Case Law Details
The assessing officer accumulated various payments made on a single day for making dis allowance under section. 40A(3). While carrying out this exercise the assessing officer summarized all payments to a transport agency rather than a truck owner/driver. The payments made by the assessee to truck drivers are not disputed by the assessing officer. All the payments are genuine and payees are identifiable. The learned Authorized Representative submitted that the assessing officer has taken a hyper-technical view in interpreting the provisions of section 40A(3) to make dis allowance. The assessee has made payment according to market practice followed in trading of sponge iron.
The learned Authorized Representative contended that the term person‟ used in section 40A(3) has to be interpreted separately for each transaction. The assessing officer has erred in clubbing various transactions on a single day. The learned Authorized Representative contended that the assessing officer has failed to take into consideration the fact that the transporters are providing trucks to various vendors. The same is used by different suppliers on different dates. Thus, this makes evidently clear that the payments are made to the truck drivers towards the cost of transportation.
No disallowance under section. 40A(3) is warranted if cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable
In the present case, the payment made by the assessee to the individual truck driver has not been disputed. It is not the case of Department that the payments made by the assessee are not genuine or the payees are not identifiable. The assessee has sufficiently explained the circumstances under which the payments have been made to the truck drivers in cash. The assessing officer made dis allowance by taking a pedantic view of the cash transactions. Where cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable; no dis allowances under section. 40A(3) is warranted. Thus, in view of the facts of case and various decisions discussed above, we do not find any error in the findings of Commissioner (Appeals) in deleting dis allowances of Rs. 60,73,403 made by the assessing officer under section. 40A(3) of the Act. We concur with the findings of Commissioner (Appeals). Accordingly, ground Nos. 1 and 2 raised by the Department in appeal are dismissed.
Addition U/s. 69C not justified in absence of adverse comments in remand report
With regard to deleting of addition Rs. 7,62,150 made under section. 69C of the Act. The First Appellate Authority has deleted the addition after seeking comments of assessing officer on reconciliation statement filed by the assessee. The assessing officer has not made any adverse comments or has raised any doubt over the reconciliation statement filed by the assessee in the remand report. The Commissioner (Appeals), accordingly deleted the addition. The learned Department Representative has not been able to controvert the findings of Commissioner (Appeals) on this issue. We do not find any merit in the ground raised by the Department assailing the findings of Commissioner (Appeals) in deleting the said addition.
Full Text of the ITAT Order is as follows:-
This appeal by the Department is directed against the order of Commissioner (Appeals), Aurangabad dated 24-1-2013 for the assessment year 2009-10.
2. The brief facts of the case as emanating from records are : The assessee is engaged in trading of sponge iron. The assessee purchases sponge iron from vendors in Odisha and Karnataka and sells the same to ingot manufactures at Jalna. During the period relevant to the assessment year under appeal, the assessee incurred freight charges to the tune of Rs. 91,12,689. During the course of scrutiny assessment proceedings, the assessing officer observed that entire freight charges have been paid by the assessee in cash. The assessing officer invoked the provisions of section 40A(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) and disallowed freight payment of Rs. 60,73,403. Further, the assessing officer observed that there is a difference of Rs. 7,62,150 in total freight paid by the assessee and the freight payment debited to profit and loss account. The assessing officer treated the said difference as unexplained expenditure and made addition of the same under section. 69C of the Act.
Aggrieved by the assessment order dated 26-09-2011, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) after examining the documents on record deleted both the additions. Now, the Department is in appeal before the Tribunal assailing the findings of Commissioner (Appeals).
3. Shri Amit Bobde representing the Department vehemently supported the findings of assessing officer. The learned Department Representative submitted that the assessee has not been able to show compiling circumstances for making payments in cash to the transporters. The assessee could have made payment to the transporters through banking channels. The assessee has failed to show that the transport agencies had directed the assessee to make payment in cash to the trucks drivers immediately after delivery of goods to the assessee. The payments made in cash above Rs. 20,000 have been disallowed, where the assessee has made cash payments to the transporters below Rs. 20,000 the same have been accepted and no dis allowance has been made on such cash payments.
3.1 In respect of addition of Rs. 7,62,150 under section. 69C of the Act, the learned Department Representative submitted that the assessee debited freight charges of Rs. 91,12,689 in the profit and loss account, whereas as per the vouchers which were impounded under section 131(3) of the Act the aggregate of freight paid amounted to Rs. 98,74,839. The assessing officer gave opportunity to the assessee to explain the difference of Rs. 7,62,150. The assessee could not furnish any explanation or reconciliation statement before the assessing officer. The assessee submitted reconciliation statement before the Commissioner (Appeals) during the first appellate proceedings. On the basis of reconciliation statement the Commissioner of Income Tax (Appeals) deleted the addition. The learned Department Representative prayed for setting aside the findings of Commissioner (Appeals) on both the issues and for restoring the additions made by the assessing officer.
