Written Submission in respect of Shri XXXXXXXX , XXXXXXX , XXXXXXXX , for the A.Yr. 2014-15 before the Hon’ble Commissioner of Income Tax(Appeals),XXXXXXXXX, XXXXXXXXi

Respected Sir,

Addition of Rs. 326000.00,Section 40A(3) of the Income Tax Act, 1961

Out of Total Purchases of Rs. 1005450.00(Including VAT) made during the F.Yr. 2013-14 the payment was made as under

Total Purchases INR 1005450.00
Payment By Cheques from The ICICI Bank Ltd. INR 679050.00
INR 326400.00

Cash Payment Made on the following dates

2/01/2014 Cash Made in Advance 50000.00 Thursday
5/01/2014 Cash 76000.00 Sunday
8/01/2014 Cash 126400.00 Wednesday
9/01/2014 Cash 74000.00 Thursday
326000.00

The Cash Payment of Rs.50000.00 Dt. 2.01.2014 is Advance payment to the party which is not covered in section 40 A(3) .Cash payment  of Rs. 76000/- Dt. 5/01/2014 was made on Sunday which is covered as per Rule, 6DD of the Income Tax Rules, 1962.

Cash Payment >Rs. 20000/- added.

No time given to the assessee to explain why more then Rs. 20000/- Payment given in cash. Copy of order sheet speaks itself that no time given to the assessee to explain the case. It was very difficult to reply on the spot why payment > Rs. 20000/- was given to the party in a single day.

The provisions of section 40 A(3) are attracted only in cases where the genuineness of the expenditure incurred in cash is in doubt.

The Rule 6DD rule Should be interpreted liberally so as to serve the object of the second proviso to section 40A(3) and to avoid undue hardship to the bonafide and honest tax payers.

Various High Courts in the following cases have also taken the view that where the payment is genuine, there can not be denial of deduction of genuine and bonafide business expenditure merely because the assessee could not make the payment as provide in section 40A(3).

a) CIT Vs. Rhydburg Pharmaceuticals Ltd.

b) GirdhariLalGoenkaVs. CIT

c) CIT Vs. Chaudhary& Co.

d) ShriMahabir Industries Vs. CIT

e) CIT Vs. Chrome Leather Co. Pvt. Ltd.

f) CIT Vs. Mrinalini Vs. Sarabhai; and

g) Welford Transport (Eastern India) Ltd. Vs. CIT.

Assessee as a prudent businessman incurs expenditure for the purpose of the Business. In the case of the assessee neither the identity of the seller nor the genuineness of the Purchase is doubtful.The assessing officer has disallowed Rs. 326400.00 u/s 40A(3) without giving the  opportunity to explain the reasons for payment or Rs. 326400.00  in cash exceeding Rs. 20000.00 in a single day.

Section 40A(3) of the Income Tax Act , 1961.

The LD AO has not given show cause notice as well as reasonable opportunity to the assessee for making payment in excess of Rs. 20000.00 in a single day.

Section 80C of the Income Tax Act, 1961,Addition of Rs. 23488.00

In this regard, the Hon’ble court is requested to entertain additional evidence regarding deduction u/s 80C.

Addition of Rs. 326000.00 u/s 40A(3) of the Income Tax Act, 1961.

No opportunity was given to the assessee to explain the reasons for making payment of Rs. 326000/- in a single day on different dates exceeding Rs. 20000.00 in a single day. On the order sheet itself the counsel of the assessee was asked to write the reason for making the payment in cash which was not justified and principally not possible. Rule 6DD is applied in the case of the assessee on account Business expediency.

This section was made to identify bogus expenditure which reduces the Income. No opportunity was given by the AO to cross verify the expenses booked by the assesse particularly purchases made from M/s Shree Shyam Enterprises, Varanasi.

The assessee made the payment at crucial time like before banking hours. There was sufficient cash with the cash book of the assesse maintained in the normal course of the business but there was hardest emergency that payment was early in the morning. The funds in the bank were not sufficient.

Following the rule of business expediency.

The assessee has relied on the following judgment on ITAT Indore, DCIT Vs M/s Brilliant Sare Reality Pvt. Ltd. (ITAT Indore).

When cash payment has been done on insistence of the seller, amount was dully recorded in the books of accounts and no doubt was raised with regard to the genuineness of the transaction, disallowance of the u/s 40A(3) is not justifiable. The parties in the transaction were unknown therefore the 1st payment was made in cash and all the subsequent payments were made through proper banking channel. The identity of the Payee is disclosed before the ITO and AO has never doubted genuineness of the transaction with regard to purchases from ShreeShyam Enterprises, Varanasi and  Hence Provisions of Section 40A(3) cannot be attracted the crucial facts are as under:

Cash payment was done on the insistence of the seller, of the goods.

Substantial payment was made through banking channel.

The Payment was dully recorded in the books of accounts.

