D.b. Income Tax Appeal v. M/S Shree Salasar Overseas (P) Ltd., B-14 Heera Nagar Ganga Jamuna Crossing, Shipra Path, Mansarovar, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 250 / 2017 Principal Commissioner Of Income Tax-I, New Central revenue Building, Statue Circle, Jaipur (Raj.) ----Appellant Versus M/S Shree Salasar Overseas (P) Ltd., B-14 Heera Nagar Ganga jamuna Crossing, Shipra Path, Mansarovar, Jaipur ----Respondent/Assesseeconnected with Commissioner of Income Tax-I New central Revenue Building,statue circle, Jaipur (Raj.) ----Appellant M/S Shree Salasar Overseas (P) Ltd., B-14, Heera Path, GangaJamuna Crossing, Shipra Path Corner, Mansarovar, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi For Respondent(s) : Mr. Siddharth Ranka _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 04/10/2017 1.By way of these appeals, the appellants havechallenged the judgment and order of the Tribunal whereby theTribunal has allowed the appeal of the assessee and dismissed theappeal of the department. 2.This Court while admitting the ITA No.250/2017 on18.09.2017, framed following substantial question of law:- “Whether the Tribunal was justified confirming thedeletion of addition of Rs.1,65,50,000/- ignoring thespecific provisions of Section 40A (3) of the Act,ignoring that the said expenses was incurred in cashwere not failing with the exceptions provided underRule 6Dd of the Income Tax Rules?” 3.This Court while admitting ITA No.146/2014 on 29.04.2016, framed following substantial question of law:- “(iv) whether the Tribunal was justified in reversingthe order of CIT(A) as well as Assessing Offuicerand thereby deleting the addition of Rs.19,05,000/-,ignoring the specific provisions of 40A(3) of the Act,ignoring that the said expenses was incurred in cashand were not falling within the exceptions providedunder Rule 6DD of the Income Tax Rules?” 4.In view of the decision in ITA No.45/2012, Commissioner of Income Tax-Central Vs. M/s. ACE India AbodesLtd., decided on 11.09.2017 observed as under:- “1.By way of this appeal, the appellant haschallenged the judgment of the Tribunal wherebythe Tribunal has allowed the appeal filed by theassessee. 2.This Court while admitting the appeal on19.03.2012, framed the following substantialquestions of law:- “I.Whether in the facts and circumstances ofthe case the Tribunal was justified in deletingthe addition of Rs.1,89,21,509/- andRs.53,85,000/- confirmed by the CIT(A) onaccount of cash payment being made for anexpenditure in violation of Section 40A (3) forpurchasing stock in trade by the assessee? II.Whether in the facts and circumstances ofthe case the Tribunal was justified in holdingthat the provisions of Section 40A (3) wouldnot apply on expenditure for stock in trade,being land in the present case, ignoring thejudgment of Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO?” 3.The assessee is engaged in the business ofpurchase/sale and development of land and colonies.Servey u/s 133A of the Act was carried out at theassessee’s premises on 24.08.2006, during which itwas revealed that the assessee has purchased landfrom various persons for which it has paidconsideration in cash also and the said purchase wasshown as expenditure being stock in trade of theassessee. The Assessing Officer accordinglydisallowed an amount of Rs.1,89,21,509/- underSection 40A (3) of the Act, which provides fordisallowance of 20% for the expenditure exceedingRs.20,000/- if incurred in cash. 4.The CIT(A) confirmed the same order,observing as under:- case of Attar Singh Gurmukh Singh vs. ITO?” 3.The assessee is engaged in the business ofpurchase/sale and development of land and colonies.Servey u/s 133A of the Act was carried out at theassessee’s premises on 24.08.2006, during which itwas revealed that the assessee has purchased landfrom various persons for which it has paidconsideration in cash also and the said purchase wasshown as expenditure being stock in trade of theassessee. The Assessing Officer accordinglydisallowed an amount of Rs.1,89,21,509/- underSection 40A (3) of the Act, which provides fordisallowance of 20% for the expenditure exceedingRs.20,000/- if incurred in cash. 4.The CIT(A) confirmed the same order,observing as under:- “4.2 The submission of A.R. has already beenconsidered by the undersigned as discussed inearlier paragraphs and it has been held thatpayment made by the appellant in cash inexcess of Rs.20,000/- attracts the provisions ofSection 40A(3) and the case of the appellant isnot covered in the exception provided in rule6DD in view of the facts and circumstances ofthe case and the legal position on the issueunder consideration. Considering that the factand circumstances related to these furthernoticed cash payments by the undersigned aresame as for the other cash payments held to becovered under Section 40A (3), these furthernoticed cash payments are also held to becovered under Section 40A(3) requiringdisallowance of 20% out of these furthernoticed cash payments of Rs.2,69,28,892/-.Accordingly, disallowance is enhanced byRs.53,85,778/-.” 