4. On the other hand Shri Kishor Phadke appearing on behalf of the assessee vehemently supported the findings of Commissioner (Appeals) in deleting the additions made by assessing officer under section. 40A(3) and 69C of the Act. The learned Authorized Representative submitted that the assessee procures sponge iron primarily from Odisha and Karnataka. The sponge iron is transported to the assessee through trucks. The trucks are provided by various transport agencies to the vendors. Truck hiring charges are included in the payments for supply of sponge iron. Thus, freight charges are not paid by the vendors but are paid by the assessee after delivery of sponge iron. Once the truck reaches the premises of assessee part payment of the transport charges is made to the truck driver immediately. Thereafter, the sponge iron is tested for the contents of iron, etc. After testing, remaining payment is made to the truck driver. The entire process of delivery and testing sponge iron takes 2-3 days. During the course of assessment proceedings the assessing officer under section. 131 of the Act impounded books of account and bills/vouchers produced by the assessee. Thereafter, the assessing officer carried out detailed exercise of summarizing freight payments qua each transport agency and each truck. The assessing officer accumulated various payments made on a single day for making dis allowance under section. 40A(3). While carrying out this exercise the assessing officer summarized all payments to a transport agency rather than a truck owner/driver. The payments made by the assessee to truck drivers are not disputed by the assessing officer. All the payments are genuine and payees are identifiable. The learned Authorized Representative submitted that the assessing officer has taken a hyper-technical view in interpreting the provisions of section 40A(3) to make dis allowance. The assessee has made payment according to market practice followed in trading of sponge iron.
4.1 The learned Authorized Representative contended that the term person‟ used in section 40A(3) has to be interpreted separately for each transaction. The assessing officer has erred in clubbing various transactions on a single day. The learned Authorized Representative contended that the assessing officer has failed to take into consideration the fact that the transporters are providing trucks to various vendors. The same is used by different suppliers on different dates. Thus, this makes evidently clear that the payments are made to the truck drivers towards the cost of transportation. The learned Authorized Representative in order to substantiate that the payments were made to the truck driver for transportation of sponge iron, referred to tax invoice cum deliver challan and the GR receipt at pages 93 to 95 of the paper book. The learned Authorized Representative pointed that a perusal of tax invoice cum deliver challan would show that the Vehicle No., the description of the goods included weight and value is mentioned on invoice. The tax invoice also shows the freight charges. On the GR receipt the Vehicle No. is mentioned, the details of the goods transported, the name of consignor and consignee and the total freight is also mentioned. The details of the goods transported and the freight charges in tax invoice cum delivery challan and GR receipt is the same. Similarly, in other cases the details given in the tax invoice cum delivery challan and GR are given. Thus, details furnished by assessee clearly show that the payments are made to the trucks driver towards the freight. It is a well known fact that truck drivers/owners do not accept cheque payments or DD as they do not have bank accounts at various destinations. The truck drivers always receive cash payments, therefore, the payments were made by the assessee in cash. The learned Authorized Representative in support of his submissions placed reliance on the following decisions :–
(i) Attar Singh Gurmukh Singh v. ITO, (1991) 191 ITR 667 (SC);
(ii) Smt. Harshila Chordiya v. ITO, (2008) 298 ITR 349 (Raj.);
(iii) Anupam Tele Services v. ITO, (2014) 268 CTR 121 (Guj.);
(iv) Honey Enterprises v. CIT, (2016) 381 ITR 258 (Del.);
(v) Gurdas Garg v. CIT, [IT Appeal No. 413 of 2014, dt. 16-7-2015].
4.2 In respect of Ground No. 2 relating to dis allowance under section 69C of the Act, the ld. AR submitted that during assessment proceedings the assessee furnished reconciliation statement to the assessing officer. However, the assessing officer failed to consider the same and made the addition. The same reconciliation statement was filed by the assessee before the Commissioner (Appeals). The Commissioner (Appeals) forwarded the same to assessing officer for comments. In the remand report, the assessing officer has not pointed out any discrepancy in reconciliation statement, thus, the contentions of the assessee remained un-rebutted. The Commissioner (Appeals) deleted the addition under section. 69C on the basis of reconciliation statement furnished by the assessee and the remand report of the assessing officer.
5. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the learned Authorized Representative of the assessee has placed reliance in support his contentions. The first issue in appeal raised by the Department is with respect to dis allowance of Rs. 60,74,403 under section. 40A(3) of the Act. The dis allowance has been made in respect of freight charges paid in cash by the assessee to the truck drivers. The Commissioner (Appeals) deleted the addition by observing as under :–
“6.3 I have carefully considered the facts of the case and rival contentions. In order the decide the issue under appeal, the provisions of section 40A(3) are relevant and the same reads as under —
“Where 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 account payee cheque or drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.”
