Case Law Details
Brief of the Case
ITAT Delhi held in the case of ITO vs. M/s Pranay Towers that as per the supreme court judgment of Attar Singh Grumukh Singh Vs ITO (SC)191 lTR 667, it is crystal clear that the terms of Section 40A(3) are not absolute and that the genuine and bonafide transactions are not taken out of the sweep and it is open to the assessee to furnish to the satisfaction of the AO, the circumstances under which the payment in the manner prescribed u/s 40A(3) was not practicable or would have caused to the genuine difficulty to the payee. In the present case, the seller of the potatoes insisted for cash payments because he doubted the credibility of the assessee who required the purchases to be made for smooth running of its business. The purchases were made through the agent Sh. S.K. Tiwari who procured the potatoes from M/s R.A. Traders and this fact was not doubted by the AO. The cash payments were made by the assessee to the agent who in turn made the purchases in cash for the assessee and charged the commission for the said transaction which has been accepted as genuine. Therefore, the transaction relating to the purchases of potatoes amounting to Rs.1,17,12,000/- was clearly covered by the exception laid down in Rule 6DD(k) of the I.T. Rules, 1962 and was outside the purview of the provisions of Section 40A(3).
Facts of the Case
The assessee filed the return of income electronically on 14.10.2010 declaring an income of Rs.1,59,770/- which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had made purchases amounting to Rs.1,20,00,000/- of potatoes in cash from sundry parties. The AO requisitioned the information u/s 133(6) of the Act from M/s R.A. Traders, C-87, Avantika, Moradabad which revealed that the assessee was involved in purchase of 12,200 bags of potatoes @ 960/- per bag in cash for Rs.1,17,12,000/-. The AO also requisitioned the copy of ledger and cash book on the dates of transactions from M/s R.A. Traders and thereafter asked the assessee to furnish the reason as to why the payments could not be considered as payments in contravention contained u/s 40A (3).
The assessee submitted that the transaction was covered within the norms of Rule 6DD(k) of the I.T. Rules, 1962, as the payment was made through an agent. The AO observed that the Rule 6DD(k) was to facilitate the assessee that if the transaction between the assessee and the other party was within Rules, same would hold true and in norms between the agent of the assessee and the other party too but, if any, transaction between the assessee and the third party was in contravention of the provisions of Section 40A(3), the same transaction could not be said to be within norms if the same was done between the agent of the assessee and the third party. He accordingly disallowed the purchases of Rs.1,20,00,000/- u/s 40A(3) and added the same to the income of the assessee.
Contention of the Assessee
The ld counsel of the assessee strongly supported the impugned order passed by the CIT (A) and reiterated the submissions made before the authorities below. It was further submitted that the assessee purchased the potatoes from M/s R.A. Traders through agent Sh. S.K. Tiwari who charged the commission which had been accepted by the department. Therefore, no disallowance could have been made u/s 40A (3) as the transaction was covered under the exception laid down in Rule 6DD(k) of the I.T. Rules, 1962.
Contention of the Revenue
The ld counsel of the revenue supported the order of the AO and reiterated the observations made in the assessment order dated 26.03.2013. He further submitted that the assessee made the purchases in cash from M/s R.A. Traders and the partner of the assessee firm signed the cash vouchers which clearly established that the purchases were made in cash exceeding Rs.20,000/-, so it was hit by the provisions of Section 40A(3) of the Act and the AO rightly made the addition. Therefore, the CIT (A) was not justified in deleting the same.
Held by CIT (A)
The CIT (A) after considering the submissions of the assessee observed that the assessee had made purchases of Rs.1,20,00,000/-, out of which purchases of Rs.1,17,12,000/- had been made from M/s R.A. Traders and the balance amounting to Rs.2,88,000 had been made from other small parties. He further observed that in the case of provisions of Section 40A(3) of the Act, there is Rule 6DD which lays down certain exceptional circumstances under which purchases in cash exceeding a specified limit are allowed to be made. The ld. CIT(A) pointed out that in the assessee’s case, M/s R.A. Traders, the seller had confirmed to the AO in response to notice u/s 133(6) of the Act, on the copy of account that the payments had been made through one Sh. S.K. Tiwari. Therefore, the entire transaction of purchase between the parties amounting to Rs.1,17,12,000/- were executed between the assessee and M/s R.A. Traders through the agent Sh. S.K. Tiwari and even the payments were made through him.
