Itta/262/2014 Of M/S.progressive Constructions Ltd v. Joint Commissioner Of Income Tax

THE HON’BLE SRI JUSTICE RAMESH RANGANATHANANDTHE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHYINCOME TAX TRIBUNAL APPEAL No.262 of 2014 JUDGMENT:(per Hon’ble Sri Justice Ramesh Ranganathan) This appeal, under Section 260-A of the Income Tax Act, 1961(for brevity, ‘the Act’), has been preferred against the order of theIncome Tax Tribunal in I.T.A.No.575/Hyd/01 for the assessment year1997-98. The appellant is a civil contractor. For the assessment year1997-98, the assessing authority passed an assessment order on30.03.2000 disallowing the following three payments: (1) payment toworks contractor (Banaganapally site)-Rs.1,92,80,325/-; (2) paymentto works contractors (Paruchuri site)-Rs.17,45,000/-; and (3) paymentto material suppliers (Paruchuri site)-Rs.71,52,612/-. The assessingauthority held that these payments were made to sub-contractors whowere shown to have executed works at Banaganapally and Paruchurii.e. Madhucon Projects Limited (Banaganapally), Sharada Constructions Limited (Banaganapally), B.D.Rao Constructions Company(Banaganapally), and Sharada Constructions (Paruchuri); theassessee had made payments, to M/s B.D.Rao ConstructionsCompany, by cheques drawn on State Bank of India, Banaganapally;from the ledger of Banaganapally it was clear that the assessee had abank account in Andhra Bank, and in State Bank of Hyderabad,Nandyal during the relevant previous year; the claim of the assesseethat there was no banking facility at Banaganapally was factuallyincorrect; as such the affidavit filed by the Managing Director of theassessee that no banking facility existed at Banaganapally, and othersites, was merely a self-serving document which could not be reliedupon; his enquiries revealed that M/s Madhucon Projects Limited had a bank account in State Bank of Hyderabad, Nandikotkur which was near the Banaganapally site; theclaim of the assessee, that no banking facility existed atBanaganapally, was far from the truth; with regards payments toSharada Constructions, and material suppliers also, banking facilitiesexisted both near the Banaganapally site and the Paruchuri site; thebank account, in the ledger of Banaganapally site and Paruchuri site ofthe books of accounts of the assessee, showed that there were aseries of banking transactions; accepting the assessee’s contention would require a banking facility to be available at the work spot itself;that was not the intention of the Legislature while incorporating Rule6 DD in the Income Tax Rules, 1962 (for brevity, ‘the Rules’); Rule 6DD was applicable only if there was no banking facility in theimmediate vicinity i.e. at a nearby town or a village where the workwas being executed; the assessee’s contention, that no bankingfacility existed at the concerned sites, was not correct, and thepayments in question were not covered by the exceptions provided inRule 6 DD of the Rules. The assessing authority examined the circumstances underwhich payments were made. He noted that the payments were allmade in advance to the assessee; and, subsequently, they were adjusted against the ‘work done’. The assessing authority further heldthat there was no practical difficulty or unavoidable circumstance,much less an exceptional unavoidable circumstance, which warrantedcash payments being made in violation of Section 40-A (3) of the Act;the assessee was neither new to the business nor to the payees, oreven to the provisions of the Act; both the assessee and the payeeswere regular businessmen, and had bank accounts where thepayments were made; and it was difficult to believe that the paymentsin question were made in extenuating circumstances. Aggrieved by the order of the assessing authority, the petitionercarried the matter in appeal to the Commissioner of Income Tax(Appeals) (“CIT(A)” for short) who, by his order dated 21.03.2001, set Aggrieved by the order of the assessing authority, the petitionercarried the matter in appeal to the Commissioner of Income Tax(Appeals) (“CIT(A)” for short) who, by his order dated 21.03.2001, set aside the order of the assessing authority on this score. The CIT (A)held that Rule 6DD would apply if (1) the place at which the paymentwas made was not served by any bank; and (2) the person to whomthe payment was made, ordinarily, resided or carried on business atthe place; in the present case, the payments in question were madeat the village, or the place of work, where there was no bankingfacility; that position was clear from the evidence produced beforehim; the same was accepted in the earlier assessments; it could notbe disputed that the piece rate contractors, to whom the paymentswere made, normally resided at the worksite as they