D.b. Income Tax Appeal v. Income Tax Officer

D.B. INCOME TAX APPEAL NO.04/2002(Smt. Harshila Chordia Vs. Income Tax Officer) Date of order : 7.11.2006 HON'BLE MR. JUSTICE RAJESH BALIAHON'BLE MR. JUSTICE GOPAL KRISHAN VYAS Mr. Anjay Kothari, for the appellant.Mr. K.K. Bissa, for the respondent. This appeal at the instance of assessee isdirected against the order of the Income Tax AppellateTribunal, Jodhpur Bench, Jodhpur dated 31.1.2002arising out of IT Appeal No.45/(jdpr)/2000 forassessment year 1993-94. The assessee was appointed as sub-dealer ofM/s. Ganesh Automobiles, Udaipur for the sale of BajajScooters and Mopeds in the region. The questions ashave been framed at the time of admission of theappeal read as follows :- (1)Whether the Tribunal was justified inholding that addition of Rs.40,13,000/- u/s40A (3) of the Act was wrongly deleted bythe learned CIT (Appeals) for A.Y. 1993-94and the case was not covered by theexceptions to S.40A (3) contained in Rule6DD of the IT Rules, 1962 ?holding that addition of Rs.40,13,000/- u/s40A (3) of the Act was wrongly deleted bythe learned CIT (Appeals) for A.Y. 1993-94and the case was not covered by theexceptions to S.40A (3) contained in Rule6DD of the IT Rules, 1962 ? (2)whether the Tribunal was justified inholding that the addition of Rs.6,98,000/-on account of peak of cash credits wasjustified in the facts and circumstances ofthe case whereas the sale of scooters andfact of collection of cash against sale ofscooters from the customers and the paymentof such cash to the selling dealer M/sholding that the addition of Rs.6,98,000/-on account of peak of cash credits wasjustified in the facts and circumstances ofthe case whereas the sale of scooters andfact of collection of cash against sale ofscooters from the customers and the paymentof such cash to the selling dealer M/s Ganesh Automobiles, Udaipur was not indoubt ? (3)Whether the provisions of S.40A(3) of theAct read with Rule 6DD were at allapplicable to the purchase of goods viz.Scooters and whether the terms 'Deductionfor expenditure' in the scheme of S.40A(3)is applicable to the purchase of very goodsfor the business on a harmonious reading ofthe scheme of the Act for computation ofincome under the head Income from Businessor profession u/s 28 to 43 of the Act ?]Act read with Rule 6DD were at allapplicable to the purchase of goods viz.Scooters and whether the terms 'Deductionfor expenditure' in the scheme of S.40A(3)is applicable to the purchase of very goodsfor the business on a harmonious reading ofthe scheme of the Act for computation ofincome under the head Income from Businessor profession u/s 28 to 43 of the Act ?] The aforesaid three questions read togethergive a picture that the principal question which fallsfor consideration is that assessee has made certainpayments of sale price of scooters/mopeds, whichexceeded in each case Rs.10,000/- to the principalagent M/s. Ganesh Automobiles, Udaipur in cash insteadof through crossed cheques or Bank Draft and his casefell under Section 40A (3) of the Income Tax Act, 1961and such payments in cash exceeding Rs.10,000/- weredisallowed as deduction from purchases of mopeds/BajajScooters. The Income-tax Officer has held that therewere no exceptional circumstances falling under Rule 6DD existed which could avoid the consequences of theprovisions of Section 40A (3). The CIT (Appeals) on appeal found in favourof the assessee that such circumstances did exist.The CIT (appeals) found that as per the assessee'sexplanation he had opened a Bank account at Udaipurwhere the principal Dealership existed with clearstipulation with the dealer that the remittances of The CIT (Appeals) on appeal found in favourof the assessee that such circumstances did exist.The CIT (appeals) found that as per the assessee'sexplanation he had opened a Bank account at Udaipurwhere the principal Dealership existed with clearstipulation with the dealer that the remittances of the cash received by him from the customers of suchdealer will be paid firstly in the Bank account of theassessee. Singed cheque book was given to theprincipal dealer so that he could get payment ofpurchase price from the assessee through cheques withhim by withdrawing the amount of sale price from Bank.The CIT (appeals) also found that assessee was only topurchase the vehicles from the principal agent as asub-dealer and he has no option to buy the vehiclesfrom other dealers. In these circumstances, the CIT(appeals) was of the opinion that assessee hasdischarged its burden and additions should not besustained on technical ground, if the principal dealerhas retained cash payment with him without routing itthrough assessee's bank account at Udaipur, wheneversuch situation has arisen. On appeal before the Income Tax AppellateTribunal by the revenue, the Tribunal found that inthis case the assessee has proved that the paymentsare made to the seller and the identity of the payeehas also been proved but the assessee is not in aposition to prove the existence of exceptional andunavoidable circumstances which would have causedgenuine difficulty to the payee in terms of Rule 6DDand sustained the additions made by the