The only crux of the issue to be decided is whether a person mentioned in the above provision is to be considered as each individual truck driver separately or a transport agency who has arranged delivery through various trucks. In order to decide the above issue, the intention of the legislature, the purpose for which the section has been introduced and also the peculiar facts of the case are to be considered. The section has been introduced to curb the tendency of the assessees to make cash payments without recording the same in the books of accounts which encourages the generation of black money and also gives rise to tax avoidance. In the case under appeal, the appellant has recorded all the cash payments in his books and the details of payment made to various transporters are also available on record and on the said payments, TDS has been deducted and hence there is no likelihood of non-recording of entries in the books of accounts and generation of black money. Secondly, the suppliers have arranged the delivery of goods through transport agencies which are located at faraway places and as per the trade practice, the appellant has to make cash payment on receipt of delivery of goods to the truck drivers. Therefore, it cannot be said that the payment made by the appellant in cash not exceeding Rs. 20,000 each truck driver on receipt of delivery of goods has resulted into generation of black money or has encouraged avoidance of Income Tax.
6.4 The term “person” mentioned in section 40A(3) refers to an individual (truck driver in the case under appeal) to whom the payment has been made and not each assessee assessed under different category such as partnership firm, company, AGP etc. The term “person” has been defined in the Income Tax Act with reference to the status of the assessee which is not relevant for deciding the term “person” referred to in section 40A(3) of the Act. For example if an assessee who is a company or partnership firm has opened various branches at different places and if goods are purchased from each branch on the same day by an assessee through his different employees by making cash payments in each branch not exceeding Rs. 20,000 then it will be unreasonable to disallow the said payment under section 40A(3) on the ground that on the same day the payments exceeds Rs. 20,000 have been made to the same assessee owning difference branches at different places exceeding Rs. 20,000.
6.5 In view of the above facts and discussion, I am of the considered view that the appellant has made payment to different persons i.e. truck drivers for each delivery not exceeding Rs. 20,000 at a time on a single day and hence the dis allowance under section 40A(3) is not justified. The addition of Rs. 60,73,403 is, therefore, deleted. The assessing officer is directed accordingly. Ground No. 1 stands allowed.”
6. The Hon’ble Supreme Court of India in the case of Attar singh Gurmukh Singh v. Income Tax Officer (supra) under similar circumstances deleted the dis allowances made under section 40A(3) by holding as under :–
“4. As to the validity of section 40A(3), it was urged that, if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft, then the income tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy of tax on an assumed income would be a restriction on the right to carry on business, besides being arbitrary.
5. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or ‘crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations 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. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. Mudiam Oil Company v. ITO (1973) 92 ITR 519 (AP). If the payment is made by a crossed cheque drawn on a bank or crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute, the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.”
7. The Hon’ble Rajasthan High Court in the case of Smt. Harshila Chordia v. Income Tax Officer (supra) deleted the dis allowances made under section. 40A(3) by observing that no dis allowance under section. 40A(3) could be made by taking a hyper technical view where the transactions are genuine.
8. The Hon’ble Punjab and Haryana High Court in the case of Gurdas Garg v. Commissioner of Income Tax (supra) while considering similar issue where dis allowances under section. 40A(3) was made deleted the dis allowance by observing that where genuineness of transaction made in cash in excess of Rs. 20,000 was not disbelieved by authorities, the same cannot be disallowed under section. 40A(3) of the Act.
9. In the present case, the payment made by the assessee to the individual truck driver has not been disputed. It is not the case of Department that the payments made by the assessee are not genuine or the payees are not identifiable. The assessee has sufficiently explained the circumstances under which the payments have been made to the truck drivers in cash. The assessing officer made dis allowance by taking a pedantic view of the cash transactions. Where cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable; no dis allowances under section. 40A(3) is warranted. Thus, in view of the facts of case and various decisions discussed above, we do not find any error in the findings of Commissioner (Appeals) in deleting dis allowances of Rs. 60,73,403 made by the assessing officer under section. 40A(3) of the Act. We concur with the findings of Commissioner (Appeals). Accordingly, ground Nos. 1 and 2 raised by the Department in appeal are dismissed.
10. The second issue raised in the appeal is with regard to deleting of addition Rs. 7,62,150 made under section. 69C of the Act. The First Appellate Authority has deleted the addition after seeking comments of assessing officer on reconciliation statement filed by the assessee. The assessing officer has not made any adverse comments or has raised any doubt over the reconciliation statement filed by the assessee in the remand report. The Commissioner (Appeals), accordingly deleted the addition. The learned Department Representative has not been able to controvert the findings of Commissioner (Appeals) on this issue. We do not find any merit in the ground raised by the Department assailing the findings of Commissioner (Appeals) in deleting the said addition. Accordingly, ground No. 3 raised by the Department in appeal is dismissed.
11. Ground Nos. 4 and 5 are general in nature, hence, require no adjudication.
12. In the result, the appeal filed by the Revenue is dismissed being devoid of any merit.