Genuineness of the transaction was never doubted.

As per cash book maintain by the assessee and audited by the  Chartered Accountant as per section 44AB of the Income Tax Act, 1961. The cash was available on these dates.

As per bank statement the balances with banks were not sufficient to make the payment through banking channel. As per rule 6DD of the Income Tax Act and Proviso to section 40A(3A) which prescribe for consideration of business expediency and another relevant factors. The business expediency was as under:

a)The seller was new to the assessee

b)He asked for the advance payment

c)He insisted for the payment even on Sunday in cash

d)The assessee wanted to make relations with the seller so he made the payment in cash as the cash was available with the party and bank balance was not there on these dates.

At the time of assessment no opportunity given to the assessee to explain the reasons for making payment of Rs. 326000/- in cash in violation of section 40A(3).

No bogus expenditure has been booked in the books of accounts of the assessee. There was blind emergency that payment was made in cash.

These rule are part & parcel of the statute and section 40A(3) can not be read in isolation of section 40A(3) and Rule 6 DD should be read together. Once the rule areframed by the Govt. through the Central Board of Direct Taxes, the authorities are bound to follow such rules.

In the case of assessee, the identity of the payee is not in dispute and the payment by crossed Cheque/Draft/RTGST/NEFT/IMPS/ could not be made due to business expediency and other relevant factors.

The courts should do justice considering the substantive provision of the Act which includes the proviso to section 40A(3). He stated that if there are two opinions about the interpretation of a particular provision, the interpretation which is favorable to the assessee should be adopted. In the support of our contention, we rely upon the decision of the Hon’ble  Apex  Court in the case of Vegetables Products Ltd. (1973) 88ITR 192.

The Payment were made against the purchases and trading result of the assessee are in consonance regarding GP ratio.This payment cannot be considered in order to reduce the profit of the assessee. These parameters prove that the assessee has not manipulated the profit in the guise of making cash payment.

Considerations of the business expediency available 

It was the request of the seller of the goods to make the payment in cash. Assessee was not interested to make the payment in cash. He is law abiding citizen. But he was pressurized to make the payment in cash. Assessee did not want to make the relation sour. He made the payment in cash on different  dates. Now as per provision to section 40A(3) and keeping in mind rule 6DD of the Income tax Rules 1962 the cash is requested to be allowed in these circumstances and particularly business expediency.

 Other relevant factors. 

The other relevant factors are that 

(a) the assessee was having sufficient cash balances on the date of payment.

(b) the assessee was giving the payment to the party through banking facilities other than these four payments.

c) The expense is quite genuine. The purchases are genuine. The purchases has been shown in the sales tax returns. (d) Confirmation from the seller has been obtained which is part of the paper book.

It is pointed out that terms of s. 40A(3) are not absolute. Consideration 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.

Rule 6DD Says

No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A 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, exceeds twenty thousand rupees in the cases and circumstances specified  as above.

S. 40A 33[34(3)35where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on an bank or account payee bank draft, 35a[exceeds twenty thousand rupees], no deduction shall be allowed in respect of such 36expenidutre.

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, 36c[exceeds twenty thousand rupees,] in such cases and under such circumstances as may be prescribed37, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors:]

As per the second proviso to section 40A(3), which will exempt the applicability of section 40A(3), considering the (i) banking facility; (ii) business expediency; and (iii) other relevant factors. In such circumstances, the courts have power to interpret section 40A(3) in a manner so as to allow the deduction for genuine business expenditure where the identity of the payee is not in dispute and the payment by crossed cheque/bank draft could not be made due to business expediency or other relevant factors.

The courts should do justice considering the substantive provisions of the Act which include the proviso to section 40A(3). He also stated that if there are two opinions about the interpretation of a particular provisions, the interpretation which is favorable to the assessee should be adopted. In support of this contention, he relied upon the decision of the hon’ble apex court in the case of Vegetable Products ltd. [1973] 88 ITR 192.

During the F.Yr 2013-14 the assessee had made purchases of Rs. 75826457.80 which has been debited to the Profit & Loss A/c as per books  has been audited by a Chartered Accountant including purchases from M/s XXXXXXXXX Enterprises, Varanasi. During the month of January 2014 the assessee has made purchases of Rs. 160000726.00 including purchases of Rs. 957571.43 from M/s SH. Shyam Enterprises, Varanasi. In this regard the same the form No. 24 with the Noida sales tax authority has been filed complete month wise purchase statement has already been filed with the Assessing officer at the time of Assessment proceedings u/s143(3) of the Income Tax Act, 1961. Which clearly indicated that purchases are genuine and expenditure is not bogus. This was mere emergency that assessee made cash payments. Following Rule 6DD of the Income Tax Act 1962.In considerations of business expediency. Hence you are requested to allow relief to the assessee on this cash payment of 326000.00.

