The assessee in terms of its contract is bound to deliver the goods within the stipulated time. In the course of such transportation, the assessee is bound to incur expenses for putting fuel in the vehicle, payment of toll gate charges, incurring of expenses for routine and exceptional repairs and maintenance apart from fooding expenses of the staff. Since the AO has not doubted the genuineness of the expenses as no such disallowance has been made and the AO has made only disallowance u/s 40A(3) of the Act on the basis of the bills/vouchers/ledger account produced before him, we are of the considered opinion that the disallowance u/s 40A(3) made by the AO under the facts and circumstances of this case is not justified and the provisions of 6DD(k) will come to the rescue of the assessee. In this view of the matter, we set aside the order of the CIT(A) and direct the AO to delete the addition.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the order dated 7th March, 2019 of the CIT(A)-12, New Delhi relating to assessment year 2012-13.
2. The assessee, in his only effective ground of appeal has challenged the order of the CIT(A) in confirming the addition of Rs.88,71 ,5 11/- made by the AO invoking the provisions of Section 40A(3) of the IT Act.
3. Facts of the case, in brief, are that the assessee is an individual and is engaged in the business of transport services under the name and style of M/s Suman Roadlines and Trading in motor parts under the name and style of M/s Dara Motors. The assessee is running a service station of Hero Motors Corporation also under the name and style of M/s Dara Motors. He filed his return of income on 29th September, 2012 declaring the total income at Rs.20,47,990/-. The AO completed the assessment u/s 143(3) on 30th March, 2015 determining the total income of the assessee at Rs.30,37,990/- wherein he made an addition of Rs.9,90,000/- being 10% of the vehicle expenses shown at Rs.99 lakhs on ad hoc basis out of the vehicle expenses claimed at Rs.1,58,79,841/-. This assessment was set aside by the ld.CIT, vide order passed u/s 263 of the IT Act on 17th March, 2017 on the ground that the AO did not examine the allowability of cash payments as per section 40A(3) r.w. Rule 6D of IT Rules, 1962.
4. The AO, thereafter, issued notice u/s 143(2) of the IT Act to the assessee and asked him to explain as to why the payment of Rs.95,53,516/- made in cash on account of vehicle expenses be disallowed. The details of such expenses have been given by the AO at pages 2-4 of the order.
5. It was submitted by the assessee that these are not single payments and under different heads. Majority of these expenses were incurred by the drivers or staff of the company and most of these expenses are incurred en route during the transport. It was submitted that the nature of expenses would be purchases of diesel, repairs, payment at toll gates and others and these expenses were incurred outside the head office. It was submitted that at the places of incurring of such expenses, there will be no bank account and due to the nature of business, these expenses had to be made in cash. It was submitted that the expenses were incurred for the purpose of business and the assessee is in transport and logistics business and, therefore, it necessarily has to incur the expenditure in cash. Further, the drivers and staff had to incur the expenses like travelling, conveyance, toll charges, sundry repairs, diesel and lubricant, etc. Relying on the decision of Hyderabad Bench of the Tribunal in the case of DRS Logistics Pvt. Ltd. vs. ACIT, vide ITA No.1 648/Hyd/20 13, it was argued that no disallowance u/s 40A(3) is called for. The assessee further submitted that an amount of Rs.6,82,005/- were made on Sundays and the assessee firm is, therefore, covered under Rule 6DD of IT Rules, 1962. It was further submitted that the payments were made generally after 9 PM as it is notified that the plying of heavy vehicles on most of the roads in Delhi is not permitted between 7.30 AM and 9.30 PM and as per prevailing rate of diesel during F.Y. 2011-12, the average purchase of diesel for vehicle was not more than Rs.20,000/- and the payment was always made for more than one vehicle. Various other decisions were also brought to the notice of the AO and it was accordingly argued that no disallowance u/s 40A(3) is called for.
6. However, the AO was not satisfied with the arguments advanced by the assessee. After excluding an amount of Rs.6,82,005/- incurred on Sundays (bank holiday) which was allowable as per sub-rule (j) of rule 6DD, the AO made addition of Rs.88,71,51 1/- u/s 40A(3) of the IT Act.