carried on theiractivities there; similarly, the labourers always reside at the worksite;payments in such cases could not have been made otherwise thanthrough cash; the piece rate contractors, and the labour, who reside atthe worksite, required payment to be made in cash and, therefore, theappellant had to make payment in cash; the assessing authority wasnot correct in his observation as, in this case, there was no bankingfacilities in any nearby town; in certain cases, payment to materialsuppliers was made through demand drafts; this showed that theappellant had made payment at the worksite, and cash payments hadto be made when the material suppliers/labourers demanded cashpayment; in his opinion, the payments in question were squarelycovered by Rule 6 DD; and they had to be excluded from the purview of Section40-A (3) of the Act. Against the order of the CIT (A), the Joint Commissioner ofIncome Tax (Assessment) carried the matter in appeal to the IncomeTax Appellate Tribunal (“ITAT” for short). In the order under appealbefore us, the ITAT noted the explanation of the assessee, withregards the subject payment, that payments were made at the worksites which were not served by banking facilities during the year; theCIT (A) had ignored that there was a branch of the State Bank of Indiaat Banaganapally, and the works contractors had their bank accounts either at Banaganapally or at Paruchuri; he had also ignored thatpayments through cheques were made to the works contractors onseveral occasions; the assessing authority had also observed thatmost of the payments, were advance payments which were lateradjusted against the bills raised; according to him no unavoidable orexceptional circumstances existed, or were shown to have existed, forpayments to be made in cash; the CIT (A) had considered affidavitsfrom the Managing Director of the assessee company, a certificatefrom the Executive Engineer, Banaganapally site, and a letter fromKonkan Railway Corporation Limited, to the effect that there were nobanking facilities at the concerned places; the CIT (A) had alsoaccepted the explanation that the material suppliers were paidthrough demand drafts, and held that the payments in question werecovered by Rule 6 DD of the Rules; the assessing authority had givena categorical finding that State Bank of India had a branch atBanaganapally, and had also given the account code of the bank asshown in the ledger; no concrete evidence was placed on record todisprove this finding; in the light of this fact, the affidavit of theManaging Director cannot be given weightage; the CIT (A) had totallyignored this finding, and had accepted whatever the assessee hadstated; while works may be going on at several sites, and some of thesites may be at a far distance from the bank, it had also to beconsidered that the assessee did not suffer total disallowance; theyhad suffered only 20% disallowance; no exceptional circumstanceswere shown by the assessee for making payments in cash; and therewas no justification, in the order of the CIT (A), for deleting thedisallowance. The disallowance, in respect of the three payments,made to works contractors and material suppliers, was restored bythe ITAT. Before us Sri Challa Gunaranjan, learned counsel for theappellant, would reiterate the very same contentions which were urged, on behalf of the appellant, before the ITAT. Learned counselwould further submit that the ITAT has not considered the fact that anaffidavit was filed by the Managing Partner of the appellant; thefindings of the CIT(A) should not have been perfunctorily brushedaside by the ITAT; Rule 6 DD should be given a wide and liberalconstruction; the letter submitted by the Managing Director of theassessee should have sufficed; and these issues stand concluded bythe judgment of the Supreme Court. In Attar Singh Gurmukh Singh[1]v. Income Tax Officer; and this Court in Sri Laxmi Satyanarayana Oil Mill v. Commissioner of Income Tax[[2]]. Sri Challa Gunaranjan,learned counsel for the appellant, would fairly state that no appeal hasbeen preferred to this Court, against the order of the ITAT, for thesubsequent assessment year 1998-99. Before examining the aforesaid contentions, it is necessary torefer to Section 40-A (3) of the Act and Rule 6 DD of the Rules. Section 40-A (3) of the Act provides that,where the assessee incurs expenditure in respect of which a paymentor aggregate of payments made to a person in a day, otherwise thanby account payee cheque drawn on a bank or account payee bankdraft, exceeds twenty thousand rupees, no deduction shall be allowedin respect of such expenditure. Rule 6 DD of the Rules stipulates that no disallowance, under sub-Section (3) of section 40-A of theAct, shall be made, and no payment shall