5.However, considering the matter, theTribunal held as under:- “11. We have heard rival submission andconsidered them carefully. After considering thesubmissions and various case laws, we are ofthe view that assessee deserves to succeed inits appeal on the ground that no expenditurehas been claimed in the year underconsideration in the Profit & Loss account and, therefore, no disallowance can be made undersection 40A(3). First, we would like to see theprovisions of section 40A(3) which are asunder:- ”40A(3) Where the assessee incurs any expenditurein respect of which a payment or aggregate ofpayments made to a person in a day, otherwisethan by an account payee cheque drawn on a bankor account payee bank draft, exceeds twentythousand rupees, no deduction shall be allowed inrespect of such expenditure.” “11. We have heard rival submission andconsidered them carefully. After considering thesubmissions and various case laws, we are ofthe view that assessee deserves to succeed inits appeal on the ground that no expenditurehas been claimed in the year underconsideration in the Profit & Loss account and, therefore, no disallowance can be made undersection 40A(3). First, we would like to see theprovisions of section 40A(3) which are asunder:- ”40A(3) Where the assessee incurs any expenditurein respect of which a payment or aggregate ofpayments made to a person in a day, otherwisethan by an account payee cheque drawn on a bankor account payee bank draft, exceeds twentythousand rupees, no deduction shall be allowed inrespect of such expenditure.” After going through the above provisions, it is seenthat where any expenditure has been incurred incash then in that case no deduction will be allowed.Assessee has not claimed any deduction on accountof purchase of land which was shown in stock-in-trade. The ld. CIT(A) by placing heavy reliance onthe decision of Hon’ble Apex Court in case of AttarSingh Gurmukh vs. ITO, 191 ITR 667 (SC) has heldthat once an item has been shown in closing stockthen it has to be presumed that assessee hasclaimed expenditure. However, in the said decisionof Hon’ble Apex Court it is seen that the Hon’bleSupreme Court has observed that the value of stockin trade has to be taken into account whiledetermining the gross profits under section 28 onprinciples of commercial accounting. The ration isnot applicable on the facts of the present case asassessee has not claimed any expenditure andthere is no gross profit earned by essessee. Neitherany trading account was drawn as assessee has notclaimed any expenditure. Land was purchased andexpenditure on purchase of land was incurred, theywere shown in asset side and whatever the amountwas received on account of booking of plot that wasshown in liability side. Copy of balance sheet wasfiled before AO as well as before ld. CIT (A) and itwas clearly mentioned that assessee has notclaimed any expenditure on account of purchase ofland. The ld. CIT (A) has also observed in his orderthat assessee has not prepared any trading accountand, therefore, he has not shown the expenditureclaimed but has shown the land in stock-in-tradeand in view of principles of accountancy anypurchases of stock-in-trade has to be treated asclaimed in the trading account. In our view theseobservations of ld. CIT (A) are not correct asassessee has not claimed any expenditure. Sinceentire land was shown in asset side in the BalanceSheet and advance received was shown in liabilityside as advance, therefore, in our view there wasno trading during the year under cosideration. 11.1 It is also a well settled proposition in law thatthe entries in the books of account are notdetermined in nature to hold that any expenditurehas been claimed or not as held by Hon’bleSupreme Court in case of Jute Corporation of India.Therefore, merely on the basis of entries in thebooks of account it cannot be determined thatassessee has claimed any expenditure. Theassessee has shown Nil income and same has beenaccepted by the AO also. Therefore, we are of theview that since no expenditure was claimed duringthe year under consideration, therefore, provisionsof section 40A(3) cannot be attracted. 12. In case of CIT vs. Balaji Engineering andConstruction Works, 323 ITR 351 (Kar.), the Hon’bleKarnataka High Court has held that where theassessee being a principal contractor had passed onthe amount to the sub-contractor, such amountcould not be treated as an expenditure as the samewas not claimed in its Profit & Loss account. 