6.1 In appeal, the ld.CIT(A) upheld the action of the AO by observing as under:-
7.1 Briefly, the facts of the case are that the Assessee is engaged in the business of lying of tracks under the name & style of M/s. Suman Road Lines. The Assessee is also running a service station, of Hero Motor Corporation under the name & style of M/s Dara Motors. The Pr. CIT-12, Delhi passed the order u/s 263 of the IT Act observing that the payments have been made in cash exceeding Rs.20,000/- in a day.-The Assessee has not been able to bring on record the bills & vouchers relating to vehicle expenses. The contention of the Assessee that the drivers had to pay cash for instant repair at unknown places is not covered under the cases and circumstances specified under Rule 6DD of IT Rules. The Ld. Pr.CIT relied on the decision of Associated Engineering Enterprise vs. CIT (1995), 216 ITR 366 (Gau.) in which it was held that the payments made in cash exceeding the specified limit as laid down under section 40A(3) are disallowable. Even proof of genuineness of payment will not suffice. Circumstances warranting the payment in cash have to be proved. Therefore, the onus is on the Assessee to prove that the so called unknown places are covered under Rule 6DD(k) of IT Rules but the Assessee has failed to discharge his onus. The cases and circumstances in which the payments have been made in cash do not qualify exemption under Rule 6DD(k) as the drivers of the Assessee are his employees and the employees cannot be the agents of the Assessee.\
7.2 The Assessing Officer examined the ledger account of vehicle expenses and found that the Assessee had made cash payments exceeding Rs. 20,000/- in a day. Total of such payments was found, to be Rs.95,53,516/-. The Assessing Officer asked the Assessee to explain as to why the expenses should not be disallowed in view of the provisions of section 40A(3) of the IT Act r.w. Rule 6DD of the IT Rules. The Assessing Officer has prepared date-wise and voucher-wise list of cash payments exceeding’ Rs.20,000/- on pages 2, 3 & 4 of the Assessment Order.
7.3 The Assessee submitted that he had already produced copy of ledger of vehicle expenses during the assessment proceedings. Majority of the expenses were incurred by the drivers or staff of the company and most of these expenses are incurred en-route during the transport. The nature of expenses were purchase of diesel, repairs, payment of toll gate and others. Such expenses were incurred outside the head office. There were no bank accounts at the places of expenses and hence the payments had to be made in cash. The expenses were incurred for the purpose of the business where such payments had to be made in cash. Out of total cash payments of Rs.95,53,516/-, Rs.6,82,005/- was paid on Sundays. The truck drivers mostly belonged to rural area and insist for payment in cash. The payments were made generally after 9 pm as the plying of heavy vehicles on most of the roads in Delhi is not permitted between 7.30 am to 9.30 pm. The average purchase of diesel for vehicle was not more than Rs.20,000/- and the payment was always made for more than one vehicle. The Assessee referred to the clauses 6DD(g), (j) & (k). It was also, stated that payments to a person in a day in cash did not exceed Rs.20,000/-
7.4 . The Assessing Officer observed that the reply of the Assessee is tenable only with respect to the payments amounting to Rs.6,82,0.05/- made on Sundays (bank holiday), which is allowable as per sub-rule (j) of Rule 6DD of IT Rules. The Assessee has not been able to, brought anything on record in form-of vouchers in support of his claim that the remaining payments exceeding Rs.20,000/- were not made to a single party in a day. In view of the above facts, the Assessing Officer added Rs.88,71,51 1/- to the total income.
7.5 During the proceedings before me, the Appellant has reiterated his arguments as those were placed before the Pr. CIT and the Assessing Officer.
7.6 I have considered the facts of the case and the submission of the Appellant. The Appellant has not disputed about the amounts mentioned against the vouchers on a particular date aggregating to Rs.95,53,516/-. Ld. Pr. CIT while passing the order u/s 263 of the IT Act gave sufficient opportunity to the Assessee to explain the payments covered under the clauses of the Rule 6DD. But the Appellant could not explain the payments made by him covered under those clauses. The Appellant has only given general remarks and modus operandi without bringing out specific facts and documents. The provisions of section 40A(3) have been brought on the statute to check the payments by the cash exceeding certain limit in order to check excess or bogus claim of expenses. The Appellant has stated that no payments exceeded Rs.20,000/- is not supported by the vouchers. However, the Assessing Officer already considered the payments made on Sundays and reduced the same from the total amount of disallowance. The decisions cited by the Appellant are distinguishable on facts. Therefore, the disallowance made by the Assessing Officer is confirmed and the ground of appeal taken by the Appellant is dismissed.
7. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
8. The ld. Counsel for the assessee strongly challenged the order of the CIT(A) in confirming the addition of Rs.88,71 ,5 11/- made by the AO by invoking the provisions of section 40A(3) of the Act. He submitted that the AO has considered the payment exceeding Rs.20,000/- per day for making disallowance u/s 40A(3) of the Act whereas the law provides for the limit of Rs.35,000/- per day from person in case of transporters as per second proviso to section 40A(3) of the IT Act. This mistake has resulted into excessive addition of Rs.6,49,570/-. Further, it is a matter of fact that the payments have been made to the truck drivers against expenses to be incurred in the course of transportation of goods involving long transit period. The payments have to be made for the expenses such as routine and exceptional repairs and maintenance of the vehicles, food expenses of the crew and other usual expenses during the trip. He submitted that such expenses are to be incurred in cash because the drivers/running staff are not in a position to avail banking facilities during the transit period. Further, such persons are illiterate and not exposed to routine banking activities. Sometimes such expenses may arise at odd hours at night and also at the places which may not be having banking facilities.
9. Referring to the decision of the Hon’ble Delhi High Court in the case of R.C. Goel vs. CIT, vide ITA 636/2012, order dated 4th December, 2012, he drew the attention of the Bench to page 5, para 9 of the order where it has been held that when the cash expenses had to be incurred by a catering contractor of Railways for the supplies in trains of small articles of daily necessity and use to the passengers, such expenses had to be incurred per force in cash. The assessee in terms of its contract is bound to maintain constant supplies in trains and payments have to be made to small time concerns. The Hon’ble Court held that the protection u/s 40A(3) seeks to relieve to a certain extent the measure of hardship which might be imposed upon small businesses which are dependent on timely cash flow. In the circumstances of the case, the statutory mandate in Rule 6DD(k) of IT Rules has to be construed as to mean that but for cash payment the assessee would have been deprived of its supplies itself. The consequences of instances of payment through cheques in small businesses which are dependent on such supplies would be completely stifle, if not stop, the business activities. The Hon’ble Court gave interpretation to the expression ‘required’in that matter. He submitted that the above decision of the Hon’ble Delhi High Court is in consonance with the proposition laid down by the Apex Court in the case of Attar Singh Gurmukh Singh vs. ITO, reported in 4 SCC 385 (SC). Referring to various decisions, he submitted that the courts have held that even if the case of the assessee does not fall in any of the clauses of Rule 6DD, invoking the provisions of section 40A(3) can be dispensed with if the assessee is able to prove the business expediency because of which it had to make cash payment if genuineness of transaction is verified.
9.1 Referring to the decision of the Hon’ble Punjab & Haryana High Court in the case of Gurdas Garg vs. CIT, he submitted that while considering similar issue where disallowance u/s 40A(3) were made was deleted by observing that since the genuineness of the transaction made in cash of Rs.20,000/- was not disbelieved by the authorities, the same cannot be disallowed u/s 40A(3) of the Act. Referring to the decision of the Hon’ble Gujarat High Court in the case of Hasanand Pinjomal vs. CIT, 112 ITR 134, he submitted that the court has held that the practicability would have to be judged from the angle of a businessman and not that of the Revenue. Referring to the decision of the Delhi High Court in the case of Honey Enterprises vs. CIT, reported in 381 ITR 258 (Del), he submitted that the Hon’ble High Court in para 36 of the order has held that when the AO does not dispute that the assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights and the contention of the assessee that such payments were made as the producers required the payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business, the disallowance was deleted. He accordingly submitted that the disallowance made by the AO u/s 40A(3) which has been sustained by the CIT(A) is not called for and, therefore, the same should be deleted.
10. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). He submitted that the assessee has violated the provisions of section 40A(3) of the IT Act by making cash payments in excess of Rs.20,000/- paid otherwise than by account of payee cheque or bank draft, therefore, the lower authorities are fully justified in making the addition.
11. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, invoking the provisions of section 40A(3) of the Act, made disallowance of Rs.88,71,51 1/- which has been upheld by the CIT(A) and the reasons for which have already been reproduced in the preceding paragraphs. It is the submission of the ld. Counsel that the assessee is in the business of transport contract and the payments have been made to the truck drivers against the expenses to be incurred in the course of transportation of goods involving long transit period such as diesel expenses, routine and exceptional repairs and maintenance of the vehicles, toll charges, their fooding expenses, etc. It is also his submission that incurring of such expenses in cash are necessary because such drivers/running staff are unable to avail banking facilities during the transit period and that such persons are illiterate and not exposed to routine banking activities. Further, sometimes such expenses may be required to be incurred at odd hours at night and also at places which may not be having banking facilities.