assessingofficerunderSection40A(3)amountingtoRs.40,13,000/-. The principal reason which weighedwith the Tribunal in discarding the explanation furnished by the assessee notwithstanding the factsthat he was receiving the cash from his customerssending it to the principal dealer and he was requiredto deposit in the Bank and make the payments throughcheques when signed cheque book was already deliveredto him, which was not found to be factually incorrectpremise, solely on the ground that the case of theassessee did not fall in any of the clauses enumeratedin the Circular issued by the Central Board of DirectTaxes about the Explanatory Note appended to Clause(j) was to operate as it was existing at the relevanttime. The Tribunal has said that the purchaser wasnot new to the seller; the transactions were made atthe place where the assessee had Bank account as hehas opened the Bank account at Udaipur; thetransactions were not made on the Bank Holiday andtherefore, case for exceptional circumstance is notmade out. In our opinion, perusing the provisions ofSection 40A (3) along with Rule 6 DD and ExplanatoryNote contained in the Circular issued by the CentralBoard of Direct Taxes, which binds all the authoritiesunder the Act, shows that the Tribunal has been ledaway by considering enumeration of instances in theCircular in which the provisions of Clause (j) underRule 6DD would operate to be exhaustive of suchcircumstances and had not been properly understood,its implication. In our opinion, perusing the provisions ofSection 40A (3) along with Rule 6 DD and ExplanatoryNote contained in the Circular issued by the CentralBoard of Direct Taxes, which binds all the authoritiesunder the Act, shows that the Tribunal has been ledaway by considering enumeration of instances in theCircular in which the provisions of Clause (j) underRule 6DD would operate to be exhaustive of suchcircumstances and had not been properly understood,its implication. It may be pertinent to notice that primaryobject of enacting Section 40A (3) in its originalincarnation was twofold firstly putting a check ontrading transactions with a mind to evade theliability to tax on income earned out of suchtransaction and secondly to inculcate the bankinghabits amongst the business community. Theconsequence which was provided was to disallow ofdeduction of such payments/expenses which were notthrough Bank either by crossed cheques or by DemandDraft or by pay order. This provision has beensubsequently amended. Apparently, this consequencewas directly related to curb the evasion of tax andinculcating the banking habits. Therefore, theconsequence, which befell on account of nonobservation of Sub-section (3) of Section 40A musthave nexus to the failure of such object. Therefore,the genuineness of the transactions and it being freefrom vice of any device of evasion of tax is relevantconsideration which has been overlooked by theTribunal. In this connection, the judgment of Hon'bleSupreme Court which needs to be noticed is in case ofCommercial Tax Officer & Ors. Vs. Swastik Roadways &anr., reported in (2004) 3 SCC 640. The consequenceof non-compliance of certain provisions of MadhyaPradesh Sales Tax Act, which were intended to check the evasion and avoidance of sales tax weresignificantly harsh. The Court while upholding itsconstitutional validity negated the existence of amensrea as a condition necessary for levy of penaltyfor non-compliance with such technical provisionsrequired held that “in the consequence to follow theremust be nexus between the consequence that befall fornon-compliance of such provisions intended forpreventing the tax evasion with the object ofprovision before the consequence can be inflicted uponthe defaulter.” The Supreme Court has opined that theexistence of nexus between the tax evasion by theowner of the goods and the failure of C&F agent tofurnish information required by the Commission isimplicit in Section 57 (2) and the Assessing Authorityconcerned has to necessarily record a finding to thiseffect before levying penalty under Section 57 (2). Of course, present is not a case of levy ofpenalty but the requirement of law to be followed bythe assessee was of as technical nature as was in thecase of Swastik Roadways (supra) and the consequenceto fall for failure to observe such norms in thepresent case are much higher than which wereprescribed under the MP Sales Tax Act. Apparently, itis a relevant consideration for the assessingauthority under the Income Tax Act that beforeinvoking the provisions of Section 40A (3) in thelight of Rule 6DD as clarified by Circular of Central Board of Direct Taxes that whether the failure on thepart of the assessee in adhering to requirement ofprovisions of Section 40A (3) has any such nexus so asto invite such a consequence. This is particularly so, because theconsequence provided under Section 40A (3) for failureto make payments through Bank is not absolute in termsnor automatic but exceptions have been provided andleverage has been left for little flexing by making ageneral provision in the form of Clause (j) in Rule6DD, which reads as under : Board of Direct Taxes that whether the failure on thepart