Case Law Details
Abhishek Saha Vs ACIT (ITAT Kolkata)
ITAT Kolkata held that provisions of section 40A(3) of the Income Tax Act doesn’t apply to cash payments when ultimately the amount is deposited in the bank account of the payee.
Facts- The brief facts of the case were that the assessee was a proprietor of M/s. K D Pharma, which was engaged in the business of distribution of wholesale lines of medicines.
Assessee contended disallowance made u/s 40A(3) of the Act of Rs.1,22,97,460/- on account of payments made to M/s. K D Enterprises (stockist of drugs and medicine) by depositing cash in bank account of supplier.
It was stated that owing to business expediency and compelling requirements from the seller to make payments in cash over the counter for certain products of specific companies which required advance payments before leaving the goods from the godown, the assessee had to make payments in cash for such supplies. The assessee deposited directly into the bank account of M/s K D Enterprises for the purchase price which has been disallowed by the ld. AO by invoking the provisions of Section 40A(3) of the Act. Assessee claimed that he did not pay cash directly to the party but such amounts were directly deposited into the bank account of the supplier. The transactions of purchases from the said supplier are genuine and bonafide which have been duly accounted in the books of account and reported in the audited financial statements.
CIT(A) sustained the addition. Being aggrieved, the present appeal is filed.
Conclusion- The Hon’ble High Court of Punjab & Haryana in the case of CIT v. Smt. Shelly Passi reported in (2013) 350 ITR 227 (P& H), wherein the Hon’ble Court upheld the view of the Tribunal in not applying Section 40A(3) of the Act to the cash payments when ultimately such amounts were deposited in the bank of the payee.
Accordingly, considering the above facts and judicial precedents and the material placed on record discussed above, we allow the ground of appeal and direct for deletion of addition of Rs.1,22,97,460/-, made u/s 40A(3) of the Act.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal by the assessee is directed against the order passed by the National Faceless Appeal Centre, Delhi, (hereinafter the “ld. CIT(A)”) dated 23/12/2021 for Assessment Year 2017-18 against the assessment order passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by ACIT, Circle-23(1), Hooghly, dated 07/11/2019.
2. Assessee has placed on record revised grounds of appeal for which ld. Counsel for the assessee gave assurance to the Bench that there are no new grounds taken while revising the grounds. These are merely to summarize and concise the grounds originally taken by the assessee.
There are five issues involved in the present appeal which are dealt here in-seriatim.
3. Brief facts of the case are that assessee is proprietor of M/s. K D Pharma, which is in the business of distribution of wholesale in line of medicines. Assessee filed its return of income on 31/07/17, reporting total income at Rs.50,94,820/-. During the course of assessment proceedings u/s 143(3) of the Act. Ld. AO passed an order by making additions which are in contest by this appeal.
4. In respect of Ground No. 1, ld. AO made addition of Rs.3,95,400/-for cash deposited in the Axis Bank account of assessee. Assessee deposited Rs.29,400/- which included Rs.21,000/- towards old currency and Rs.3,74,000/- on the two dates, namely, 12/11/2016 and 13/12/2016. Assessee had submitted before ld. AO that these deposits were made from sale proceeds and only small amount of Rs.21,000/- was deposited in the old currency. It was also submitted that during the period of demonetization, medicines were essential items and Government had given permission to provide hospitals and pharmacies to accept old notes during demonetization period. Disregarding this submission, ld. AO made addition which was sustained by ld. CIT(A). Before us, ld. Counsel for assessee demonstrated from the documents placed in the paper book that assessee had adequate cash in hand on the date of announcement of demonetization on 08/11/2016 at Rs.11,53,329/-. Further ld. Counsel for assessee submitted that total turnover of assessee during the year under consideration was Rs.32,20,61,758/- and thus, the deposit of amount of Rs.3,74,400/- is a miniscule amount in comparison to the total turnover which is adequately substantiated by books of accounts and corroborative documents. On confronting these submissions to ld. Sr. D/R, nothing was brought on record to controvert the same. We, considering the facts and material on record, find force in submissions made by ld. Counsel for assessee and accordingly delete addition made in this respect.