12. In case of CIT vs. Balaji Engineering andConstruction Works, 323 ITR 351 (Kar.), the Hon’bleKarnataka High Court has held that where theassessee being a principal contractor had passed onthe amount to the sub-contractor, such amountcould not be treated as an expenditure as the samewas not claimed in its Profit & Loss account. 13. The facts in this case were that the assesseewas a civil contractor who entrusted work to a sub-contractor and payment of Rs. 37,17,788/- weremade to sub-contractor. The AO disallowed thesame by holding that expenditure paid by way ofcash was contrary to section 40A(3) of the Act. Theld. CIT(A) as well as the Tribunal held that it wasnot an expenditure claimed by assessee but it was apayment made to sub-contractor pursuant to anagreement. On appeal, as stated above, the Hon’bleKarnataka High Court affirmed the view of theTribunal. 14. This ratio of Hon’ble Karnataka High Court canbe applied on the facts of the present case as in thiscase also no expenditure has been claimed by theassessee in its Profit & Loss account. Language ofsection 40A(3) is very clear where it is providedthat no deduction will be allowable if anyexpenditure has been incurred in cash. 15. We further noted that the Board had occasion todeal with several representations from variousChambers of Commerce, trade associations andbusinessmen regarding the scope of provisions ofsection 40A(3) of the IT Act, 1961, and Rule 6DD ofIT Rules, 1962. Since many of the points raisedtherein were of an important nature, theclarifications thereon was issued by the Board byCircular No. 33 dated 29.12.1969 wherein it wasclarified that the provisions of section 40A(3) wouldapply in computing the income under the headProfits and Gains of business or profession, whereany expenditure has been incurred. The Board circular supports the case of the assessee asassessee has not claimed any expenditure onaccount of purchase of agricultural land fromfarmers under the head Profits and Gains ofbusiness or profession. 16. In view of the above facts and circumstances,we hold that since assessee has not claimed anyexpenditure, therefore, no disallowance can bemade during the year under consideration. 17. Even on alternate contention of assessee thatpayments were made to various farmers in villageswhere no bank facilities were available, we find thatassessee deserves to succeed on this alternatecontention in part. Except payments to three partiesi.e. Shri Vedvrat Sharma at Rs. 2,21,20,000/-,Mehla Real Estate Pvt. Ltd. At Rs. 3,57,13,900/-,and to Shri Chordia at Rs. 2,85,00/- which has beenmade in cash. They are residents of Jaipur.Therefore, provisions of section 40A(3) can beapplied on these payments. However, in case ofother parties, provisions of sections 40A(3) cannotbe applied as they are residing in villages where nobanking facilities were available. 18. Similar issue came up before the Tribunal incase of M/s Rishabhdev Township & Developers P.Ltd. The Tribunal while deciding the appeal of thedepartment in ITA No. 181/JP/2010 vide its orderdated 29.4.2011 has held as under:- 18. Similar issue came up before the Tribunal incase of M/s Rishabhdev Township & Developers P.Ltd. The Tribunal while deciding the appeal of thedepartment in ITA No. 181/JP/2010 vide its orderdated 29.4.2011 has held as under:- “7. After considering thesubmissions and perusing the material on record,we find no infirmity in the finding of ld. CIT (A). Thedepartment is in appeal and if they want to verifywhether there is a branch in village Ballupura or notcan be verified at any point of time which they havenot done. It will be just futile exercise in sendingthe matter back to the file of AO to just satisfyhimself by giving him opportunity. The exceptionprovided under Rule 6DD(g) is very clear by it isprovided that where the payment is made in avillage or town, which on the date of such paymentis not served by any bank, to any person whoordinarily resides, or is carrying on any business,profession or vocation, in any such village or town,then no disallowance can be made under section40A(3). In fact, the ld. CIT (A) has mentioned subclause (h) whereas the correct clause is 6DD(g).The ld. Counsel of the assessee has madestatement at Bar that there is no bank branch invillage Ballupura at the time of purchase of the landfrom various sellers. It was also submitted by ld.A/R that normally the villagers paid in cash at thetime of entering into agreement and sale deed is completed at a later stage wherein they haveagreed to receive the amount from the assesseeeither in cash or cheque as the case may be. Thiscontention of the ld. Counsel of the assesseeremained uncontroverted, therefore, we see noreason to interfere with the finding of ld. CIT (A)and held that ld. CIT (A) was right in deleting thedisallowance made by AO under section 40A(3).” 