Rs.27,31,485/- Under Section 40A(3)Oftheact,Of)Thefactsandcircumstances Of The Case? v. Income Tax

IN THE HIGH COURT OF KARNATAKA AT BENGALURU|ON THE 29 DAY OF NOVEMBER, 2018 BEFORE THE HON BLE MR. JUSTICE RAVI MALIMATH| AND| THE HON'BLE MR. JUSTICE K. NATARAJAN) INCOME TAX APPEAL NO.83 OF 2ZO1 BEI|WEE M/S. M.K. AGROTECH PRIVATE LTD.REPESENTED BY ITS MANAGING DIRECTOR, MR. SUBHAN KHAN, M.B. ROAD,SRIRANGAPATTANA,MANDYA DISTRICT. .., APPELLAN| (BY SRI A. SHANKAR, SENIOR ADVOCATE, ALONG WITH SRI M. LAVA, ADVOCATE) | AND THE ADDL. COMMISSIONER OF INCOME-TAXRANGE-2, 55/1,SHILPASHREE BUILDING,OPP. STERLING TALKIES,VISHWESHWARANAGAR,MYSORE. ~., RESPONDENT (BY SRI E.I. SANMATHI, ADVOCATE) THIS INCOME TAX APPEAL [IS FILED UNDERSECTION 260A OF THE INCOME TAX ACT, 1961,|PRAYING|TO.FORMULATETHE.SUBSTANTIALQUESTION OF LAW AS STATED THEREIN AND ANSWER|THE SAME IN FAVOUR OF THE APPELLANT AND T7QALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO.THE EXTENT AGAINST THE APPELLANT IN THE ORDER.PASSEDBY|THE.TRIBUNALIN|NO.401/BANG/2009 DATED 30-9-2009. 1.7.A. THIS INCOME TAX APPEAL COMING ON FORHEARING THIS DAY, RAVI MALIMATH, J., DELIVERED|THE FOLLOWING: JUDGMENT The assessee is a Company engaged in themanufacturingof refinedOlls, solventOWSde-mealed meals. On 29-10-2005, the assessee filed|its return of income for the Assessment Year 2005-06|declaring a total income of Rs.6,68,16,400/-. The}return was processed determining a refund payable of Rs.20,60,121/-. The case was selected for scrutinyand a notice under Section 143(2) of the Income Tax'Act, 1961, (for short, ‘the Act’) was issued. The|Assessing Officer disallowed Rs.5,31,09,/701/- on theground that the assessee contravened the provisions of ana | Section 40A(3) of the Act with regard to payments|made to the Challakere parties, wherein 20% of the|payments made, was disallowed and was added back|to tne total income. Aggrieved by tne same, an.appeal was filed before the Commissioner of Income|Tax (Appeals). The Commissioner of Income Tax'|(Appeals) neld that there is no case for holding that thepurcnases are bogus. However, it upheld tnepayments made to Challakere parties, wnerein the total purcnasesforall|three parties|amounted.TO.Rs.1,36,57,416/-. Questioning the same, an appealwas filed before the Tribunal, which was dismissed.Hence, this appeal. | 2. By the order dated 12-4-2010, the appeal wasadmitted to consider the following substantial question|of law: — Whether the Tribunal was justified in law in confirming the disallowance of Rs.27,31,485/- under section 40A(3)|ofthe|Act,Of)the|factsandcircumstances of the case? 3. Sri A. Shankar, the learned senior counsel,appearing for the appellants counsel, contends tnat theAutnorities have committed an error in misapplying|Section 40A of the Act. The only ground for!disallowance was with regard to three parties, where|the drafts have not been crossed, |.e. Vaishnavi Oil|Traders for Rs.1,04,51,051/-, Laxmi Trading Co. for|Rs.7,15,294/- and Ratna Traders for Rs.24,91,0/71/-.He contends that even though the drafts were notcrossed, the end sources Nave been furnished by nim.He has also furnisned the Bank report, which clearlyindicates that drafts nave been received py the!purcnasers. In respect whereto, he relies on the.judgment of the Hon'ble Supreme Court in the case of ATTAR SINGH GURMUKH SINGH v. INCOME TAX. 3. Sri A. Shankar, the learned senior counsel,appearing for the appellants counsel, contends tnat theAutnorities have committed an error in misapplying|Section 40A of the Act. The only ground for!disallowance was with regard to three parties, where|the drafts have not been crossed, |.e. Vaishnavi Oil|Traders for Rs.1,04,51,051/-, Laxmi Trading Co. for|Rs.7,15,294/- and Ratna Traders for Rs.24,91,0/71/-.He contends that even though the drafts were notcrossed, the end sources Nave been furnished by nim.He has also furnisned the Bank report, which clearlyindicates that drafts nave been received py the!purcnasers. In respect whereto, he relies on the.judgment of the Hon'ble Supreme Court in the case of ATTAR SINGH GURMUKH SINGH v. INCOME TAX. OFFICER, LUDHIANA reported in (1991) 191 ITR 66/7(SC), wherein it was held that when the bank drafts|were not crossed, it is open for the assessee to furnishto the satisfaction of the Assessing Officer, the|circumstances under whicn the payment, in the)manner, as prescribed under Section 40A(3) of the Act|was not practicable or would have caused genuine|difficulty to the payee. It is open for the assessee to |identify the person, who has received the. saidpayment. That the object of the Act and Rule is to|check the proliferation of black money, which is under|circulation. Tnat any restraints intended to curb the)chances and to give opportunities to use or create|DlacK money should not be recorded as curtailing the|freedom of trade or business. Hence, he pleads that|the appeal be allowed by setting aside the order passedby tne Tribunal. 4. On the other nand, Mr. E.I. Sanmatni, the)learned counsel for the respondent, has disputed the| Same. He contends that there is no_ satisfactory|explanation offered by tne assessee as to wny the)drafts were not crossed. That having considered the|material produced by the assessee, the same would)clearly indicate that so far as the three accounts are|concerned, drafts nave not been crossed and there isgross violation of Section 40A(3) read with Section 6|DD of the Income Tax Rules. There is no errorscommitted by the Authorities. Therefore, the order|does not call for interference. 5. Heard tne learned counsels.| 6. Section 40A(3) of the Act reads as under: “Where the assessee incurs any.expenditure in respect of which aspayment or aggregate of payments.madetoadPersor)Indday, otnerwise that Dy an account payee|cheque drawn on a bank or account|payee bank draft, [exceeds twenty|thousand rupees,/ no deduction snallbe.alloweqInrespectofsuUCNexpenditurea . 7. A reading of Section 40A(3) makes it clear.that any payment in excess of Rs.20,000/- would nave|to be made by crossed cheque or crossed Dank drafts.On failure to do so, the said payment would be|disallowed. Admittedly, in the payments made to the)aforesaid three accounts, the drafts were not crossed. |Rule 6 DD of the Income Tax Rules provides the cases.and circumstances, in whicn sucn a payment can be.made,otnerwiseDy crossed qdemanadraft.Admittedly, the said conditions are not complied with|by the assessee nerein. However, wnat is relevant is |that specific material is placed by the assessee before|tne Assessing Officer. All the purchases made by the|aSSeSSCefromtneaforesaidthree.parties|a fC 7. A reading of Section 40A(3) makes it clear.that any payment in excess of Rs.20,000/- would nave|to be made by crossed cheque or crossed Dank drafts.On failure to do so, the said payment would be|disallowed. Admittedly, in the payments made to the)aforesaid three accounts, the drafts were not crossed. |Rule 6 DD of the Income Tax Rules provides the cases.and circumstances, in whicn sucn a payment can be.made,otnerwiseDy crossed qdemanadraft.Admittedly, the said conditions are not complied with|by the assessee nerein. However, wnat is relevant is |that specific material is placed by the assessee before|tne Assessing Officer. All the purchases made by the|aSSeSSCefromtneaforesaidthree.parties|a fC Supported by the registered dealer invoice along with|valid transit/receipt documents, freight charges paid,|weightment slips, etc. of the supplier. The stock|register is maintained to record purchase of Sunflower|cake. None of these documents are disputed by the|Assessing Officer. Letters have been issued by the|Bankers whicn would indicate that the payments made.to the suppliers are credited to their respective bank|accounts. Therefore, all the purchases made are’Supported by valid dealer invoices. The Commissioner|of Income Tax, having considered the said material,|recorded a finding that the parties are existent. That|their bank accounts are identified. Except one party,|all other parties have filed sales tax returns, though theturnover disclosed is very small compared to the)purcnases claimed by the appellant. Tne fact remains,that since the transactions are made through the bank|account of the assessee and considering the evidence|let in, in respect of purchases made by it, there was no material to nold that the purchases nave not been.made. However, the Commissioner of Income Tax)(Appeals) applied the provisions of Section 40A(3) of|tne Act and disallowed tne said claim of the assessee. | 8. We are of the view that the judgment of the|Hon bie Supreme Court stated supra, while considering»the provisions of Section 40A(3) of the Act read with|Rule 6 DD of the Rules, stands squarely applicable to.tne facts of the present case. In the aforesaid|judgment of the Honble Supreme Court, the question|for consideration was the validity of Section 40A(3) andits applicability to the payments made in stock-in-trade. In considering