of the assessee in adhering to requirement ofprovisions of Section 40A (3) has any such nexus so asto invite such a consequence. This is particularly so, because theconsequence provided under Section 40A (3) for failureto make payments through Bank is not absolute in termsnor automatic but exceptions have been provided andleverage has been left for little flexing by making ageneral provision in the form of Clause (j) in Rule6DD, which reads as under : “Clause (j) of rule 6DD provides that nodisallowance under section 40A (3) shall bemade where the assessee satisfies theIncome-tax Officer that the payment couldnot be made by way of a crossed cheque drawnon a bank or by a crossed bank draft; a.duetoexceptionalorunavoidable circumstances; or b.because payment in the manneraforesaid was not practicable, or wouldhave caused genuine difficulty to thepayee, having regard to the nature ofthe transaction and the necessity forexpeditious settlement thereof, and also furnishes evidence to thesatisfaction of the Income-tax Officeras to the genuineness of the payment andthe identity of the payee.” This clause raised many doubts and enquiriesas to what shall constitute an exceptional and unavoidable circumstances within the meaning of clause(j) and that led to issuance of Circular by the Boardon 31.5.1977, which is published in Taxmann, Vol. 1,1988 Edition. Significantly para-4 of the aforesaidCircular shows very clearly that all the circumstancesin which the conditions laid down in Rule 6DD (j)could be applicable cannot be spelt out. However,some of them which will seem to meet the requirementsof the said Rule are as follows : a.the purchase is new to the seller; or b. the transactions are made at a placewhether either the purchaser or the sellerdoes not have a bank account; or c.the transactions and payments are madeon a bank holiday; or d.the seller is refusing to accept thepayment by way of crossed cheque/draft andthe purchaser's business interest wouldsuffer due to non-availability of goodsotherwise than from this particular seller;or e.the seller, acting as a commissionagent, is required to pay cash in turn topersons from whom he has purchase the goods;or f.specific discount is given by theseller for payment to be made by way ofcash. It was further clarified in para 6 that theabove circumstances are not exhaustive butillustrative. Therefore, in our opinion, the Tribunal was clearly in error in not travelling beyond thecircumstances referred to in para-4 of the Circularand to consider the explanation submitted by theassessee on its own merit. Significantly para-5 reproduced hereinbelowgives a clear indication that clause 6DD (j) has to beliberally constituted and ordinarily where thegenuineness of the transaction and the payment andidentity of the receiver is established, therequirement of rule 6DD (j) must be deemed to havebeen satisfied. Para-5 of the Circular reads asunder : “5.It can be said that it would,generally, satisfy the requirement of rule6DD (j), if a letter to the above effect isproduced in respect of each transactionfalling within the categories listed abovefrom the seller giving full particulars ofhis address, sales tax number/permanentaccount number, if any, for the purposes ofproper identification to enable the Income-Tax Officer to satisfy himself about thegenuineness of the transaction. TheIncome-tax Officer will, however, recordhis satisfaction before allowing thebenefit of rule 6DD (j).” It appears that fulfillment of the conditionsof para 5 of the Circular has clearly escaped theattention of the Tribunal. The Circular clearlyindicates that ordinarily where the Income-tax Officeris satisfied about the genuineness of the transactionand payment and identification of the cash payment is It appears that fulfillment of the conditionsof para 5 of the Circular has clearly escaped theattention of the Tribunal. The Circular clearlyindicates that ordinarily where the Income-tax Officeris satisfied about the genuineness of the transactionand payment and identification of the cash payment is established, the Income-tax Officer shall record hissatisfaction about the fulfillment of the conditionsfor allowing the benefit of Rule 6DD (j). Apparently,Section 40A (3) was intended to penalize the taxevader and not the honest transactions and that is whyafter framing of Rule 6 DD (j), the Board stepped intoissuing the aforesaid Circular. This clarification, in our opinion, is inconformity with the aforesaid principle enunciated bythe Supreme Court in Commercial Tax Officer & Ors. Vs.Swastic Roadways & Anr., reported in (2004) 3 SCC 640.In this case, there is no dispute about genuineness ofthe transactions and the payment and identity of thereceiver are established. Therefore, the case clearlyfell within the parameters of para-4 and 5 of theaforesaid Circular. Moreover, the list of circumstances statedunder para 4 of the Circular being not exhaustive, interms of the Tribunal's own finding that the assesseewas receiving payments in cash from his customers atKankroli and was to get delivery of vehicles fromUdaipur and he has opened a bank account to facilitatethe quick transfers of money from Bank to its