19. Similar view has been expressed by the Tribunalin case of PACL India Ltd., 3 8 DTR 1(JP) alsowherein it has been held as under:- completed at a later stage wherein they haveagreed to receive the amount from the assesseeeither in cash or cheque as the case may be. Thiscontention of the ld. Counsel of the assesseeremained uncontroverted, therefore, we see noreason to interfere with the finding of ld. CIT (A)and held that ld. CIT (A) was right in deleting thedisallowance made by AO under section 40A(3).” 19. Similar view has been expressed by the Tribunalin case of PACL India Ltd., 3 8 DTR 1(JP) alsowherein it has been held as under:- “Clause (h) of r. 6DD takes out of the purview of s.40A(3) such cash payment which is made in avillage or town which is not served by any bank toany person who ordinarily resides or is carrying onany business in such village or town. There is nodispute that the sellers of the land are villagersengaged in farming activities and are residing atplaces and are carrying on farming activities atplaces which are not served by any bank and suchsellers have no bank accounts anywhere. It hasbeen emphatically argued on behalf of theappellant-company that all apyments were made atthe villages prior to registration of the sale. Thissubmission cannot be outrightly rejected. Normally,illiterate poor farmers would insist on cashpayments, especially when such payments involvehuge amounts, at the place of their residence forthe simple reason that they would like to avoid therisk of receiving cash at the town where the sale isto be registered and which may be far away fromthe village and such csh has to be carried back bythem to the village. It is common knowledge thatthe seller has to confirm before the Sub-Registrarthat full payment has been received by him. At thesame time, the Sub-Registrar satisfies himselfabout the identify of the seller to ensure that thepayment has been made to the right person. Fortthe sake of convenience, in the receipt the place ismentioned as the town where the document isregistered. The AO has not made any effort toexamine any of the sellers to verify as to whetherthe payments were received at the villages or at thetown. Considering the entire facts the propositionthat the payments were made at villages wherebanking facilities did not exist is accepted. Even if itis assumed that payments were made at a townwhere banking facilities were available, the case ofthe appellant-company would still fall under theexception of r.6DD. Rule 6DD(h) has to beinterpreted liberally so as not to frustrate the objectof the legislature. The object of s. 40A(3) is not todisallow genuine payments and the r. 6DD has to be interpreted keeping in view the object of the mainprovision. The second proviso to s. 40A(3) refers to“the nature and extent of banking facilitiesavailable, considerations of business expediencyand other relevant factors”, which means that theobject of the legislature is not to make disallowanceof such cash payments which have to becompulsorily made by the assessee in view ofabsence of banking facilities at the place ofpayment. In the present case, even if it is assumedthat the payment was made at the Districtheadquarter, the admitted position is that thesellers did not have any bank accounts at such townand they did not reside or carry on any business orfarming activity at such town. It would be too muchto expect that the appellant company would be ableto compel the villagers to open bank accounts atthe town which ultimately they will not be able tooperate as they do not reside at such town. If sucha myopic view is taken regarding the interpretationof r. 6DD(h), the very object to the legislaturewould be frustrated. There is no dispute regardingthe identity of the payee and the genuineness ofthe land transactions in respect of which paymentshave been made. It is notable that r. 6DD(k)provides an exception in respect of cash paymentwhich is made on a day on which the banks wereclosed. This proves that the object of the legislatureis to provide exception in respect of such paymentwhich is required to be made in cash or absence ofbanking facilities. Rule 6DD(h) must be interpretedkeeping in view this object and purpose. Therefore,the cash payments recovered under Section provisoto s. 40A(3) and rs. 6DD(h). The AO is directed todelete the addition of Rs. 1,60,69,350/- sustainedby the CIT (A)”. While holding so, the Tribunal has taken intoconsideration cases of M/s