Case Law Details
Shree Buildcon & Associates Vs JCIT (ITAT Pune)
It is found as an admitted position that the assessee paid the amounts in question to the labour contractors in violation of section 40A(3) of the Act. The case of the assessee is that the payments were covered under clause (k) of Rule 6DD, which provides that no disallowance will be made where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such persons.
The important point to be noted in such cases is that the payment must be by the assessee to his agent, who, in turn, pays to some third person on behalf of the assessee for goods or services. It means that the agent to whom the payment is made must represent the principal in making the payments for goods or services.
Adverting to the facts of the instant case, it is seen that the assessee made payment to contractors and such payments were as such recorded as expenditure in the books of account of the assessee. In such circumstances, it cannot be said that the contractors were agents of the assessee for the provision of labour. Had the payments been made by the assessee to contractor and then, in turn, to the labourers and the transaction of payments to labourers had been considered as expenditure of the assessee, then the case would have been covered by clause (k) of Rule 6DD. Here is a case in which the assessee paid to the contractors on principal-to-principal basis and no agency of any sort was involved in this transaction.
We, therefore, hold that the authorities below were justified in coming to the conclusion that clause (k) of Rule 6DD was not attracted. If Rule 6DD is taken out of purview, then the payment is otherwise in violation of section 40A(3) of the Act. As such payments were made in violation of the provision, we hold that the disallowance u/s.40A(3) has been rightly confirmed in the first appeal.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee arises out of the order dated 15-01-2015 passed by the CIT(A)-2, Nashik in relation to the assessment year 2010-11.
2. The only issue raised in this appeal is against the confirmation of two disallowances made by the Assessing Officer (AO) u/s.40A(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’).
3. Briefly stated, the facts of the case are that the assessee is a Builder and Developer engaged in civil construction and also rendering allied legal and technical services. A return was filed declaring total income of Rs.1,10,61,126/-. During the course of assessment proceedings, the AO observed that the assessee made certain payments through bearer cheques amounting to Rs.24,65,500/- which were in violation of section 40A(3) of the Act. On being called upon to put forth its stand, the assessee submitted that all the payments were made to Kharjul family members through bearer cheques during the course of carrying out its business activity. Commercial expediency was stated to be the reason for making payments through bearer cheques. The AO discussed one-by-one all the payments by observing that such amounts were paid through bearer cheques while certain other payments to all such persons were also made through account payee cheques. Not accepting the assessee’s commercial expediency, the AO made disallowance u/s.40A(3) amounting to Rs.24,65,500/-. The ld. CIT(A) countenanced the disallowance.
4. Having heard the both the sides and gone through the relevant material on record, it is found as an admitted position that payments totalling Rs.24,65,500/- were made to Kharjul family members against which deduction was claimed in the Profit and loss account. The case of the assessee is that these payments were made because of business expediency and hence, disallowance should not be made. The assessee also harped on the genuineness of the transactions so as to escape the disallowance. However, one thing has been admitted that the payments were made through bearer cheques which are otherwise hit by section 40A(3) and further none of the payments fall under any of the relevant exemption clause of Rule 6DD.
5. The rival sides have relied on certain decisions fortifying their respective points of view. Por una parte, certain High Courts including the Hon’ble Gujarat High Court in Anupam Tele Services Vs. ITO (2014) 366 ITR 122 (Guj.) and the Hon’ble Rajasthan High Court in Harshila Chordia Vs. ITO (2008) 298 ITR 349 (Raj.) have deleted the disallowance in the cases of genuine business transactions, por otra parte, certain other High Courts including the Hon’ble Bombay High Court in Madhav Govind Dulshete Vs. ITO (2018) 259 Taxman 949 (Bom.), the Hon’ble Madras High Court in Vaduganathan Talkies and others Vs. ITO (2020) 428 ITR 224 (Mad.), the Hon’ble Karnataka High Court in Nam Estates Pvt. Ltd. Vs. ITO (2020) 428 ITR 186 (Kar.) and the Hon’ble Calcutta High Court in Bagmari Tea Company Ltd. Vs. CIT (2001) 251 ITR 640 (Cal.) have confirmed the disallowance where the payment was made in cash exceeding the stipulated amount notwithstanding the genuineness of the transaction.
6. The assessee in Madhav Govind Dulshete (supra) was engaged in the business of sale of Kerosene which was purchased from notified dealers. He made purchases of Kerosene from certain companies. Some of the payments were made in cash while others were in cheque. The AO made disallowance by invoking section 40A(3) in respect of cash payments exceeding the limit by noticing that both the assessee and seller had banking facilities. The CIT(A) affirmed the assessment order. The Tribunal echoed the AO’s view by finding that both the buyer and sellers had bank accounts. The Hon’ble jurisdictional High Court countenanced the view of the Tribunal sustaining the disallowance thereby repelling the assessee’s contention of a genuine business transaction as a ground for not making disallowance u/s 40A(3) of the Act.
7. On an overview of the view canvassed by various Hon’ble High Courts on the point – some deleting the disallowance on the basis of the genuineness of the transactions while others sustaining the disallowance – what matters for the Tribunal is to follow the binding precedent, being, the judgment of Hon’ble jurisdictional High Court. That being the position, the Pune Tribunal is bound by the judgment of the Hon’ble jurisdictional High Court in Madhav Govind Dulshete (supra) sustaining the disallowance in case of cash payments exceeding the stipulated limit notwithstanding the fact that the transactions were genuine and the parties were identifiable. Respectfully following the judgment, we uphold the disallowance sustained in the first appeal. This ground fails.
8. The second disallowance under challenge amounting to Rs.20,05,056/- is again u/s.40A(3) of the Act. The assessee made total payment of Rs.27,97,856/- to various persons through bearer cheques. Explanation was tendered about payments amounting to Rs.7,87,800/- which was accepted by the AO. Remaining amount of Rs.20.05 lakh was paid to contractors towards weekly bill of labour. The assessee contended that the payment was covered under Rule 6DD(k) being payment made to an agent. The AO rejected this contention, which got affirmed in the first appeal.
9. After considering the rival submissions and perusing the relevant material on record, it is found as an admitted position that the assessee paid the amounts in question to the labour contractors in violation of section 40A(3) of the Act. The case of the assessee is that the payments were covered under clause (k) of Rule 6DD, which provides that no disallowance will be made where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such persons. The important point to be noted in such cases is that the payment must be by the assessee to his agent, who, in turn, pays to some third person on behalf of the assessee for goods or services. It means that the agent to whom the payment is made must represent the principal in making the payments for goods or services. Adverting to the facts of the instant case, it is seen that the assessee made payment to contractors and such payments were as such recorded as expenditure in the books of account of the assessee. In such circumstances, it cannot be said that the contractors were agents of the assessee for the provision of labour. Had the payments been made by the assessee to contractor and then, in turn, to the labourers and the transaction of payments to labourers had been considered as expenditure of the assessee, then the case would have been covered by clause (k) of Rule 6DD. Here is a case in which the assessee paid to the contractors on principal-to-principal basis and no agency of any sort was involved in this transaction. We, therefore, hold that the authorities below were justified in coming to the conclusion that clause (k) of Rule 6DD was not attracted. If Rule 6DD is taken out of purview, then the payment is otherwise in violation of section 40A(3) of the Act. As such payments were made in violation of the provision, we hold that the disallowance u/s.40A(3) has been rightly confirmed in the first appeal.
10. In the result, the appeal is dismissed.
Order pronounced in the Open Court on 10th May, 2022.
