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Case Law Details

Case Name : Bolkunda Pachwai & (S) C.S. Shop vs. Income-tax Officer (ITAT Kolkata)
Appeal Number : I.T.A Nos. 165 & 166/Kol/2014
Date of Judgement/Order : 25.07.2016
Related Assessment Year : 2008-09 & 2009-10
CA Saurabh Chokhra

Brief of the case:

  • The ITAT Kolkata in the above cited case held that the consequence, which were to be fall on  account of non-observation of section 40A(3) must have nexus to the failure of object of introducing of the provision. Therefore, no disallowance can be made if the transactions do not defeat the object of Sec 40A(3) in as much as there genuiness is not challenged and they can be tracked end to end.
  • Therefore , deposit in bank account of supplier in compliance with govt. regulations who is wholesale dealer  where genuiness of transaction is not disputed by revenue cannot be disallowed  as the same is routed through banking channel making evasion of taxes difficult thus, not defeating the provisions of Sec 40A(3).

pound-coins-currency-bank-note-money-wealthFacts of the case:

  • The assessee is a partnership firm engaged in the business of retail trading of liquor under the name and style of M/s Bolkunda Pachwai & (S) C.S.Shop. During the course of assessment proceedings AO observed that the assessee had made cash payments in excess of Rs. 20,000/- to M/s Asansol Bottling & Packaging Co. Pvt Ltd (ABPL) for purchase of country spirit by way of cash deposits into the bank account of ABPL.
  • AO asked assessee as to why such payments made by cash deposit in bank account not to be disallowed u/s 40A(3).
  • Assessee pleaded that the payment was made to the wholesale licensee who is an agent of the Government and hence the payment would fall under the exception provided in Rule 6DD(k) of the IT Rules.
  • AO not convinced with this reply proceeded to make disallowance u/s 40A(3) of the Act in respect of cash purchases made by the assessee which was confirmed by the ld CITA on first appeal. Aggrieved, the assessee is in appeal before tribunal.

Contention of the Assessee:

  • Excise Rules of the West Bengal Govt. mandates the retail vendor to deposit the monies directly into the bank account of the wholesale licensee and not by any other mode. It was also argued that ABPL is the collecting agent of the Government and the payment made to them should be treated as payments made to Government and therefore covered by Rule 6DD(b) of the Rules.
  • Further , the he genuineness of transactions was not disputed by the revenue. The payment is made to wholesale licensee and payment has gone into the treasury of the West Bengal Government.
  • Further, it was argued that if the entire purchases made in cash is disallowed, then effectively the it would result in  taxing the entire sale proceeds as income of the assessee which would only result in an anomalous situation. Reliance was placed on the decision of the Co-ordinate Bench of this tribunal in the case of Prabir Kumar Mullick vs ITO in ITA No. 1603/Kol/2011.

Held by ITAT Kolkata:

  • ITAT observed that the department has not challenged the genuineness of transactions made by assessee, identity of receiver and payment made by assessee in bank account of supplier. Since the genuinity of the payments made to the M/s ABPL is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case.
  • Further, it was observed that the assessee by depositing cash directly into bank account of supplier ensured that the supplier don’t escape from the ambit of taxation. Moreover, the West Bengal Excise Rules also mandates the payment to be made by way of direct deposit into the bank account of the wholesale licensee which is also not disputed by revenue.
  • It is pertinent to go behind the intention of Sec 40A(3) which was to put two fold – i.e. first a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits
  • Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object meaning thereby as long as the transaction do not fail the object of Sec 40A(3) the same even when not strictly in line with Sec 40A(3) cannot have penal consequences on assessee.
  • Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration.
  • Further more , the excise regulation of West Bengal mandated the payments to be made directly into the bank account of the said wholesale licensee by the retail vendor (i.e assessee herein) for strict and effective regulation of the country liquor and for prevention of spurious stocks and black marketing transactions from the same. Hence it could be safely concluded that the said wholesale licensee had acted at the instance of the State Government. Once this is so, then the said wholesale licensee could be construed as an agent of the State Government. As such the case is covered under Rule 6DD(k) which provide exception cases in which payments can be made in cash.
  • After considering the above observations , disallowance was ordered to be deleted . In result appeal of assessee was allowed.

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