P.Pravin & Co.,274 ITR534 (Guj.), Hasanand Pijomal, 112 ITR 134 (Guj.),Venkata Satyanarayana Timber Depot, 165 ITR 253(AP) and Chaudhary & Co.,217 ITR 431 (ALL).20. While deciding this issue, the id. CIT(A) has taken into consideration the decision ofHon’ble Gujarat High Court in case of HasanandPinjormal (supra). In this case also it has been heldthat where payment has been made in villages, theprovisions of Section 40A(3) cannot be applied.While holding so, the Tribunal has taken intoconsideration the genuineness of the paymentmade by assessee that even on account ofgenuineness of he payment disallowance should notbe made under Section 40(A) (3). The Id.CIT(A)has rejected both the contentions of assessee that payments were made in villages and amount ofpayment was genuine. Since both these issues havealready been decided by the Tribunal in abovestated cases, therefore, on account of paymentmade to villagers in the villages, provisions ofSection 40A(3) are not applicable as held by theTribunal above. Since we have allowed the issuetoto in favour of the assessee by holding that noexpenditure can be disallowed under section 40A(3)as assessee has not claimed any expenditure in itsprofit & loss account, therefore, we hold that evenpart disallowance cannot be made on account ofpayment made to the parties residing in Jaipur.Accordingly, we delete the entire disallowancesustained by id. CIT(A).” 6.Counsel for the respondent has relied uponthe following decisions:- 1. Attar Singh Gurmukh Singh vs. ITO - [1991]ITR 667 (SC) observed as under : “The terms of section 40A(3) are not absolute .Consideration of business expediency and otherrelevant factors are not excluded. Genuine andbona fide transactions are not taken out of thesweep of the section . It is open to the assesseeto furnish to the satisfaction of the AssessingOfficer the circumstances under which thepayment in the manner prescribed in section40A(3) was not practicable or would havecaused genuine difficulty to the payee. 2. Hotel Nagas Pvt. Ltd. vs. CIT [2016] 69taxman.com 438 (Mad.) observed as under : 6.Counsel for the respondent has relied uponthe following decisions:- 1. Attar Singh Gurmukh Singh vs. ITO - [1991]ITR 667 (SC) observed as under : “The terms of section 40A(3) are not absolute .Consideration of business expediency and otherrelevant factors are not excluded. Genuine andbona fide transactions are not taken out of thesweep of the section . It is open to the assesseeto furnish to the satisfaction of the AssessingOfficer the circumstances under which thepayment in the manner prescribed in section40A(3) was not practicable or would havecaused genuine difficulty to the payee. 2. Hotel Nagas Pvt. Ltd. vs. CIT [2016] 69taxman.com 438 (Mad.) observed as under : “Therefore, if as rightly observed by theTribunal in paragraph 4 of its order, the purposeof Section 40A(3) is to discourage cashtransactionsleadingtocirculationofunaccounted money, then, the same may notnormally happen before the Sub Registrar at thetime of registration of documents, as thepayments made at that time get recordedofficially.[Para 22] All the three authorities have failed toappreciate that when a vast extent ofagricultural lands is purchased from several persons, especially in villages, it is not possibleto expect the villagers to accept the saleconsideration by way of crossed account payeecheque or bank draft. Therefore, so long as thepayees are identified and the genuineness of thetransaction is not questioned and so long as thepayments have been made at the time ofregistration in the presence of the Sub Registrar,the case would fall under the exceptionsprovided in Clause (j) of Rule 6DD. This positionhas also been clarified by Circular No. 220,dated 31-5-1977. [Para 23]” 3. CIT vs. Chaudhary and co. [1996] 217 ITR431 (Allahabad) observed as under : The object of section 40A(3) of the Income TaxAct, 1961, is that a fictious amount should notbe claimed as revenue expenditure. Theintention of section 40A(3) was not that cashpayment can never be allowed as a deduction.The terms of section 40A(3) are not absolute. 4. Walfare Transport v/s CIT (240 ITR 902) &CIT vs. Chrome Leather (235 ITR 708) observedas under : Where a transaction was found to be genuineand the identity of the payee was established, aliberal view of compelling and mitigatingcircumstances should be taken. 5. CIT vs. Raja Pal Automobiles [2010] (320 ITR185 (All.)) observed as under: Where Tribunal had held that assessee had fullyexplained details of payment made in cash,entire evidence in form of bills, cash memos,etc., had also been furnished by assessee, andlooking into business of assessee and alsonature of items purchased, it could not bedisputed that assessee had to make payments incash under unavoidable and exceptional circumstances, Tribunal was justified in deletingdisallowance under section 40A(3). 