Geo Connect Ltd Vs DCIT (ITAT Delhi)
The factual matrix reveal that the assessee is in real estate business and for that purpose it purchased an agricultural land from one Sh. Ugma, an old man of 75 years. Towards sale consideration of the said land, the assessee issued bearer cheques for an amount of Rs. 1,06,50,000/- to the seller. It is the stand of the assessee from the stage of assessment proceeding itself that the seller of the agricultural land made a precondition of payment of cash for registration of sale deed. Since, the assessee was desperately in need of the land, he had no other option but to accede to the pre-condition of the seller. Accordingly, the payment was made through bearer cheques. From perusal of bank statements, a copy of which is placed in the paper-book, it appears that the sale consideration was paid to the seller of the agricultural land through eight bearer cheques, which were withdrawn on the same day i.e. 07.02.20 14. On the very same day, the sale deed was registered in favour of the assessee. Thus, from the aforesaid facts, it is very much clear that the transaction between the parties and the payment made and purpose of the payment is well established and genuine.
On a reading of section 40A(3) of the Act, it becomes clear that any expenditure exceeding the amount prescribed therein would not be allowed as deduction, if they are made other than by way of account payee cheque or bank draft. However, the first proviso to section 40A(3) makes it clear that no disallowance under subsection (3) to section 40A should be made in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, consideration of business expedience and other relevant factors. Rule 6DD prescribes the exceptions under which section 40A(3) would not apply. Consistent with the substantive provisions of section 40A(3) of the Act, sub-rule (j) of Rule 6DD was introduced.
No disallowance under section 40A(3) can be made, if the transaction for which the payment is made is genuine and due to business expediency and other compelling factors payment was required in cash.
In case of Attar Singh Gurmukh Singh Vs. ITO, 191 ITR 667 (SC), the Hon’ble Supreme Court while interpreting the provisions of section 40A(3) read with Rule 6DD has held as under:
“6. 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 tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary.
7. 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 disclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. – Mudiam Oil Co. v. ITO [1973] 92 ITR 519 (API. If the payment is made by a crossed cheque drawn on a bank or a 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.”
As could be seen from the aforesaid decision of the Hon’ble Supreme Court, though, constitutional validity of section 40A(3) of the Act was upheld, however, the Hon’ble Supreme Court observed that the provisions are not intended to restrict business activity and the restrictions provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. While interpreting the provisions of section 40A(3) and Rule 6DD(j), the Hon’ble Supreme Court has held that the terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transaction are not taken out of the sweep of 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 under 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.
The ratio laid down in the aforesaid judicial precedents squarely apply to the facts of the assessee’s case due to following reasons:
(a) The genuineness of the payment made was not doubted.
(b) The recipient of the amount made a pre-condition for registration of sale deed only on payment of cash.
(c) Due to business expediency the assessee had to make the payment in cash.
The other decisions cited by learned counsel also supports this view. Even otherwise also, various judicial precedents have been cited before us laying down the ratio that no disallowances under section 40A(3) of the Act can be made where seller of agricultural land insisted on payment in cash. Thus, applying the legal principles enunciated in the judicial precedents cited before us, we hold that the disallowance made under section 40A(3) of the Act is unsustainable. Accordingly, we delete it.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned cross appeals arise out of order dated 12.02.20 18 of learned Commissioner of Income Tax (Appeals)-4, New Delhi, pertaining to assessment years 20 14-15.
2. The effective grounds raised by the assessee are as under:
