Principal Commissioner Of Income Tax v. M/S.sumukha Synthetics, Race Course Mansion, 2[Nd] Floor, 8/1-M, Race Course, Coimbatore – 641 018

In the High Court of Judicature at Madras Dated : 08.09.2020Orders reserved onOrders pronounced on31.08.2020 08.09.2020 Coram : The Honourable Mr.Justice T.S.SIVAGNANAMand The Honourable Mrs.Justice PUSHPA SATHYANARAYANA Tax Case Appeal No.759 of 2018 Principal Commissioner of Income Tax 1,63, Race Course Road,Coimbatore – 641 018....Appellant/RespondentVs M/s.Sumukha Synthetics,Race Course Mansion,2[nd] Floor, 8/1-M, Race Course,Coimbatore – 641 018PAN: AAXFS3967M ...Respondent/Appellant APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 16.03.2018 in ITA No.1176/Chny/2017 onthe file of the Income Tax Appellate Tribunal Chennai 'C' Benchfor the assessment year 2005-06 and against the order of theCommissioner of Income Tax (Appeals)-2, Coimbatore dated27/02/2017 in ITA No.50/15-16 and against the order of theAssistant Commissioner of Income Tax, Non Corporate, Circle-2,Coimbatore dated 28/03/2015 in PA No.GIR No.AAXFS3967M. For Appellant : Mr.T.R.Senthil Kumar Senior Standing Counsel Assisted by M/s.K.G.Usha Rani Junior Standing CounselFor Respondent : Mr.Rahul Balaji Assisted by M/s.Janani Shankar This appeal by the assessee filed under Section 260A of theIncome Tax Act, 1961 (“the Act” for brevity), is directedagainst the order dated 16.03.2018 in ITA No.1176/Chny/2017 onthe file of the Income Tax Appellate Tribunal Chennai 'C' Benchfor the assessment year 2005-06. 2.The appeal was admitted on 16.12.2019 on the followingsubstantial questions of law: “1.Whether the Appellate Tribunal is correctin holding that the assessee is entitled forallowable expenditure u/s.40A(3) even though thetransaction undertaken by the assessee was incontravention of section 40A(3) of the Income TaxAct? 2.Whether the Tribunal was right in holdingthe decision of the Hon'ble Supreme Court in thecase of Attar Singh Gurumukh Singh as applicablein the assessee's case without appreciating thatthe decision was with reference to Rule 6DD(j)which was omitted w.e.f. 01.04.1996?” 3.The assessee is a partnership firm filed its return ofincome for the relevant assessment year AY 2005-06 on 31.03.2005declaring a total income of Rs.23,29,830/-. The assessment wascompleted under Section 143(3) of the Act. The Commissioner ofIncome Tax exercised his power under Section 263 of the Act onthe ground that certain payments made by the assessee toM/s.Sitalakshmi Mills Ltd. ['M/s.SLM' for brevity] towardsconversion charges paid by cash were omitted to be disallowedunder Section 40A(3) of the Act. After hearing the assessee,the Commissioner set aside the assessment order and directed theAssessing Officer to make fresh assessment after considering theapplicability of Section 40A(3) of the Act. On such direction,the Assessing Officer made an addition of Rs.61,32476/- underSection 40A(3) being 20% of total cash payment ofRs.3,06,62,382/-. Aggrieved by the same, the assessee preferredappeal to the Commissioner of Income Tax (Appeals)[CITA(A)]which was dismissed. The assessee challenged the said orderbefore the Tribunal which set aside the order passed by the CIT(A) and directed to re-examine the issue of disallowance underSection 40A(3) and whether the assessee is entitled forexemption under Rule 6DD in respect of payments made in cash.Pursuant to such direction, the Assessing Officer passed anorder on 28.03.2015 under Section 143 r/w. 254 of the Act andsustained the addition. Aggrieved by the same, the assesseepreferred appeal before the CIT(A) which was dismissed by order dated 27.02.2017. Challenging the same, the assessee preferredappeal before the Tribunal which was allowed by the impugnedorder. Aggrieved by the same, the revenue is before us by wayof an appeal. dated 27.02.2017. Challenging the same, the assessee preferredappeal before the Tribunal which was allowed by the impugnedorder. Aggrieved by the same, the revenue is before us by wayof an appeal. 4.We have elaborately heard Mr.T.R.Senthilkumar, learnedsenior standing counsel assisted by Mr.K.G.Usharani, learnedjunior standing counsel appearing for the appellant, Mr.RahulBalaji, learned counsel assisted by M/s.Janani Shankar, learnedcounsel appearing for the respondent and carefully perused thematerials placed on record. 