6. Harshila Chordia vs. CIT [2008] 298 ITR 349(Raj) observed as under: Where genuineness of transaction and identityof payee were established and explanation ofassessee for making cash remittances wasacceptable in the light of modus operandi ofassessee’s business, payments in cash could notbe disallowed. 7. Sri Laxmi Satyanarayana Oil Mill v. CITobserved as under: “Whether since assessee had placed proof ofpayment of consideration for its transaction toseller, and later admitted payment and therewas no doubt about genuineness of payment, nodisallowance could be made under section40A(3). 8. Gurdas Garg v. CIT [2015] 63 taxman.com289 (Punjab & Haryana) observed as under: circumstances, Tribunal was justified in deletingdisallowance under section 40A(3). 6. Harshila Chordia vs. CIT [2008] 298 ITR 349(Raj) observed as under: Where genuineness of transaction and identityof payee were established and explanation ofassessee for making cash remittances wasacceptable in the light of modus operandi ofassessee’s business, payments in cash could notbe disallowed. 7. Sri Laxmi Satyanarayana Oil Mill v. CITobserved as under: “Whether since assessee had placed proof ofpayment of consideration for its transaction toseller, and later admitted payment and therewas no doubt about genuineness of payment, nodisallowance could be made under section40A(3). 8. Gurdas Garg v. CIT [2015] 63 taxman.com289 (Punjab & Haryana) observed as under: “Section 40A(3) of the Income Tax Act, 1961,read with rule 6DD of the Income Tax Rule, 1962– Business disallowance – Cash paymentexceeding prescribed limits (genuineness oftransactions) - During assessment proceedingsAssessing Officer noted that assessee, who wasengaged in trading in properties, made certaintransactions in cash in excess of Rs.20,000/-and disallowed same under section 40A(3) –Whether since genuineness of said transactionshad not been disbelieved by the authoritiesbelow, it made out a case of businessexpediency and could not be disallowed u/s40A(3) - Held, yes [paras 4,5,6,7,8,9 and 10][in favour of assessee] 9. Anupam Tele Services v. ITO [2014] 43taxman.com 199 (Gujarat) observed as under: “Section 40A(3) of the Income Tax Act, 1961,read with rule 6DD of the Income Tax Rules, 1962 – Business disallowance – Cash paymentexceeding prescribed limit (rule 6DD (j) -Assessment year 2006-07 – Assessee wasworking as an agent of Tele Services Limited fordistributing mobile cards and rechrgae vouchers -Principal company Tata insisted that chequepayment from assessee’s co-operative Bankwould not do, since realisation took longer timeand such payment should be made only in cash intheir bank account – If assessee would not makecash payment and make cheque payments alone,it would have received recharge vouchers delaydby 4/5 days which would severely affect itsbusiness operation – Assessee, therefore, madecash payment – Whether in view of above, nodisallowance u/s 40A(3) was to be made inrespect of payment made to principal - Held, yes[ paras 21 to 23] 10. CIT V/s Balaji Engineering [2010] 323 ITR351 (Karnataka) observed as under: “The assessee who was a civil contractor, afterobtaining a contract from the Governmententrusted the work to a sub contractor. Accordingto him, on the total cost of project, the assesseewas entitled to 1 per cent commission forhaving transferred his right in favour of the sub-contractor. According to the assessee, though ithad received the payments form theGovernment, 99 per cent of the amount hadbeen passed to the sub-contractor in cash andtherefore, the said amount had to be consideredas an amount paid to the sub-contractor by theassessdee. The contention of the assessee wasrejected by the Assessing Officer on the groundthat, since the amount was paid in cash the samehad to be considered as an expenditure and theassessee was not entitled to claim any deduction.The Tribunal as well as the Commissioner(Appeals) on facts held that it was not anexpenditure claimed by the assessee, but it wasa payment made to the sub-contractor pursuantto an agreement. Held that, both the authorities,on facts, had held that as the assessee being aprincipal contractor had passed on the amount to the sub-contractor, such amount, could not betreated as an expenditure. Thus, section 40A(3)could not be said to be attracted to suchpayment in cash.” the sub-contractor, such amount, could not betreated as an expenditure. Thus, section 40A(3)could not be said to be attracted to suchpayment in cash.” 7.The transactions which has taken place arestock in trade and villagers paid the