The CIT (A) also pointed out that Sh. S.K. Tiwari had filed a confirmatory letter before the AO that he had acted as an agent and had earned brokerage in this deal, which had been debited by the assessee in the audited profit and loss account which had also been accepted by the AO. The CIT (A) observed that in the present case, it was not the case of the AO that the payment was not genuine or had been made out of undisclosed sources and this was also not the claim of the AO that the purchases and payment had not been made by the assessee firm through the agents.
The CIT (A) also observed that M/s R.A. Traders had specifically confirmed before the AO that the entire deal was struck through the agents and not directly between the parties and that M/s R.A. Traders had confirmed that it had demanded payments only in cash from the assessee as it doubted the credibility of the assessee. The CIT (A) further observed that Sh. S.K. Tiwari had confirmed the fact that he had acted as an agent of the entire transaction of purchases and payments were done through him. The ld. CIT (A) opined that this was a case of a genuine transaction where the purchases were made through Sh. S.K. Tiwari in cash as was required by the seller, therefore, it was squarely covered by the exception laid down in Rule 6DD(k) of the I.T. Rules and thus the assessee was not hit by the provisions of Section 40A(3) of the Act. Accordingly, addition of Rs.1,17,12,000/- was directed to be deleted. Regarding the balance payment of Rs.2,88,000/-, the CIT(A) observed that the assessee had made the payments for the purchase of loose potatoes from farmers on various dates and the AO had not doubted the said fact, therefore, no addition was liable to be made, in view of the above transaction being genuine and the purchase being from agriculturist farmers. Accordingly, the addition of Rs.2,88,000/- was also deleted.
Held by ITAT
ITAT held that it is an admitted fact that the assessee made the purchases of potatoes valuing Rs.1,17,12,000/- from M/s R.A. Traders, Moradabad through the agent Sh. S.K. Tiwari. The AO made the inquiries u/s 133(6) and examined the statement of accounts as well as the copy of ledger and cashbook from M/s R.A. Traders, which revealed that the cash payments were made through agent Sh. S.K. Tiwari only. In the present case, the genuineness of the transaction and the purchases were not doubted. Further it is an admitted fact that Sh. S.K. Tiwari acted as an agent and procured the potatoes from M/s R.A. Traders, Moradabad who doubted the credibility of the assessee and insisted on cash payment. The agent made the payment in cash to the seller of the potatoes i.e. M/s R.A. Traders and it is nowhere established that the assessee directly made the cash payment to M/s R.A. Traders. Even in response to the notice u/s 133(6) , the seller firm M/s R.A. Traders, itself confirmed this fact to the AO that the payments were made through the agent only. Therefore, the cash payments amounting to Rs.1,17,12,000/- was clearly covered by the exception laid down in clause (k) of Rule 6DD.
Further from the case of Attar Singh Gurmukh Singh Vs ITO (SC), 191 ITR 667, it is crystal clear that the terms of Section 40A(3) of the Act are not absolute and that the genuine and bonafide transactions are not taken out of the sweep of the Section 40A(3) of the Act and it is open to the assessee to furnish to the satisfaction of the AO, the circumstances under which the payment in the manner prescribed u/s 40A(3) of the Act was not practicable or would have caused to the genuine difficulty to the payee. In the present case, the seller of the potatoes insisted for cash payments because he doubted the credibility of the assessee who required the purchases to be made for smooth running of its business. The purchases were made through the agent Sh. S.K. Tiwari who procured the potatoes from M/s R.A. Traders and this fact was not doubted by the AO that the purchases were made by the assessee through its agenti from M/s R.A. Traders, Moradabad in cash. In the instant case, the cash payments were made by the assessee to the agent who in turn made the purchases in cash for the assessee and charged the commission for the said transaction which has been accepted as genuine and allowed to be set off against the income in the profits and loss accounts, by the AO. Therefore, the transaction relating to the purchases of potatoes amounting to Rs.1,17,12,000/- was clearly covered by the exception laid down in Rule 6DD(k) of the I.T. Rules, 1962 and was outside the purview of the provisions of Section 40A(3).
As regards to the remaining addition of Rs.2,88,000/- made by the AO and deleted by the ld. CIT(A) is concerned, the contention of the assessee was that those purchases were made directly from the small farmers, the said contention has not been doubted at any stage. Therefore, this transaction is covered under Rule 6DD (e) of the I.T. Rules, 1962 wherein cash payments made for purchase of agricultural produce is kept outside the purview of Section 40A (3).
Accordingly appeal of the revenue dismissed.