5.The question which falls for consideration is whether thedisallowance under Section 40A(3) of the Act as made by theAssessing Officer is sustainable and the extent of applicabilityof Rule 6DD of the Income Tax Rules. For better appreciation,Section 40A(3) and Rule 6DD are quoted herein below: “Section 40A(3): Where the assessee incurs anyexpenditure in respect of which a payment oraggregate of payments made to a person in a day,otherwise than by an account payee cheque drawn on abank or account payee bank draft, or use ofelectronic clearing system through a bank account[or through such other electronic mode as may beprescribed], exceeds ten thousand rupees, nodeduction shall be allowed in respect of suchexpenditure.” Rule 6DD: No disallowance under sub-section (3)of section 40A shall be made and no payment shall bedeemed to be the profits and gains of business orprofession under sub-section (3A) of section 40Awhere a payment or aggregate of payments made to aperson in a day, otherwise than by an account payeecheque drawn on a bank or account payee bank draftexceeds twenty thousand rupees in the cases andcircumstances specified hereunder, namely:- (a) where the payment is made to- (i) the Reserve Bank of India or any bankingcompany as defined in clause 9c0 of section 5 of theBanking Regulation act, 1949 (10 of 1949)(ii) the State Bank of India or any subsidiarybank as defined in section 2 of the State Bank ofIndia (Subsidiary Banks) Act, 1959 (38 of 1959)(iii) any co-operative bank or land mortgagebank (iv) any primary agricultural credit society orany primary credit society as defined under section56 of the Banking Regulation Act, 1949 (10 of 1949)(v) the Life Insurance Corporation of India established under section 3 of the Life InsuranceCorporation Act, 1956 (31 of 1956); (b) where the payment is made to the Governmentand under the rules framed by it, such payment isrequired to be made in legal tender; (c) where the payment is made by- (i) any letter of credit arrangements through abank;(ii) a mail or telegraphic transfer through abank;(iii) a book adjustment from any account in abank to any other account in that or any other bank;(iv) a bill of exchange made payable only to abank;(v) the use of electronic clearing systemthrough a bank (vi) a credit card; (vii) a debit card. Explanation: For the purposes of this clause andclause (g), the term “bank” means any bank, bankingcompany or society referred to in sub-clauses (i) to(iv) of clause (a) and includes any bank [not beinga banking company as defined in clause (c) ofsection 5 of the Banking Regulation Act, 1949 (10 of1949)], whether incorporated or not, which isestablished outside India; (d) where the payment is made by way ofadjustment against the amount of any liabilityincurred by the payee for any goods supplied orservices rendered by the assessee to such payee;(e) where the payment is made for the purchaseof- (i) agricultural or forest produce; or (ii) the produce of animal husbandry (includinglivestock, meat, hides and skins) or dairy orpoultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower of such articles,produce or products; (d) where the payment is made by way ofadjustment against the amount of any liabilityincurred by the payee for any goods supplied orservices rendered by the assessee to such payee;(e) where the payment is made for the purchaseof- (i) agricultural or forest produce; or (ii) the produce of animal husbandry (includinglivestock, meat, hides and skins) or dairy orpoultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower of such articles,produce or products; (f) where the payment is made for the purchaseof the products manufactured or processed withoutthe aid of power in a cottage industry, to theproducer of such products; (g) where the payment is made in a village ortown, which on the date of such payment is not https://hcservices.ecourts.gov.in/hcservices/ served by any bank, to any person who ordinarilyresides, or is carrying on any business, professionor vocation, in any such village or town; (h) where any payment is made to an employee ofthe assessee or the heir of any such employee, on orin connection with the retirement, retrenchment,resignation, discharge or death of such employee, onaccount of gratuity, retrenchment compensation orsimilar terminal benefit and the aggregate of suchsums payable to the employee or his heir does notexceed fifty thousand rupees; (i) where the payment is made by an assessee byway of salary to his employee after deducting theincome-tax from salary in accordance with theprovisions of section 192 of the Act, and when suchemployee— (i)is temporarily posted for a continuous periodof fifteen days