Tca/645/2019 Of M/S.vaduganathan Talkies v. Income Tax Officer

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 22.09.2020 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN TAX CASE APPEAL NOS.645, 646 & 647 OF 2019ANDC.M.P.NO.18806 OF 2019 M/s.Vaduganathan Talkies,No.11/1, Old No.6,Murrays Gate Road,Alwarpet, Chennai-600 018.AADFV6069R.. Appellant/Appellantin T.C.A.No.645 of 2019 M/s.Lena Talkies,No.11/1, Murrays Gate Road,Alwarpet, Chennai-600 018.AAAFL2556Q .. Appellant/Appellant inT.C.A.Nos.646 & 647 of 2019-vs- Income Tax Officer,Non-Corporate Ward 20(5),Chennai-34. .. Respondent/Respondentin all TCAs Appeals under Section 260A of the Income-tax Act, 1961,against the common order dated 25.04.2019 made inI.T.A.No.3434/Chny/2018, I.T.A.No.3433/Chny/2018 & I.T.A.No.3432/Chny/2018 on the file of the Income Tax Appellate Tribunal 'C'(SMC) Bench, Chennai for the assessment years 2014-15, 2015-16and 2014-15 respectively. Appeal against the order dated 28.09.2018 made inITA.No.241/CIT(A)-14/2016-17 on the file of the Commissioner ofIncome Tax (Appeals)-14, Chennai-34 for the Assessment Year2014-15. And as against the order dated 30.06.2016 made inPA.No.AADFV6069R on the file of the Income Tax Officer, NonCorporate Ward–20(5) Chennai-34, for the Assessment Year 2014-15. https://hcservices.ecourts.gov.in/hcservices/ Appeal against the order dated 28.09.2018 made in ITA.No.242(2016-17) & 41 (2017-18)/CIT(A)-14 on the file of theCommissioner of Income Tax, (Appeals)-14, Chennai-34 for theAssessment year 2014-15 & 2015-16. And as against the order dated 22.06.2017 made inGIR.No./PAN.No. on the file of the Income Tax Officer,Non corporate ward – 20(5) Chennai-34. For the Assessment year2015-16. These appeals have been filed by the appellant/assesseesunder Section 260A of the Income Tax Act, 1961 (hereinafterreferred to as “the Act”) challenging the common order dated25.04.2019, made in I.T.A.No.3434/ Chny/2018, I.T.A.No.3433/Chny/2018 and I.T.A.No.3432/Chny/2018 on the file of the Income TaxAppellate Tribunal 'C' (SMC) Bench, Chennai (for brevity “theTribunal”) for the assessment years 2014-15, 2015-16 and 2014-15respectively. 2.Before us, there are two assessees, viz., VaduganathanTalkies, whose relevant assessment year is 2014-15 and LenaTalkies, whose assessment years are 2014-15 and 2015-16. 3.The assessees have raised the following substantialquestions of law for consideration of this Court:- “1. Whether on the facts and circumstances ofthe case, the Tribunal was right in not lookinginto proviso to Section 40A(3) wherein nodisallowance can be made u/s.40A(3) having regardto the nature and extent of banking facilitiesavailable, consideration of business expediencyand other relevant factors? 2. Whether on the facts and circumstances ofthe case, the Tribunal was right in holding thatRule 6DD has not been satisfied, without lookinginto the legality that second proviso to Section40A(3) is a substantive provision of the law andsatisfaction of Rule 6DD will not affect theexemption from the rigor of Section 40A(3)? 3. Whether on the facts and circumstances ofthe case, the Tribunal was right in confirmingthe addition when the assessee had discharged itsonus of proving the genuineness of thetransactions and identity of the filmproducers/distributors? And 4. Whether on the facts and circumstances ofthe case, the Tribunal was right in rejecting thedocuments like copies of agreements andconfirmation from film distributors and filmproducers filed at the time of hearing withoutrestoring the matter to the lower authorities tocheck on the veracity of the documents filed?” 3. Whether on the facts and circumstances ofthe case, the Tribunal was right in confirmingthe addition when the assessee had discharged itsonus of proving the genuineness of thetransactions and identity of the filmproducers/distributors? And 4. Whether on the facts and circumstances ofthe case, the Tribunal was right in rejecting thedocuments like copies of agreements andconfirmation from film distributors and filmproducers filed at the time of hearing withoutrestoring the matter to the lower authorities tocheck on the veracity of the documents filed?” 4.It is an admitted case of the assessees that cash paymentswere effected by the assessees for the purpose of acquiringrights to screen movies in their theatres. The AssessingOfficer referring to Section 40A(3) of the Act held that thecash payments exceeded Rs.20,000/- and ran to several lakh ofrupees and accordingly, disallowed the expenses under Section40A(3) of the Act and completed the assessment under Section 143(3) of the Act by order dated 30.06.2016. The assesseespreferred appeals before the Commissioner of Income Tax(Appeals)-14, Chennai (for brevity “the CIT(A)). The appealswere dismissed by order dated 28.09.2018. Challenging the same,the assessees filed appeals before the Tribunal, which weredismissed by the impugned order. 5.The learned Senior Counsel would contend that theassessees had produced a list containing the payments made bythe assessees in cash to various parties, those payees wereidentifiable and the assessees also produced letters from thepayees to show that the payees have received the money andaccounted for the same in their books and the payees had alsofurnished their Permanent Account Numbers (PAN). Therefore, itis submitted that the genuineness of the transactions can neverbe doubted more particularly when, 75% of the payments effectedby the assessees were through banking channel, that is, throughcheques or bank drafts. This aspect was not even considered bythe Assessing Officer or for that matter the CIT(A) or theTribunal and therefore, it is submitted that the genuineness of the transactions is a very relevant factor, which should betaken into consideration. In this regard, reliance was placedon the decision of the Hon'ble Supreme Court in the case ofAttar Singh Gurmuk Singh Etc. vs. Income Tax Officer [(1991) 191ITR 0667]. It is submitted that this decision was followed bythe Hon'ble Division Bench of this Court in the case of CIT vs.Chrome Leather Co. (P) Ltd. [(1999) 235 ITR 0708]. 