objection on following grounds:

(i) On the facts and circumstances of the case, the ITO, 2(5) has erred in disallowance u/s 40A(3) of the Income-tax Act, 1961, of Rs. 2,63,60,750/-.

(ii) Without prejudice to ground no.1, on the facts and circumstances that the assessee failed to prove exceptional or unavoidable circumstances necessitating payment of cash towards the payment for purchases of land.

(iii) Further without prejudice to the above grounds, on the facts and circumstances of the case and in law, the ld. AO was not justified in filing the appeal merely on the basis of tax effect in the case exceeded the monetary limits prescribed and ignoring the merits of the case from the base.”

16. The Cross-Objection is merely supportive to CIT(A)’s order and does not require any separate adjudication. Hence, the same is hereby dismissed.

17. Resultantly, the revenue’s Appeal is partly allowed and assessee’s Cross-Objection is dismissed.

Order pronounced in the open court on 05.09.2023.