be deemed to be the profitsand gains of business or profession under sub-section (3) of section40-A of the Act where a payment or aggregate of payments made to aperson in a day, otherwise than by an account payee cheque drawn ona bank or account payee demand draft, exceeds twenty thousandrupees in the cases and circumstances specified hereunder, namely:- “ (g) Where payment is made in a village ortown, which on the date of such payment is not servedby any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, inany such village or town”. As has been noted by the CIT (A) himself, the said Ruleapplies where (1) the place at which the payment is made is notserved by any bank; and (2) the person, to whom the payments wasmade, ordinarily resides or carries on business at the place. Theassessing authority held that Banaganapally was served by a branchof the State Bank of India, and has also noted its account number. TheCIT (A) has completely ignored this finding of the assessing authority,and has merely relied on an affidavit filed by the Managing Director ofthe appellant to the contrary. In the said affidavit, and in the otherdocuments filed by the appellant, it was contended that there was no branch of any bank available near the worksite. These self-servingaffidavits and certificates, as has been rightly noted by the ITAT, arecontrary to the findings recorded by the assessing authority that abranch of the State Bank of India existed at Banaganapally. The ITAThas rightly reversed the finding of the CIT (A) and restored the orderof the assessing authority concurring with the finding that thereexisted a branch of the State Bank of India at Banaganapally. Reliance placed by Sri Challa Gunaranjan, Learned Counsel for1the appellant, on Attar Singh Gurmukh Singh is misplaced. In thesaid judgment, the Supreme Court observed: “………..As to the validity of section 40A(3), itwas urged that, if the price of the purchased materialis not allowed to be adjusted against the sale price ofthe material sold for want of proof of payment by acrossed cheque or a crossed bank draft, then theincome-tax levied will not be on the income but it willbe on an assumed income. It is said that the provisionauthorizing levy of tax on an assumed income wouldbe a restriction on the right to carry on business,besides being arbitrary. Reliance placed by Sri Challa Gunaranjan, Learned Counsel for1the appellant, on Attar Singh Gurmukh Singh is misplaced. In thesaid judgment, the Supreme Court observed: “………..As to the validity of section 40A(3), itwas urged that, if the price of the purchased materialis not allowed to be adjusted against the sale price ofthe material sold for want of proof of payment by acrossed cheque or a crossed bank draft, then theincome-tax levied will not be on the income but it willbe on an assumed income. It is said that the provisionauthorizing levy of tax on an assumed income wouldbe a restriction on the right to carry on business,besides being arbitrary. In our opinion, there is little merit in thiscontention. Section 40A(3) must not be read inisolation or to the exclusion of rule 6DD. Thesection must be read along with the rule. If read together, it will be clear that the provisions are notintended to restrict the business activities. Thereis no restriction on the assessee in his tradingactivities. Section 40A(3) only empowers theAssessing Officer to disallow the deductionclaimed as expenditure in respect of whichpayment is not made by crossed cheque orcrossed bank draft. The payment by crossedcheque or crossed bank draft is insisted on toenable the assessing authority to ascertainwhether the payment was genuine or whether itwas out of the income from undisclosed sources.The terms of section 40A(3) are not absolute.Considerations 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 assessee tofurnish to the satisfaction of the Assessing Officerthe circumstances under which the payment in themanner prescribed in section 40A(3) was notpracticable or would have caused genuinedifficulty to the payee. It is also open to theassessee to identify the person who has receivedthe cash payment. Rule 6DD provides that anassessee can be exempted from the requirementof payment by a crossed cheque or crossed bankdraft in the circumstances specified under therule. It will be clear from the provisions of section40A(3) and rule 6DD that they are intended to regulatebusiness transactions and to prevent the use ofunaccounted money or reduce the chances to useblack money for business transactions…..” (emphasis supplied). As has been held by the Supreme Court, in the aforesaidjudgment, considerations of business expediency, and other relevantfactors, are not excluded; genuine and bona fide transactions aretaken out of the