12. We find some force in the above arguments of the ld. Counsel. A perusal of the audited balance sheet filed by the assessee at pages 5-20 of the paper book shows that the assessee, during the impugned assessment year owned 48 trucks which were used for the purpose of business. Therefore, the assessee is bound to incur expenses in cash during the movement of those vehicles especially in remote areas, during night time and at places where the banking facility is not readily available for meeting routine expenses such as purchase of diesel and lubricants, routine and exceptional repair and maintenance, fooding of staff, toll gate charges, etc.
13. We find, somewhat identical question had come up before the Hon’ble Delhi High Court in the case of R.C. Goel vs. CIT, vide ITA No.636/2012, order dated 4th September, 2012. In that case, the assessee was a mobile railway catering contractor. The AO noted that the assessee had purchased goods and supplies to the tune of Rs.27,48,860/- from one M/s Shruti Enterprises, a Mumbai-based concern for providing it supplies in the trains which it serves, i.e., Punjab Mail and Pushpak Express. The assessee had urged that purchases from this concern were necessary because one of the trains never touched Delhi and the other train used to halt at Delhi for a limited time. Consequently, it was not possible to load the stock within the short period, necessitating purchase and loading the stock in Mumbai. It was also urged that the Mumbai supplier i.e. M/s Shruti Enterprises insisted for payment in cash against delivery of items and the assessee, having regard to the nature of its contract with the IRCTC was bound to supply the goods and articles in the trains in a short time and also make payments in cash in order to maintain supplies. It was argued that these transactions were genuine and bona fide and had to be taken out of the scope of Section 40A (3). However, the assessee was unsuccessful before the AO, CIT(A) as well as the ITAT. When the matter travelled to the Hon’ble High Court, the Hon’ble High Court reversed the order of the Tribunal and allowed the claim of the assessee by deleting the addition made u/s 40A(3) by observing as under:-
“8. The proviso which was introduced in the year 1999 has remained constant except in the year 2005 when sub-section (3A) was introduced by the Parliament. However, Rule 6DD which was introduced and has been existing on the statute for the nearly two decades has been amended from time to time. Rule 6DD (k) to the extent it is relevant reads as follows: –
6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely: –
XXX XXX XXX
(k) 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.”
9. In the present case, the previously noted discussion would reveal that the assessee engages itself in executing catering contracts for Railways in respect of two trains. In those trains, its personnel are deployed for sale of small articles of daily necessity and use to the passengers. Per force, the payments received by them are necessarily in cash. These amounts are collected and in turn handed over to the assessee. The assessee in terms of its contract is bound to maintain constant supplies in the trains and ensure that at no point in time can the passengers be deprived of these articles (which are food articles, soft drinks and other items necessary for travel). In the course of such transactions, it sources these articles from M/s Shruti Enterprises. Apparently, that concern is also a small time one and insists on cash payments for ensuring continuity and timely supplies. Whilst, the Court is conscious and does not in any manner wish to comment adversely on the larger public interest element embedded in Section 40A and the underlying principle, at the same time, the Court also notes that the proviso seeks to relieve to a certain extent, the measure of hardship which might be imposed upon small businesses and professionals who are engaged in activities and are dependent entirely on timely cash flow. It is in such cases that Rule 6DD – which was formulated as a proviso to Section 40A (3) – steps in to aid such assessees and concerns. In this context, the statutory mandate in Section 6DD (k), at least in the circumstances of the case, has to be so construed as to mean that but for the cash payment, the assessee would have been deprived the benefit of supplies itself. This Court clarifies that the interpretation of the expression “who is required to make payment in cash”having regard to the circumstances of the case is fact dependent, at least in the present case. The consequence of instances of payment through account payee cheques in small business which are dependent on such supplies would be to completely stifle, if not stop, the business activities. It is in that sense that the expression “required”would have to be construed.
10. In view of the above discussion, this Court is of the opinion that having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of Rule 6DD(k), the benefit of which the assessee clearly was entitled to. The question of law is accordingly answered in favour of the assessee and against the Revenue.