the same, the Hon ble Supreme|Court neld as under: | “In our opinion, there ts little merit in this |contention. Section 40A(3) must not beread in [isolation or to the exclusion of Rule6DD. Tne Section must be read along witnthe Rule. If read together, it will be clear that the provisions are not intended torestrict the Dusiness activities. Tnere is norestriction on the assessee in his tradingactivities. Section 40A(3) only empowersthe Assessing Officer to disallow thedeductionclaimed aS|expenditureIn|respect of wnich payment is not made bycrossed cheque or crossed bank draft. Thepayment by crossed cheque or crossedbank araft Is Insisted on to enable theassessing authority to ascertain whetherthe payment was genuine or whether itwas out of the Income from undisclosedsources. The terms of Section 40A(3) arenot absolute. Consideration of businessexpediency and other relevant factors arenot excluded. The genuine and bonafidetransactions are not taken out of thesweep of tne Section. It is open to theassessee to furnish to the seatisfaction ofthe assessing officer the circumstancesunaer which the payment in the mannerprescribed in Section 40A(3) was notpracticable or would have caused genuinedifficulty to the payee. It is also open to the assessee to identify the person whonas received the casn payment. Rule 6DDprovidesthatal)dssesseeCaf}be|exemptedfromtherequirement|ofpayment by a crossed cnegue or crossedbank draft in the circumstances specifiedUnder the ru/e. It will be clear from theprovisions of Section 40A(3) and rule 6DDthat tney are intended to regulate thebusiness transactions and to prevent theuse of unaccounted money or reduce thecnances to use black money for businesstransactions. See: Mudiam Oil Company v.ITO, [(1973) 92 ITR 519 (AP)/. If thepayment is made by a crossed chequedrawn on a bank or a crossed bank dreft|then it will be easier to ascertain, whendeductionIS|claimed, whetherthepayment was genuine and whetner it wasout of the Income from disclosed sources.In interpreting a taxing statute the Courtcannot be oblivious of the proliferation ofblack money which ts under circulation inour country. Any restraint intended to curbthe chances and opportunities to use or 17 create|black|MoneyShouldnot|be|regardead as curtailing the freedom oftrade or DUSINeSS. ” 9. Therefore, we are of the view that followingthe said judgment of the Hon'ble Supreme Court, the|appeal requires to be allowed. 10. The main purpose of crossing a demanddraft is to ensure tnat the payment is cleared by meansof an account, |I.e., the payment is deposited in theBank Account of the person in whose favour thedemand draft has been drawn. It ensures the payee|receives the payment and it is routed througn bank|channels. In the facts of this case, both have been|proved. Tne Bank report would indicate that demand|drafts were admittedly not crossed. However, the|payments were credited into the accounts of the|payees. Therefore, the object with which Section| 40A(3) was promulgated stands satisfied with such|material. 11.)Further, the only objection was as to why.payments have not been made through crossed|demand drafts. In fact, in its order, a question was|asked as to why the payments were not made in.crossed demand drafts. The same is answered by the|assessee, who stated that, generally, suppliers require|demand drafts for quick realisation. For purchasing tnedemand drafts normally ‘yourself cheque’ will be issuedto the bankers. Tne Bank may not Nave crossed the|demand caraft. It did not come to nis notice. 12.|We are of the view that expecting aanswer for a specific question as to why the demand|draft has not being crossed, would not be appropriate.In view of the fact that the Bank report would indicate|that payees have received the said amounts with the) concerned drafts, the finding of the Tribunal on this|issue with regard to unsatisfactory answer given by theassessee falls into insignificance. 13..For the aforesaid reasons, the substantialquestion of law is answered by holding tnat the|Tribunal!WaSnotjustifiedInconfirmingtnedisallowance of Rs.27,31,483/- under Section 40A(3) of tne Act in tne facts and circumstances of the case.Consequently, the appeal is allowed. Tne orders of the|Tribunal, the Commissioner of Income Tax (Appeals)|and the Assessing Officer are set aside on the issue of cGisaliowanceUnder|Section40A(3)OT theAct.Consequently, tne Assessing Officer to grant relief in|terms of tnis order. SD/-JUDGE| SD/-|JUDGE kKVK