or more in a place other than hisnormal place of duty or on a ship; and (ii)does not maintain any account in any bank atsuch place or ship; (j) where the payment was required to be made ona day on which the banks were closed either onaccount of holiday or strike; (k)where the payment is made by any person tohis agent who is required to make payment in cashfor goods or services on behalf of such person; (l) where the payment is made by an authoriseddealer or a money changer against purchase offoreign currency or travellers cheques in the normalcourse of his business. Explanation:- For the purposes of this clause,the expressions “authorised dealer” or “moneychanger”means a person authorised as an authoriseddealer or a money changer to deal in foreigncurrency or foreign exchange under any law for thetime being in force. In terms of the above provision, the assessee is prohibitedfrom effecting cash payments over and above Rs.20,000/-. Rule6DD states that no disallowance under Sub-section (3) of Section40A shall be made and no payment shall be deemed to be theprofits and gains of business or profession under sub-section(3A) of section 40A where a payment or aggregate of paymentsmade to a person in a day, otherwise than by an account payeecheque drawn on a bank or an account payee bank draft exceedsRs.20,000/- in the case and circumstances specified in clauses https://hcservices.ecourts.gov.in/hcservices/ (a) to (l) of Rule 6DD. In terms of the above provision, the assessee is prohibitedfrom effecting cash payments over and above Rs.20,000/-. Rule6DD states that no disallowance under Sub-section (3) of Section40A shall be made and no payment shall be deemed to be theprofits and gains of business or profession under sub-section(3A) of section 40A where a payment or aggregate of paymentsmade to a person in a day, otherwise than by an account payeecheque drawn on a bank or an account payee bank draft exceedsRs.20,000/- in the case and circumstances specified in clauses https://hcservices.ecourts.gov.in/hcservices/ (a) to (l) of Rule 6DD. 6.It is the argument of the revenue that none of thecontingencies mentioned in clauses (a) to (l) in Rule 6DD areattracted in the instant case. Further, it is submitted thatthe Assessing Officer rightly held that the decision in th caseof Attar Singh Gurumukh Singh vs. ITO [(1991) 191 ITR 667] isnot applicable to the facts and circumstances of the casebecause the Punjab National Bank had directed M/s.SLM toimmediately close their account with the State Bank of India,Sivagangai and all transactions should be routed through theiraccount in their bank. It is submitted that this direction wasissued because M/s.SLM had been declared as a sick industry inthe year 1999, Punjab National Bank was appointed as anoperating agency and the said Company was under a scheme ofrehabilitation and in the path of recovery. Therefore, it issubmitted that it is not as if there is no banking facilityavailable to bring the case of the assessee within the ambit ofproviso under sub-section (3) of Section 40A nor it can beconsidered as a business expediency nor there are any otherrelevant factors to justify such huge payments in cash. Therevenue placed reliance on the decision in the case of CIT,Madurai vs. Venkatadhri Constructions [(2013) 31 taxmann.com 71(Madras)], P.K.Ramasamy Nadar & Bros. vs. Income Tax Officer,Ward-I(3), Virudhunagar [(2014) 41 taxmann.com 538 (Madrs)],Natesan Krishnamurthy vs. ITO, Non-Corporate Ward 9(2), Chennai[(2019) 103 taxmann.com 342(Madras)], N.Mohammed Ali vs. ITO,Ward-VII(2), Chennai [(2016) 65 taxmann.com 189(Madras)] and CitVS. A.D.Jayaveerapandia Nadar & Sons [(2007) 162 taxmann 195 (Madras)]. 7.These decisions have been relied on by the revenue forthe proposition that even though Section 40A(3) is not absolute,payments made in cash cannot automatically be allowed merely forthe reason that payments were made to a person who isidentifiable, more particularly, when the cash payments wereeffected to avoid the attachment of the bank account of M/s.SLMat the instance of the Employees State Insurance Corporation,Madurai. These decisions have also been relied on to state thatthe reason assigned by the assessee cannot be a businessexpediency nor as the assessee brought the circumstances to be arelevant factor to be considered in terms of the proviso undersub-section (3A) of Section 40A. The assesee seeks to resistthe appeal by contending that there is no substantial questionof law involved in the present appeal and the