Case Law Details
Ayub Ali Vs ACIT (ITAT Jaipur)
The assessee has entered into an agreement with a Government Hospital in Bikaner whereby it operates the MRI and CT Scan machines. The nature of such activities therefore demand a continuous supply of electricity and the assessee cannot risk the life of the patients especially those admitted in emergency cases by not operating these machines for want of electricity. Therefore, we find force in the contention of the ld AR that there was business expediency of making cash payments so that there is no disruption in supply of electricity required to operate the MRI and CT scan machines. Further, we note that it is not in all cases that the payments have been made in cash, rather the assessee has made cheque payments as well during the year. Therefore, it is in only those cases where the cheque payments couldn’t be arranged nearing the due date of payment that the payments have been made in cash.
In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that there is no dispute regarding the identity of state electricity distribution company, the genuineness of the transaction in terms of electricity bills for consumption of electricity by the assessee, and the test of business expediency has also been met in the instant case. Further, as held by the Hon’ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), the consequences, which were to be fall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction and test of business expediency been satisfied, no disallowance is called for by invoking the provisions of section 40A(3) of the Act. In the result, we hereby direct the deletion of disallowance so sustained by the ld CIT(A) and the ground of appeal is hereby allowed.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-3, Jaipur dated 31.10.2017 for Assessment Year 2012-13 wherein the assessee has taken following grounds of appeal:
“1. The Ld. CIT(A) has erred on facts and in law in confirming the disallowance of Rs. 12,31,292/- out of electricity payment paid to Jodhpur Vidyut Vitran Nigam Limited u/s 40A(3) of the IT Act.
2. The Ld. CIT(A) has erred on facts and in law in confirming the disallowance of Rs. 15,000/- out of shop & freight and labour expenses. ”
3. Firstly, regarding ground No. 1, briefly the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee has made payment of Rs 14,09,082/- in cash towards electricity bills of Jodhpur Vidyut Vitran Nigam Limited and a show cause notice was issued to the assessee as to why disallowance should not be made U/s 40A(3) of the Act. The various contentions of the assessee so raised were not found acceptable by the Assessing Officer and the relevant findings of the Assessing officer are contained at paras 2.1 to 2.3 which are reproduced as under:-
“2.1 The explanation so made by the AR of the assessee has been duly considered and found to be self explanatory that the earlier RSEB which was Government body has been unbundled into five private companies out of which one is JDVVNL. The same explanation made by the assessee cannot be accepted as the JDVVN ltd is an individual entity incepted in the form of limited company and the transactions made to such company do not fall under the clauses (a) to (1) of Rule 6DD o f the IT Rules, 1962. It is pertinent to mention that the payments made to Government under the rules requiring that such payment be made in legal tender. The CBDT vide Circular No. 34 dated 05/03/1970 has clarified that payments made to the Railways on account of freight charges or for booking of wagons and payment towards sales tax/excise duty are only to be considered under this clause.
2.2 On this issue, reliance is made upon the order of the Hon’ble ITAT, Bangalore bench-B in its decision in the case of P. Vijaya Kumar vs. ITO in ITA No. 570/Bang/2010 dated 29/06/2012 wherein Hon’ble ITAT has held that Rule 6DD provides certain exemptions from the application o f sec. 40A(3) and only a payment to Life Insurance Corporation of India is exempt and not the payment to General Insurance Company.
2.3 The assessee has made payment in cash otherwise than by an account payee cheque drawn on a bank or account payee bank draft in excess of twenty thousand rupees aggregating in a single day in contravention of section 40A(3) of the Act. Since the assessee has incurred expenditure otherwise than an account payee cheque exceeding Rs. 20,000/-, no deduction shall be allowed in respect o f such expenditure. Hence, an amount of Rs. 14,09,082/- is disallowed under section 40A(3) of the IT Act, 1961 and added back to the tota l income of the assessee. ”
3. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the said disallowance and his findings are contained at para 4.3 which are reproduced as under:-
“4.3 I have carefully considered the material before me and cited case law of the A/R of the appellant. I find that Assessing officer made the disallowance u/s 40A(3) of the I.T. Act of Rs.14,09,022/- making the observation that cash payment more than Rs.20,000/- are not allowable deduction. The A/R of the appellant submitted that the payment made by the appellant on behalf of the Government hospital. Thus in fact it is payment to the Government but this argument is not tenable because the appellant himself made the payment to JdVVNL and claimed as expenditure.