dealerto satisfy the conditions of Section 40A (3) and thathe has left the signed cheque book also in possessionof the dealer so that the cash is transmitted in theassessee's bank account and he could receive the payments through cheques, which are not disputed, itis apparent that the assessee has done all which hewas required to do and it is not the finding of theTribunal that the assessee was purchasing the vehiclesfrom Udaipur and carrying them to Kankroli for thepurposes of delivering them to its buyers. On thecontrary, the modus operandi of the assessee wasaccepted by the Tribunal while considering thequestion of the cash credit that deposit of eachreceipt of the cash money from its customersseparately was not conducive to the type of thebusiness which the assessee was running. Moreover,the assessee and the Principal dealer had stuck a wayout by opening a bank account at Udaipur so thatneither the payment to principal dealer is delayedbecause of the bank middleman nor the assessee wasrequired to deposit every receipt from his customersand then draw a cheque and send it to the principaldealer. The one significant factor which is notdisputed and which is found to be correct that theassessee was to receive his supplies from theprincipal dealer who was situated at Udaipur and thedealing was from buyer to buyer. Therefore, makingthe prompt payments to dealer, the cash considerationreceived from end purchaser and getting delivery ofvehicles for such purchaser by payment ofconsideration received from him to principal dealerwas the modus operandi. In these circumstances, we are of the opinionthat the conclusion reached by the CIT (Appeals) wascorrect and the Tribunal by ignoring the scope ofClause (j) of Rule 6 DD as explained by the Board'sCircular has erred in reversing the finding reached bythe CIT (Appeals) on hyper-technical view. We,therefore, allow this appeal and set aside the orderof the Tribunal to the extent it sustains theadditions of Rs.40,13,000/- under Section 40A (3). In these circumstances, we are of the opinionthat the conclusion reached by the CIT (Appeals) wascorrect and the Tribunal by ignoring the scope ofClause (j) of Rule 6 DD as explained by the Board'sCircular has erred in reversing the finding reached bythe CIT (Appeals) on hyper-technical view. We,therefore, allow this appeal and set aside the orderof the Tribunal to the extent it sustains theadditions of Rs.40,13,000/- under Section 40A (3). So far as question No.2 is concerned,apparently when the Tribunal has found as a fact thatthe assessee was receiving money from the customers inhands against the payment on delivery of the vehicleson receipt from the dealer the question of such amountstanding in the book of accounts of the assessee wouldnot attract Section 68 because the cash depositsbecomes self explanatory and such amount was receivedby the assessee from the customers against which thedelivery of the vehicle was made to the customers.The question of sustaining the addition ofRs.6,98,000/- would not arise. We, therefore, hold that no addition wasrequired to be made in respect of Rs.6,98,000/-, whichwas found to be the cash receipts from the customersand against which delivery of vehicle was made to them. Question No.2 relates to the directions given by the Tribunal for adjustment of Rs.6,98,000/- foundin para-36 to be part of unexplained cash credits inbooks of accounts of the assessee by the comparativereading of audited and unaudited books of accounts.However, we find that while a categorical finding hasbeen reached in para No.36 and 23. The Tribunal hascuriously found that while re-payment of the aforesaidamount after 31.12.1991 would not affect the peak ofcash credit but this amount is liable to be consideredwhile considering the assessee's explanation by theassessing officer to whom the issue about the receiptof cash money from the customers and the delivery ofthe vehicles against such receipts has been remandedback. In our opinion, the two findings arecontradictory in terms, if Rs.6,98,000/- could formthe part of consideration received from the customersand paid to the dealer M/s. Ganesh Automobiles, itcould not form the part of the unexplained cashcredit. Therefore, the finding in respect ofRs.6,98,000/- should necessarily depend upon theoutcome of the consideration to be made by the ITO inpursuance of the directions issued by the Tribunal andcannot be outrightly rejected at this stage and tothat extent the order of the Tribunal is set aside andultimate decision in that respect would depend on theconsideration by the ITO about the issue relating tothe unexplained cash credit in the light of theTribunal's order. Until then no additions in respectof Rs.6,98,000/- or lesser amount can be sustained. arun Accordingly, while we set aside theTribunal's order to the extent it sustains additionsof Rs.40,13,000/-, we modify the directions of theTribunal relating to deleting Rs.6,98,000/- as part ofthe cash credit and hold that it should also be partof consideration by the ITO in respect of otherunexplained cash credit unembellished by anyobservation made in that regard. No costs. (GOPAL KRISHAN VYAS), J. (RAJESH BALIA), J.