As far as deduction u/s 80C is concerned the assessee has paid the following payments. The assesssee has full evidence Rs. 37128.00 claimed u/s 80C which are produced before the CIT(A) which includes the additional evidence of Rs. 101000.00 payment made to ICICI Prudential Life insurance 101000.00 toICICI Prudential Life Insurance Dt.11.03.2014 from  C/A of the assessee.

Receipt is enclosed. The assessee has claimed only Rs. 37128.00/- in his ROI filed vide Sr. No. 434973611301114 Dt.30.11.2014 Online. He has not claimed this Rs. 101000/-in the return filed now additional evidence is produced before you for providing benefit of this investment under section 80C.At CIT(A) no new claim is made but only a modification of the claim is made. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law.

Additional ground is raised before CIT(A).

In CIT vs. Ramco. International [ TS-132-HC-2008(P&H)-0] . “The assessee did not make a claim for deduction u/s 80IB in the return. The assessee however filed form 80CCB and other relevant documents during assessment proceedings. The CIT(A) allowed the claim. The ITAT upheld the order by CIT(A). The High Court upheld the ITAT order.”

The law is very much clear that:

1. An assessee is entitled to make a fresh claim for deduction or relief before the appellate authorities, during the course of the appellate proceedings, irrespective of the claim not being made by revising the return of income or before the assessing officer during the course of the assessment proceedings. The decision in Goetze (India)’s case has not prohibited such a claim before the appellate authorities.

2. An assessing officer when confronted with the valid claim, though not made in the return of income or the revised return of income, is required to consider the same on merits and not reject simply on the ground that the claim was made outside the return of income.

Hence Tax Payers can make new / amended / revised claims even if the same cannot be made by him due to any reason not limited to the following under the Income Tax Laws

1. In ability to file revised returns as Original returns weren’t file within due date

2. Expiry of Due-date for filing revised returns

3. Cases where Rectification/Revision of orders aren’t made/ cannot be made.

As per Assessment Order for the A.yr. 2014-15 received by the assessee dated 09.01.2017:- The assessing officer has calculated Net Profit @ 8% on Rs. 1474180 which is on the higher side.

The additions of 117934.00 has been made by AO calculating 8% of the Net Profit of Rs. 1474180.00. The AO is not justified in taking the net profit @8% when in the general market profit remains less than 1% and assesse has earned less than 1% (0.61% actual) when he started the same business as a Registered Business . Same items were traded. No doubt was raised to the trading results of the assesse during the course of assessment proceedings. Same items were traded. The estimation of 8 % is so high in comparison to (0.61%).

Hence the Hon’ble CIT(A) is prayed to allow additional claim to the assessee u/s 80C for investment made to the ICICI prudential life of Rs. 101000.00 which could not be claimed in the original return.

Profit @ 8% of the turnover of Rs. 1474180.00

The AO has calculated net profit @8% on Rs. 1474180.00. which is on the higher side. The following facts supports the assessee:

a) Assessee was quite new to the Business. It is not possible to earn profit @8% in the market.

b) After he got registered he was earning profit which is less than 2% of the sales.

c) If he had met with a profit margin of 8% then why he had got himself registered with U.P. sales tax authorities. In the general market Profit Remain less than 1%

Before starting M/s XXXXXXXXXX Enterprises assessee was doing small business as unregistered dealer in XXXXXXXXXXXX. The assessee earned no money out of this small business. The entire cash deposit with the Bank Account is sale proceeds of Camera of different sizes and the cash withdrawals were used for purchase of material and other expenses were made. The assessing officer has calculated the net profit @8% on Rs. 1474180 which is on the very high side, the learned A.O has not shown any calculation why he is calculating Net Profit @8%. The net profit Ratio of the assessee when he started business as a registered dealer is less than 1%. The AO was requested for 1% additions but he made additions at the rate of Rs. 8% without assigning any reason for the same. Hence you are requested to delete the additions. Why he will take registration and will decide the earn less profit. Hence the profit at the same percentage may be decided by your goodself so that assessee may not suffer.This was quite start of the business. The business of the assesse was quite new during the F.Yr. 2013-14. This was the first year of the business of the assesse. Earlier he was in job.

On going through the brief written submission in respect of the assesse the Hob’ble CIT (A) is requested to given suitable relief to the assesse as you may deem fit looking at the facts and grounds of appeal of the assesse.

Thanking You,

Yours Faithfully,

(XXXXXXXX)

Counsel to the assesse.

Author Bio

Qualification: LL.B / Advocate
Company: S.K.Jain & Co.
Location: Faridabad, Haryana, India
Member Since: 16 May 2019 | Total Posts: 39
I am S.K.Jain , Tax Consultant cum Advocate practising in Income Tax , GST , Company Matters . The name of the concern is S.K.Jain & Co. and I am prop. of this concern . I am in practice for the last 30 years . Those who have joined the profession recently and want to discuss on the particular i View Full Profile

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