amount in cash.Such transaction may not be allowed but neverthelessdiscussed by the Gujrat High Court (supra) which wasfollowed by Tribunal in case of PACL India Ltd., 38DTR 1 (JP) in Para 19, reads as under :- “19.Similar view has been expressed by theTribunal in case of PACL India, Ltd., 38 DTR 1 (JP)also wherein it has been held as under :Tribunal in case of PACL India, Ltd., 38 DTR 1 (JP)also wherein it has been held as under : “ Clause (h) of r.6DD takes out of the purview of s. 40A(3)such case payment which is made in a village or town which Isnot served by any bank to any person who ordinarilyresides or is carrying on any business in such village or town.There is no dispute that the sellers or the land are villagersengaged in farming activities and are residing at places andare carrying on farming activities at places which are notserved by any bank and such sellers have no bank accountsanywhere. It has been emphatically argued on behalf of theappellant-company that all payments were made at thevillages prior to registration of the sale. This submissioncannot be outrightly rejected. Normally, illiterate poorfarmers would insist on cash payments, especially whensuch payments involve huge amounts, at the place of theirresidence for the simple reason that they would like to avoidthe risk of receiving cash at the town where the sale is to beregistered and which may be far away from the village andsuch cash has to be carried back by them to the village. It iscommon knowledge that the seller has to confirm before theSub-Registrar the full payment has been received by him. Atthe same time, the Sub-Registrar satisfies himself about theidentity of the seller to ensure that the payment has beenmade to the right person. For the sake of convenience, in thereceipt the place is mentioned as the town where thedocument is registered. The AO has not made any efforts toexamine any of the sellers to verify as to whether thepayments were received at the villages or at the town.Considering the entire facts the proposition that thepayments were made at villages where banking facilities didnot exist is accepted. Even if it is assumed that paymentswere made at a town where banking facilities were available, the cash of the appellant-company would still fall under theexceptions of r.6DD . Rule 6DD(h) has to be interpretedliberally so as not to frustrate the object of the legislature.The object of section 40A(3) is not to disallow genuinepayments and the r.6DD has to be interpreted keeping inview of the object of the main provision. The second provisoto s. 40A(3) refers to “the nature and extent of bankingfacilities available, considerations of business expediencyand other relevant factors,” which means that the object ofthe legislature is not to make disallowance of such cashpayments which have to be compulsorily made by theassessee in view of absence of banking facilities at the placeof payment. In the present case, even if it assumed that thepayment was made at the District headquarter, the admittedposition is that the sellers did not have any bank accounts atsuch town and they did not reside or carry on any businessor farming activity at such town. It would be too much toexpect that the appellant-company would be able to compelthe villagers to open bank accounts at the town whichultimately they will not be able to operate as they do notreside at such town. If such a myopic view is taken regardingthe interpretation of r.6DD(h), the very object of thelegislature would be frustrated. There is no dispute regardingthe identity of the payees and the genuineness of the landtransactions in respect of which payments have been made.It is notable that r.6DD(k) provides an exception in respect ofcash payment which is made on a day on which the bankswere closed. This proves that the object of the legislature isto provide exception in respect of such payment which isrequired to be made in cash or absence of banking facilities.Rule 6DD(h) must be interpreted keeping in view this objectand purpose. Therefore, the cash payments recoveredunder section proviso to s. 40A(3) and r.6DD(h). The AO isdirected to delete the addition of Rs.1,60,69,350/- sustainedby the CIT(A)”.” While holding so, the Tribunal has taken intoconsideration cases of M/s P. Pravin & Co. 274 ITR 534(Guj.), Hasanand Pinjomal, 112 ITR 134 (Guj.), VenkataSatyanarayana Timber Depot, 165 ITR 250 (AP) andChaudhary & Co., 217 ITR 431 (All.)” 8.Taking above into consideration, the issueis answered in favour of the assessee and against thedepartment. 9The appeal stands dismissed.” 5.Issue is required to be answered in favour of assessee. 6.The appeals are dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Chouhan/60