The next argument of the A/R of the appellant that this is a payment to the Rajasthan Government. This argument is also not acceptable because the JdVVNL is a company which is neither comes central Government nor the State Government.
The AR further argued that the payment made to JdVVNL for business expediency and for that he relied upon various case laws. He relied upon one case law of Hon’ble Supreme Court Attar Singh Gurmukh Singh V. ITO 191 ITR 667, 673 held that terms of section 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 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 difficulties to the payee. Hence even without considering rule 6DD i f a payment is genuinely made and the circumstances are such that the payment can’t be made by cheque, provisions of section 40A(3) would not be attracted but in this case the appellant failed to established that which factors prevent him to make the payment by cheque and in which circumstance he had made payment in cash therefore the facts of this care are totally different from the cited cases.
Considering the above facts and observation I am of the view that the payment made to JdVVNL in cash more than Rs.20,000/- are violation of 40A(3) of the I.T. Act. The Assessing officer made the disallowance u/s 40A(3) of the I.T. Act of Rs.14,09,082/- . On verification of records, it is found that cash payment was made only Rs.12,31,292/- and balance amount of Rs.1,67,790/- is shown as liability in the books o f accounts. Therefore the appellant made the violation of 40A(3) of the I.T. Act of Rs.12,31,292/-. Accordingly I confirm the addition o f Rs.12,31,292/- u/s 40A(3) of the I.T. Act and balance amount of Rs. 1,67,790/- is deleted. This ground is partly allowed. ”
4.1 During the course of hearing, the ld. AR has submitted that the assessee has entered into an agreement dated 08.07.2009 with Medical Superintendent-cum- Member Secretary Rajasthan Medical Relief Society P.B.M. Hospital, Bikaner for installing a MRI and C.T. Scan machines. The P.B.M. Hospital, Bikaner is a Government Hospital. As per this agreement, assessee is to bear the cost of machines and for the test carried on these machines, he has to charge fee at the approved rates. Further, 20% of the total MRI/CT scan is to be done free for BPL and other free category patients as referred by the Superintendent Medical College. All expenses on account of electricity, water, maintenance of premises and the machines, security or other expenses incurred on day to day running of the machines is to be borne by the assessee. It was submitted that in pursuance to this agreement, electricity bills raised by Jodhpur Vidhut Vitran Nigam Ltd. (JdVVNL) on the secretary Rajasthan Medical Relief Society, PBM Hospital, Bikaner is paid by the assessee on behalf of the society directly to JDVVNL. During the year, out of total electricity bills of Rs. 19,13,935/-, payment of Rs. 12,41,292/- is paid in cash to JDVVNL.
4.2 It was further submitted that from the copy of electricity bills, it can be noted that the same is in the name of Secretary, Rajasthan Medical Relief Society. The bills received by them are given to assessee for making payment to JdVVNL which is evident from the endorsement made by the Medical Superintendent on these bills. After receipt of these bills, assessee makes payment to JdVVNL. Thus, the assessee has made the payment as agent of the Government hospital. Had the payment been made by the Government hospital directly to JdVVNL, there would not be any application of section 40A(3) and therefore, on the payment made by the assessee on behalf of the Government Hospital, section 40A(3) cannot be applied.
4.3 It was further submitted that earlier the distribution of electricity was done by Rajasthan State Electricity Board ( RSEB) which was a government body. In August 2000, RSEB was unbundled into five companies one of which is JdVVNL. The assessee was therefore, under the bona fide belief that payment of electricity charges is made to the Government on which section 40A(3) do not apply. Thus, there is a reasonable cause in making payment of some bills of electricity of JdVVNL in cash. Further, cash payment was made on last due date/just a day before to avoid late fees/disconnection.