11. The Appeal – ITA 636/2012 – is accordingly allowed.”
14. We find, the Hon’ble Delhi High Court in the case of Honey Enterprises (supra) has observed as under:-
29. Before considering the rival contentions, it is necessary to observe (i) that there is no dispute as to the identity of the producers to whom cash payments have been made by the Assessee; and (ii) that the payments were made bona fide and in consideration of a genuine transactions as advances either for processing the positives of the film or acquiring the rights of exhibition of feature films. Thus, indisputably, such payments were allowable as deduction being revenue expenses incurred wholly and exclusively for business. The only issue to be considered is whether the same have to be disallowed by virtue of Section 40A(3) of the Act because the same were made in cash.
30. Section 40A(3) of the Act as in force during the AYs 1992-93 and 1993-94 reads as under:-
“(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction:
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Assessing Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made:
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.”
31. Rule 6DD of the Rules expressly provides that no disallowance under Subsection 3 of Section 40A shall be made, inter alia, in circumstances specified thereunder. Clause (j) of Rule 6DD of the Rules (as applicable during the relevant assessment years) expressly provided that no disallowance under Section 40A(3) of the Act would be made in cases where the Assessee furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee. And, the Assessee further satisfies the Income-tax Officer that payment could not be made by crossed cheque drawn on a bank or by a crossed bank draft “(a) due to exceptional or unavoidable circumstances; or (b) because payments in the manner aforesaid was not practicable, or would have cause genuine difficulty to the payee, having regard to the nature of transaction and the necessity for expeditious settlement thereof.”
32. Apparently, several representations were received by the CBDT regarding difficulties that were being faced by tax payers due to the lack of uniformity in the interpretation of the aforesaid Rule. In the circumstances, the CBDT issued a circular –being Circular No. 220 dated 31st May, 1977, inter alia, providing as under:-
“4. All the circumstances in which the conditions laid down in rule would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are;
(i) The purchaser is new to the seller ; or
(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or
(iii) The transactions and payments are made on a bank holiday ; or
(iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from this particular seller ; or
(v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or
(vi) Specific discount is gHasanand
iven by the seller for payment to be made by way of cash.”
33. CBDT further clarified that “the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule”
34. The ITAT had considered the above mentioned CBDT Circular and had rightly concluded that the circumstances as spelt out in CBDT Circular No. 220 (supra) were not exhaustive but were merely illustrative of situations where business exigencies required that the payments be made in cash. The ITAT also referred to the decision of the Gujarat High Court in Hasanand Pinjomal v. CIT: (1978) 112 ITR 134 (Guj.) wherein the Court had observed that the practicability would have to be judged from the angle of a businessmen and not the Revenue.
35. In the present circumstances neither the genuineness of the payment nor the identity of the payee is disputed. The only controversy that needs to be addressed is whether the ITAT’s decision that such payments had been made by the Assessee on account of business exigencies is perverse.
36. In the present case, the AO does not dispute that the Assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights. The Assessee had also contended that such payments were made as the producers required the payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business.
37. In our view, the question whether the Assessee’s business exigencies required payments to be made in cash, is a question of fact. The ITAT has returned a finding in favour of the Assessee and it is not possible to conclude that such finding is without any basis or any material on record. The ITAT’s decision, thus, cannot be held to be perverse. Accordingly, the question of law is answered in favour of the Assessee and against the Revenue.
38. In view of the above, all appeals, both Revenue’s as well as Assessee’s are dismissed. The parties are left to bear their own costs.
15. The facts of the instant case are also somewhat similar. The assessee in terms of its contract is bound to deliver the goods within the stipulated time. In the course of such transportation, the assessee is bound to incur expenses for putting fuel in the vehicle, payment of toll gate charges, incurring of expenses for routine and exceptional repairs and maintenance apart from fooding expenses of the staff. Since the AO has not doubted the genuineness of the expenses as no such disallowance has been made and the AO has made only disallowance u/s 40A(3) of the Act on the basis of the bills/vouchers/ledger account produced before him, we are of the considered opinion that the disallowance u/s 40A(3) made by the AO under the facts and circumstances of this case is not justified and the provisions of 6DD(k) will come to the rescue of the assessee. In this view of the matter, we set aside the order of the CIT(A) and direct the AO to delete the addition. The grounds raised by the assessee are accordingly allowed.
16. In the result, the appeal filed by the assessee is allowed.
The decision was pronounced in the open court on 17.03.2021.