5. Second ground is in respect of disallowance made u/s 40A(3) of the Act of Rs.1,22,97,460/- on account of payments made to M/s. K D Enterprises (stockist of drugs and medicine) by depositing cash in bank account of supplier. In this respect, it was submitted that M/s. K D Enterprises is the stockiest of drugs and medicines from whom assessee has made purchases of Rs.2,46,96,376/- out of its total purchases for the year of Rs.31,23,68,302/-. It was stated that owing to business expediency and compelling requirements from the seller to make payments in cash over the counter for certain products of specific companies which required advance payments before leaving the goods from the godown, the assessee had to make payments in cash for such supplies. The assessee deposited directly into the bank account of M/s K D Enterprises for the purchase price which has been disallowed by the ld. AO by invoking the provisions of Section 40A(3) of the Act. Assessee claimed that he did not pay cash directly to the party but such amounts were directly deposited into the bank account of the supplier. The transactions of purchases from the said supplier are genuine and bonafide which have been duly accounted in the books of account and reported in the audited financial statements. Also, ld. AO has accepted the total purchases of the assessee claimed in the profit and loss statements which includes the purchases made from M/s. K D Enterprise.
5.1. During the course of hearing before us ld. Counsel has made an application under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963, for filing fresh evidence containing certificate issued by the M/s. K D Enterprise, whereby it is confirmed that the seller has specifically insisted on advance payments in cash before dispatching the required medicines from its godown. The letter issued by M/s. K D Enterprises is dt. 02/04/2016 and is taken on record. Ld. CIT(A) sustained the addition made by ld. AO in this respect.
5.2. We have heard the rival submissions and perused the material available on record and gone through the paper book. We note that the transactions of purchases by the assessee from M/s. K D Enterprises are genuine, the supplier is identified, part of purchases are made by making payments through bank account and part of it by making deposit of cash directly into the bank account of the supplier. The genuineness of the payment is not doubted and, therefore, the provisions of Section 40A(3) of the Act cannot be made applicable to the facts of the present case.
5.3. It is pertinent to go into the intention behind introduction of provision of Section 40A(3) of the Act at this juncture. We find that the said provision was inserted by the Finance Act, 1968, with the objective of curbing expenditure in cash and to prevent tax evasion. CBDT Circular No. 6P, dt. 06/07/1968, reiterated this view that, “This provision is designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and the reasonableness of the payment.” Apparently, this provision was directly related to curb the evasion of tax and inculcating banking habits. Therefore, the consequence which were to befall on account of non-observation of Section 40A(3) must have nexus to failure of such objective. Accordingly, the genuineness of the transaction, it being free from vice of any device of evasion of tax, is a relevant consideration. In the present case, assessee has deposited cash directly in the bank account of the supplier i.e., M/s. K D Enterprises, against supply of certain medicines. We hold that the purpose of Section 40A(3) of the Act, is only preventive and to check tax evasions and flow of unaccounted money or to check transaction which are not genuine and may be put up as camouflage to evade tax by showing fictitious or false transactions. Admittedly, this is not so in the present case of the assessee, as ld. AO also has accepted the fact that assessee directly deposited cash in the bank account of the supplier M/s. K D Enterprises.
5.4. We find force from the decision of the Hon’ble High Court of Punjab & Haryana in the case of CIT v. Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H), wherein the Hon’ble Court upheld the view of the Tribunal in not applying Section 40A(3) of the Act to the cash payments when ultimately such amounts were deposited in the bank of the payee. Also, the Co-ordinate Bench of ITAT Bangalore in the case of Sri Renukeshwara Rice Mills V ITO (2005) 93 ITD 263, held that cash payment in the bank account of payee is sufficient to get exemptions in terms of Rule 6DD inasmuch as it is ensured that payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transactions is traceable thereby fulfilling the criterion of introduction of Section 40A(3) of the Act.
5.5. Accordingly, considering the above facts and judicial precedents and the material placed on record discussed above, we allow the ground of appeal and direct for deletion of addition of Rs.1,22,97,460/-, made u/s 40A(3) of the Act.