4.4 It was further submitted that the object of Section 40A(3) is to check evasion of taxes so that the payment is made from disclosed sources and not to deprive the assessee of the deduction, which is otherwise entitled to. Where the amount was paid in cash or received in cash, AO has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The AO has to take into account the surrounding circumstances, consideration of business expediency and the facts of each particular case in exercising his discretion [Giridharlal Goenka v. CIT (1989) 179 ITR 122, 127 (Cal.)]. In other words, object of enacting section 40A(3) is to ensure that the payment in respect of which deductions are claimed by the taxpayers are genuinely made and accommodation payments are not claimed as deduction [173 ITR 358, 363(AP)]. The Supreme Court in case of Attar Singh Gurmukh Singh V. ITO 191 ITR 667, 673 held that terms of Section 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 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 difficulties to the payee. Hence, even without considering rule 6DD if a payment is genuinely made and the circumstances are such that the payment can’t be made by cheque, provisions of section 40A(3) would not be attracted.
4.5 In light of the object of section 40A(3) and the decision of Supreme Court, it was submitted that it is not necessary that in each and every case, which is not covered by rule 6DD, this section would be attracted. Rule 6DD provide certain general exception to make the provisions of section 40A(3) workable. However, each and every exception can’t be envisaged and covered by rule 6DD. If cash payment is made under such compulsion or circumstances which, though genuine, can’t be made by cheque, section 40A(3) should not be invoked even if no specific exception for such payment is provided in rule 6DD.
4.6 In support, the ld. AR placed reliance on the following decisions:-
- Giridharlal Goenka Vs. CIT (1989) 179 ITR 122,127 (Cal.)
- Kanti Lal Purshottam & Company 155 ITR 519 (Raj.)
- Anupam Tele Services vs. ITO 366 ITR 122 (Guj.)
- C. Goeal vs. CIT 84 DTR 432/312 taxman 305 (Del.)
- PACL India Ltd. vs. ACIT (2010) 38DTR 0001 (Jaipur) (Trib.)
- ACIT vs. Sh. Rahul Pancholi (ITA No. 949/JP/2013 dated 30.09.2015)
- Aruna Rani Vs. ITO (ITA No. 613/JP15 dated 14.02.2017)
- M/s A Daga Royal Arts vs ITO (ITA No. 1065/JP/16 dated 15.05.2018)
- M/s Khetan Minerals Pvt. Ltd. Vs. ITO (DB ITA No. 291/2009 dated 02.08.2017)
5. The ld DR is heard who has relied on the order of the lower authorities.
6. We have heard the rival contentions and perused the material available on record. The assessee has entered into an agreement with a Government Hospital in Bikaner whereby it operates the MRI and CT Scan machines. The nature of such activities therefore demand a continuous supply of electricity and the assessee cannot risk the life of the patients especially those admitted in emergency cases by not operating these machines for want of electricity. Therefore, we find force in the contention of the ld AR that there was business expediency of making cash payments so that there is no disruption in supply of electricity required to operate the MRI and CT scan machines. Further, we note that it is not in all cases that the payments have been made in cash, rather the assessee has made cheque payments as well during the year. Therefore, it is in only those cases where the cheque payments couldn’t be arranged nearing the due date of payment that the payments have been made in cash. In case of ACIT vs. Sh. Rahul Pancholi (ITA No. 949/JP/2013 order dated 30.09.2015), the Coordinate Bench has deleted the disallowance under similar circumstances and held as under:
“We find from the records that the assessee has paid in cash electricity bill of Rs. 80,092/- for the month of Nov. 2008 to Rajasthan State Electricity Board under the bona fide belief that the payment is made to the Government because of the business expediency and to avoid electricity connection. The ld. CIT(A) has taken into consideration the decision of Hon’ble Delhi High Court in the case of R.C. Goyal vs. CIT (supra) wherein it is held that cash payments made in view of the business expediency is allowable as per Section 40A(3) of the Act. Thus we do not find any infirmity in the order of the ld. CIT(A) on this issue which is sustained. ”
7. A similar view has been taken in case of Smt. Aruna Rani Vs. ITO (ITA No. 613/JP15 order dated 14.02.2017), wherein the Coordinate Bench vide its order dated 02.02.2017 has held as under:-