Tribunalconsidered the facts and circumstances and granted relief to theassessee which does not warrant any interference. The decisionin Attar Singh Gurumukh Singh was rightly applied by theTribunal as in the said case while testing the vires of Section 40A(3), the Hon'ble Supreme Court has explained the reasonbehind the introduction of the said provision and has held thatwhere the payment is genuine there cannot be denial of deductionof genuine and bonafide business expenditure merely because theassessee could not make the payment as provided under Section40A(3) of the Act. The learned counsel for the assessee placedreliance on the decision in the case of Walford Transport(Eastern India) Ltd. vs. Commissioner of Income Tax [(1999) 240ITR 902][Para 10], CIT vs. Rhydburg Pharmaceuticals Ltd. [(2004)269 ITR 561][Para 2]. Further it is argued that Rule 6DD of theRules merely sets out the circumstances under which the assesseecan claim exemption provided under Section 40A(3) and it isillustrative and not exhaustive in this regard and reliance wasplaced on the decision in the case of CIT vs. Chrome Leather Co.Pvt. Ltd. [(1999) 235 ITR 708][Para 8] and Giridharlal Goenkavs. CIT [Para 14]. 8.Further it is submitted that there is adequate evidenceto prove that the assessee was compelled to make cash paymentfor the conversion work undertaken by M/s.SLM as it had incurredexpenditure for restructuring its machinery to enable to caterto the need of the assessee and maintain quality. The learnedcounsel also distinguished the decisions relied on by therevenue and submitted that the transaction was genuine andbonafide in nature which are very relevant to test the conductof the assessee. After carefully going through the decisionscited at the Bar, the underlying legal principle which emergesfrom all these decisions is the the satisfaction which has to berecorded by the Assessing Officer as regards the conduct of theassessee in effecting cash payments over and above the amountsstipulated under Section 40A(3) of the Act. In terms of thefirst proviso under Section 40A(3A), it is the assessee who hasto set out the circumstances which led to effect payment in cashin excess of the amounts stipulated in Section 40A(3) and thisexplanation needs to be tested having regard to the nature andextent of banking facilities, consideration of businessexpediency and other relevant facts. The Hon'ble Division Benchin Chrome Leather Co. Pvt. Ltd. was testing the correctness ofthe order passed by the Tribunal holding that the assessee inthe said case was not entitled to any relief from the order ofthe Assessing Officer who disallowed its claim under Section 40A(3). After referring to the decision in Attar Singh GurumukhSingh, it is held as follows:“7.Mr. Janarthana Raja, learned counsel forthe assessee, on the other hand, submitted that theTribunal has come to the conclusion that theprovisions of rule 6DD of the Income-tax Rules weresatisfied and the Tribunal has come to theconclusion that the provisions of rule 6DD of theIncome-tax Rules were fully complied with and, hence, it is not open to the Revenue to challengethe finding of fact by the Appellate Tribunal. hence, it is not open to the Revenue to challengethe finding of fact by the Appellate Tribunal. 8.We have considered the rival contentions.The provisions of section 40A(3) of the Income-taxAct along with rule 6DD of the Income-tax Rulesdeal with the subject of payment made by theassessee in cash and not by cheque or draft formore than the prescribed amount. The constitutionalvalidity of the provisions of section 40A(3) of theIncome-tax Act was the subject-matter ofconsideration before the Supreme Court in the caseof Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR667, and the Supreme Court, after considering theobject of the section held that the payment bycrossed cheque or crossed bank draft is insistedupon to enable the assessing authority to ascertainwhether the payment was genuine or whether it wasout of income from undisclosed sources. The SupremeCourt also held that consideration of businessexpediency and other relevant factors are notexcluded in examining the applicability of theprovisions of section 40A(3) of the Income-tax Act.Genuine and bona fide transactions, as held by theSupreme Court, are not taken out of the sweep ofthe section, and it is open to the assessee tofurnish to the satisfaction of the AssessingOfficer the circumstances under which the paymentin the manner prescribed under section 40A(3) wasnot practicable or would have caused genuinedifficulty to the payee. The Supreme Court alsoheld that it is open to the assessee to identifythe person who has received the cash payment. It isrelevant to notice that rule 6DD of the Income-taxRules provides that an assessee can be exemptedfrom payment by crossed cheque or crossed bankdraft in the circumstances specified in the rule.The above decision of the Supreme Court makes itclear that the assessee can be exempted from therequirements of payment by crossed cheque orcrossed bank draft where the purchases are made incertain agricultural or horticultural commodity orfrom a village where there is no banking facility. 