6. On the third issue relating to addition of Rs.22,11,728/- u/s 69C of the Act on account of alleged suppressed purchases from M/s. Aditya Medisales Ltd., it was submitted by the assessee that the difference in reconciliation of account of M/s. Aditya Medisales Ltd., is on account of dishonor of cheque of equal amount which has no effect on the purchases made by the assessee. Ld. AO has treated this amount as unexplained expenditure by holding that there is difference of creditors balance as on 31/03/2017. In this respect, ld. Counsel for the assessee invited attention to the ledger account of M/s. Aditya Medisales Ltd., placed at page 58 of the paper book as well as the bank statement to demonstrate that the difference is on account of dishonor of cheque which the ld. AO failed to recognize. Ld. Counsel for assessee referred to the statement of purchase summary placed at page 59 of the paper book to demonstrate that reversal of purchases from the said party was made owing to dishonor of the cheque and thus, claimed that the accounts of the party is completely reconciled and there is no difference. Accordingly, the addition so made ought to be deleted.
6.1. We have carefully gone through the material referred by the ld. Counsel for the assessee and find force in the submissions so made. Further in respect of Ground No. 4, which is also in respect of addition of Rs.12,947/-, on account of alleged suppressed credit note from M/s. Aditya Medisales Ltd., it was pointed out that it related to the sales return which has been duly reduced from the purchases made by the assessee and does not have any bearing on the profit reported by the assessee. Both the issues are purely questions of fact and having reference to the material on records as well as the discussion above, we are of the considered view to allow both the grounds and direct the deletion of addition on both these issues.
7. The last issue is in respect of disallowance of Rs. 1,04,05,481/- on account of sales commission paid by the assessee and claimed as expenditure which are raised in Ground Nos. 5 & 6.
7.1. In this respect, assessee had elaborately explained the nature of business and the modus-operandi for the distribution of business of wholesale in the line of medicines. It was stated that, medicines are sold directly to retailers as well as through sales agents on commission basis. Sales agents collect order from retailers and supply medicines to them by obtaining requested medicines from the assessee. They also collect payments from retailers. The collection amount from the retailers are both in cash as well as in cheques. In many cases, salesmen collect cash from the retailers and deposit the same in their accounts after which cheques are issued to the assessee against such collection. Assessee has paid commission of Rs.1,04,05,481/- from sales made during the year under consideration and has done TDS u/s 194H of the Act, wherever applicable. It was submitted that these expenses were genuine and are for the legitimate purpose of business. Before us, ld. Counsel for assessee submitted that sales reported by the assessee have been accepted. However, expenditure incurred towards commission on sales have been disallowed by ld. AO.
7.2. Before us, ld. Counsel for assessee referred to the list of sales commission agents, placed in paper book at page 60, which contained sales made by each of the salesmen and their respective PAN. Ld. Counsel for assessee also reconciled the total sales of the assessee during the year by giving details of sales made directly by the assessee and sales through these sales agents. Further, ld. Counsel for assessee referred to statements of salesman-wise as well as for each of the sales-man. These statements contained the details in respect of retailers, their addresses and the amount of sales made to these retailers by each of the salesmen. Ld. Counsel for assessee also referred to the chart giving comparison of sales and commission made by the assessee with all the salesmen, in the preceding three assessment years as well as the subsequent assessment year, to demonstrate that assessee has been consistently conducting its business through these salesmen and incurring expenditure towards sales commission. Ld. Counsel also referred to some of the confirmation which were obtained against notice u/s 133(6) of the Act on some of the salesmen and their income tax returns in which they have offered the earning of sales commission in their return. On confrontation of these facts to the ld. Sr. D/R, nothing was brought on record to controvert the factual position. Considering the material placed on record and the submissions made by the ld. Counsel for assessee as well as discussion made above, we find it proper to allow these two grounds taken by the assessee and direct for deletion of addition made by ld. AO towards sales commission expense of Rs. 1,04,05,481/-.
8. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 31.03.2023.
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