“ 5. Considering the above facts in the light of the above decision, it is clear that the nature of business of the assessee is such that assessee is required continuous supply of electricity for which assessee shall have to make payment to Jodhpur Vidyut Vitaran Nigam Ltd. for smooth functioning of the business activity of the assessee. In case no payment is made in cash to the above Nigam, then the electricity would have been discontinued. Therefore, having regard to the nature of business activity of the assessee and that assessee did not have banking facility where payment of electricity bill is to be made and considering the business expediency and other factors, I am of the view the case of the assessee would clearly fall in exception to Rule and no disallowance should be made under section 40A(3) of Income Tax Act. The learned Accountant Member has, therefore, rightly followed the decision of the coordinate Bench on identical issue in the case of Shri Rahul Panchol i (supra) in which on identical facts and issue, the departmental appea l was dismissed. Interestingly, the learned Judicial Member who has dismissed appeal of the assessee on the same set of facts, was the party to the order in the case of Shri Rahul Pancholi (supra). The learned Accountant Member was, therefore, right in his approach in allowing the appeal o the assessee by following the order of the coordinate Bench rather of the same Bench. The learned Judicia l Member did not discuss in detail as to why he has not followed the order in the case of Shri Rahul Pancholi (supra) to which he himself is a signatory. The learned Judicial Member dismissed the appeal of the assessee on the sole reason that since the assessee has to make the payment of electricity bill regularly, it should have made such arrangement which is in accordance with the provisions of Section 40A(3) of the Income Tax Act. I may respectfully note that Tribunal is created by law and have to follow the law passed by legislator. If such view is considered, it would make proviso to section 40A(3) redundant. The ld. Counsel for the assessee, however, given an undertaking during the course of hearing that assessee, in future has made alternate arrangement to make payment for electricity bill as per provisions o f law so that there is no violation of provisions of section 40A(3) of Income Tax Act.
6. Considering the totality of the facts and circumstances in the light o f the above discussion, I agree with the view of the learned Accountant Member in allowing the appeal of the assessee holding that no disallowance should be made under section 40A(3) of the Act, in facts and circumstances of the case. I, therefore, agree with the view of learned Accountant Member. Let the file be placed before the regular Division Bench for passing a consequential order. ”
8. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that there is no dispute regarding the identity of state electricity distribution company, the genuineness of the transaction in terms of electricity bills for consumption of electricity by the assessee, and the test of business expediency has also been met in the instant case. Further, as held by the Hon’ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), the consequences, which were to be fall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction and test of business expediency been satisfied, no disallowance is called for by invoking the provisions of section 40A(3) of the Act. In the result, we hereby direct the deletion of disallowance so sustained by the ld CIT(A) and the ground of appeal is hereby allowed.
9. Regarding ground No. 2, briefly the facts of the case are that during the year under consideration, the assessee has debited an amount of Rs. 2,26,399/- towards freight & labour expenses and Rs. 16,871/- towards shop expenses in his profit/loss account. The AO observed that expenses are not fully supported by bills vouchers. Accordingly, he made a lump sum disallowance of Rs. 30,000/- out of these expenses debited in the P&L A/c. The ld. CIT(A) held that assessee has accepted that the expenses are in the nature that pakka bill is not possible. However, the disallowance made by AO is without any basis and any reason which are excessive. Accordingly, he restricted the disallowance to Rs. 15,000/-.
10. During the course of hearing, the ld AR submitted that all the expenses are incurred for the purpose of business & are duly supported by vouchers. The nature of these expenses are such that pakka bill is not possible. The expenses are reasonable considering the turnover of Rs. 1,98,00,164/-. The AO has not pointed out any specific expense which is not supported by vouchers. The shop expenses pertain to tea, refreshment, etc. which is reasonable. Hence, lump sum disallowance out of these expenses is uncalled for & be deleted. We find merit in the contention so raised by the ld AR and the adhoc disallowance so sustained by the ld CIT(A) is hereby deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 04/09/2018.