sweep of Section 40-A(3) of the Act; it is open to the assessee to furnish, to thesatisfaction of the assessing authority, the circumstances under whichpayment, in the manner prescribed in Section 40-A(3) of the Act, wasnot practicable or would have caused genuine difficulty to the payee;and it was open to the assessee to identify the cash payees who hadreceived the cash payment. It was always open to the assessee toproduce evidence before the assessing authority, or before the ITAT, to show that the circumstances were such as to have disabled themfrom making payment in the manner prescribed in Section 40-A(3) ofthe Act, or that it would have caused genuine difficulty to the payee.The only contention urged before the assessing authority, by way ofthe affidavits of the Managing Director and others, was that nobanking facility existed near the site. This was rightly disbelieved bythe assessing authority and the ITAT, both of whom have noted thatthere existed a branch of the State Bank of India at Banaganapally. to show that the circumstances were such as to have disabled themfrom making payment in the manner prescribed in Section 40-A(3) ofthe Act, or that it would have caused genuine difficulty to the payee.The only contention urged before the assessing authority, by way ofthe affidavits of the Managing Director and others, was that nobanking facility existed near the site. This was rightly disbelieved bythe assessing authority and the ITAT, both of whom have noted thatthere existed a branch of the State Bank of India at Banaganapally. The Central Board of Direct Taxes (CBDT) circular dated31.05.1977 stipulates that it would, generally, satisfy the requirementof Rule 6DD of the Rules if a letter is produced in respect of eachtransaction falling within the aforesaid categories from the seller givingfull particulars of his address, S.T.No./PAN, if any for the purpose ofproper verification; and the ITO should record his satisfaction beforeallowing the benefit of rule 6DD of the Rules. It is not even theappellant’s case that a letter was produced from the payee furnishingdetails of all the aforesaid particulars. Reliance placed by Sri Challa Gunaranjan, learned counsel forthe appellant, on Sri Laxmi Satyanarayana Oil Mill[3 ]is alsomisplaced. In the said case, payments were made, for purchase ofgroundnut, in cash as the seller had not only insisted on cashpayment, but also gave incentives, such as the facility of paymentwithin one week, discount etc. This Court also found that there existedsome justification for the traders, at the relevant point of time, ininsisting on payment of the amounts in cash; the reason was that thebanking activity was not that prominent and popular, and instances ofcheques issued by agencies or persons, in the course of business,being bounced were not infrequent; and the delay, in receiving theconsideration for any material supplied by a trader, would have its owncascading effect on the business activities. It is not even thepetitioner’s case that cash payments were insisted upon by the payee or that they did not have a bank account. As noted by the assessingauthority, all these contractors had bank transactions with theassessee despite which the assessee had made payment in cash. It must also be borne in mind that the jurisdiction which thisCourt exercises, under Section 260-A of the Act to entertain anappeal, is only if it is satisfied that it involves a substantial question oflaw. While a perverse finding, or a finding based on no evidence,would constitute a substantial question of law, it is not even urged onbehalf of the appellant that the findings recorded by the ITAT sufferfrom perversity or are based on no evidence. It is not even theappellant’s case that the ITAT had failed to take into considerationrelevant material or had failed to eschew irrelevant material. Nosubstantial question of law arises for consideration in this appeal. It isalso necessary to note that this appeal has been preferred only for theassessment year 1997-98, though the Joint Commissioner hadpreferred appeals, against the order of the CIT (A) for both theassessment years 1997-98 and 1998-99, and a common order waspassed by the ITAT for both the assessment years. As the only contention urged before us is on the disallowance ofpayment made under Section 40-A(3) of the Act, and as no substantialquestion of law arises for consideration, the Appeal fails and is,accordingly, dismissed. The miscellaneous petitions pending, if any,shall also stand disposed of. There shall be no order as to costs. ______________________________ RAMESH RANGANATHAN, J __________________________________ M.SATYANARAYANA MURTHY, J [1](1991) 191 ITR 0667(1991) 191 ITR 0667[2](2014) 367 ITR 200 (AP)(2014) 367 ITR 200 (AP)