9.The Central Board of Direct Taxes has issuedcertain guidelines giving certain circumstances,and those circumstances are illustrative and notexhaustive and the underlying idea of the circularis that if the identity of the payee is known, itwould be possible for the Income-tax Officer tocross-check whether the transaction had in fact 9.The Central Board of Direct Taxes has issuedcertain guidelines giving certain circumstances,and those circumstances are illustrative and notexhaustive and the underlying idea of the circularis that if the identity of the payee is known, itwould be possible for the Income-tax Officer tocross-check whether the transaction had in fact taken place. The Tribunal took into account thecommercial need in keeping cash and referred to theneed for keeping cash for making purchases of rawskins from shandies when the upcountry tanneriesinsist upon payment of ready cash. It was alsofound that the cheques were rarely accepted. It isno doubt true that the payee is having a bankaccount in the same branch in which the assessee ishaving a bank account. But, working hours of thebank are of limited duration. Though both the payeeand payer may have accounts in the same branch ofthe bank, but it may not be possible to issue acrossed cheque after the banking hours. Further,the criticism of Mr. S. V. Subramaniam is that theassessee could have made payments in advance inanticipation of purchase. It is well establishedthat it is not for the Revenue to dictate as to howthe assessee should carry on his business. TheAppellate Tribunal, after noticing the tradepractice and the necessity to keep cash in hand,has found that there was necessity on the part ofthe assessee to keep substantial cash in its handsto meet contingencies at the time of purchase. Itwas also found, taking into account other factors,that there was a trade necessity and, issue ofcrossed cheque would delay the business operation.The Tribunal also found that the issue of crossedcheque is not practicable and having regard to thenature of the transaction and the necessity forexpeditious settlement and the nature of therelationship between the payer and payee, it foundthat the issue of payment by crossed cheque wouldhave caused genuine difficulty to the payee and theidentity of the payee is not doubted and there isno reason to doubt the genuineness of the payee incash payment. The Appellate Tribunal considered allthe relevant materials on record and came to theconclusion that there was no justification todisallow the entire payment, merely because cashpayments have been made. As regards the otheramount of Rs. 6,50,303, the Tribunal examined thematerials with reference to item-wise expenditureand found that there was justification for thepayments to be made in cash. The Tribunal alsofound that the identity of the payee wasestablished and the genuineness of the payment wasestablished beyond doubt, and the requirementsof section 40A(3) of the Income-tax Act and rule6DD of the Income-tax Rules were fully satisfied.The finding recorded by the Appellate Tribunal is a finding arrived at on the facts of the case. TheTribunal has accepted the materials produced beforeit in support of its finding that only at the timeof purchase, the actual amount would be known andthe identity of the party was successfullyestablished and the decision of the Tribunal isbased entirely on the facts of the case.” finding arrived at on the facts of the case. TheTribunal has accepted the materials produced beforeit in support of its finding that only at the timeof purchase, the actual amount would be known andthe identity of the party was successfullyestablished and the decision of the Tribunal isbased entirely on the facts of the case.” 9.The above is the legal principle which has beenconsistently adopted in all matters. What is crucial whiletesting such a claim and the applicability of Section 40A(3) isthe facts of each particular case. Therefore, a decision cannotbe taken without referring to facts. The assessee seeks tobring its case under two limbs, namely, there was no bankingfacility and it was a business expediency. The assessee bystating that there was no banking facility does not seek tobring their case under clause (j) of Rule 6DD but on account ofthe factual position. On 29.11.2002, the Punjab National Banksends a letter to M/s.SLM directing them to close the bankaccount with State Bank of India and directs them to do allbanking transactions only through the Punjab National Bank.This direction has come because the said Bank was appointed asthe operating agency to implement a scheme of revival of M/s.SLMas framed by the BIFR. Therefore, M/s.SLM cannot flout thedirection. The said Company was carrying on business and itappears that the assessee was one of the major entities withwhom they had entered into agreement. There was an agreementfor “conversion job work” dated 01.04.2004. Even prior to that,on 27.02.2004, the Punjab National Bank informs M/s.SLM thattheir bank account with them has been attached pursuant to anorder passed by the Employees State Insurance Corporation,Madurai and the interest payable towards Punjab National Bankcannot be serviced from the very same account. On receipt ofthe letter on 02.04.2004 M/s.SLM writes to the assesseeinforming this development and requesting them to pay cash formeeting the wages, salary and other expenses for their Unit torun smoothly. Further, they have represented for payment ofadditional conversion charges depending upon the quality of theproduct as they have incurred lot of expenses in modernising themachineries. These factors led to the assessee effectingpayments in cash. 10.The words “extent of banking facilities available” hasto be interpreted in the facts of a given case and all suchcases will not be covered under clause (j) of Rule 6DD which hasbeen subsequently deleted. In the instant case, bankingfacility was available but the bank account could not beoperated by the very bank themselves because of an order ofattachment passed by the ESI Department. M/s.SLM virtually came 10.The words “extent of banking facilities available” hasto be interpreted in the facts of a given case and all suchcases will not be covered under clause (j) of Rule 6DD which hasbeen subsequently deleted. In the instant case, bankingfacility was available but the bank account could not beoperated by the very bank themselves because of an order ofattachment passed by the ESI Department. M/s.SLM virtually came to the assessee with the begging bowl and requested to effectpayment in cash. The assessee has entered into an agreement forcoversion on job work basis. The assessee is required to act asa prudent businessman, so that the job work is completed to hissatisfaction with optimum quality. This has led the assessee toeffect payments in cash. The argument of the revenue is on theground that in order to avoid the attachment of the bank accountthe assessee has effected payment in cash. It is to be notedthat what is relevant to be seen insofar as Section 40A(3) isthe conduct of the assessee and not the payee. The questionwould be did the assessee have a reasonable cause to effectpayment in cash. If the assessee has a reasonable explanation,then the proviso under Section 3A would stand attracted and theassessee would be entitled to relief. It may be true thatmerely because the payee is identifiable, it will automaticallyexonerate the assessee. We are not laying down any such broadprinciple. The fact that the payee was identifiable and not afictitious person would go to show the bonafides of thetransaction and this is what is required to be considered fromthe angle of a commercially expedient and prudent businesshouse. Thus, we find that the Tribunal rightly interfered withthe order passed by the Assessing Officer as confirmed by theCIT(A) and granted the relief to the assessee. 11.In the result, the tax case appeal is dismissed and theSubstantial Question of law is answered against the revenue andin favour of the assessee. No costs. Sd/- Assistant Registrar(CCC) cse //True copy// Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Madras 'C' Bench. 2. The Commissioner of Income Tax (Appeals)-2, Coimbatore. 3. The Assistant Commissioner of Income Tax, Non Corporate Circle-2, Coimbatore. +1cc to Mr.T.R.Senthil Kumar, Advocate SR.No.29577 TCA.No.759 of 2018 KK(CO)GMY(23/09/2020)