6.Further, it is submitted that the conduct of the assesseesalso should have been noted because it is not as if theAssessing Officer had culled out these details by himself duringthe course of assessment, but these details were disclosed inthe Auditors' report filed by the assessees. Further, it issubmitted that the Central Board of Direct Taxes has issuedguidelines in Circular No.220, dated 31.05.1997 prescribinglimits – circumstances when Income Tax Officers can relaxrequirements of making payments in excess of the stipulatedamount. It is submitted that the Hon'ble Division Bench inChrome Leather Co. (P) Ltd. (supra) had considered the circularand held that the circumstances mentioned therein areillustrative and not exhaustive and the underlying idea of thecircular is that if the identity of the payee is known, it wouldbe possible for the Income Tax Officer to cross check whetherthe transaction had, in fact, taken place. 7.Further, it is submitted that as held in Attar SinghGurmuk Singh (supra), Section 40A(3) of the Act must not be readin isolation or to the exclusion of Rule 6DD of the Income TaxRules, 1962 (hereinafter referred to as “the Rules”) and theSection must be read along with the Rule. Reliance was placedon the decision of the Hon'ble Supreme Court in S.A.BuildersLtd. vs. CIT(A) [(2007) 288 ITR 1 (SC)] to explain as to what isbusiness expediency and that the Assessing Officer cannot puthimself in the arm-chair of the businessman or in the positionof the Board of Directors and assume the role to decide how muchis reasonable to explain. Thus, the learned Senior Counselsubmitted that a verification needs to be done by theauthorities or at least by the Tribunal to examine thegenuineness of the plea raised by the assessees. 8.The learned Standing Counsel for the Revenue submittedthat the assessees have not been able to bring their cases underany one of the exceptional circumstances in Rule 6DD and havingfailed to bring the same under the exceptional clauses, theauthorities as well as the Tribunal rightly denied relief to theassessees. Further, it is submitted that the assessees did notfurnish the full details in the relevant column in the return ofincome and these details were available only in the annualreport, which will go to show the conduct of the assessees. Itis further submitted that the assessees are established parties and therefore, to say that they effected cash payments due tocertain circumstances is an unacceptable plea. That apart, boththe assessees are based on Chennai and nothing prevented them toavoid payment through banking channels. Further, the assesseeshave failed to prove unavoidable circumstances, whichnecessitated payments by cash over and above a sum ofRs.20,000/-. Further, the genuineness of the transaction is nota factor to be considered while deciding a case under Section40A(3) of the Act. Further, it is submitted that commercialexpediency or business expediency depends on facts and, theauthorities rightly concluded on facts against the assessees.In support of her contention, the learned Standing Counselreferred to the following decisions:- (ii) Natesan Krishnamurthy vs. ITO [(2019) 103 taxmann.com342 (Madras)]; 9.We have elaborately heard Mr.R.L.Ramani, learned SeniorCounsel assisted by Ms.C.P.Priya, learned counsel for theassessees and Ms.S.Premalatha, learned Standing Counsel forMr.M.Swaminathan, learned Senior Standing Counsel appearing forthe Revenue.10.Section 40A deals with expenses or payments notdeductible in certain circumstances. In this case, we areconcerned about the applicability of Section 40A(3) on theassessees. For better reference, we quote the said sub-Sectionalong with the first proviso hereunder:- “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 drawnon a bank or account payee bank draft, exceedstwenty thousand rupees, no deduction shall beallowed in respect of such expenditure.Provided that no disallowance shall be made andno payment shall be deemed to be the profits andgains of business or profession under sub-section(3) and this sub-section where a payment oraggregate of payments made to a person in a day,otherwise than by an account payee cheque drawnon a bank or account payee bank draft, exceedstwenty thousand rupees, in such cases and undersuch circumstances as may be prescribed, havingregard to the nature and extent of bankingfacilities available, considerations of businessexpediency and other relevant factors.” 11.In terms of the above provision, where the assesseeincurs expenditure in respect of which a payment or aggregate ofpayments made to a person in a day, otherwise than by an accountpayee cheque drawn on a bank or account payee bank draft orthrough electronic clearing system, exceeds twenty thousandrupees, no deduction shall be allowed in respect of suchexpenditure. The proviso gives a window to the assessees and itstates that no disallowance shall be made and no payments shallbe deemed to be profits and gains of business or professionunder sub-Section (3) of Section 40A, where payment exceedstwenty thousand rupees in such cases under such circumstances asmay be prescribed, having regard to the nature and extent ofbanking facilities available, consideration of businessexpediency and other relevant factors, the circumstances whichhave been prescribed under Rule 6DD of the Rules. 12.Rule 6DD of the Rules deals with cases and circumstancesin which a payment or aggregate of payments exceeding twentythousand rupees may be made to a person in a day, otherwise thanby an account payee cheque drawn on a bank or account payee bankdraft. Various circumstances have been set out in clauses (a)to (l) of Rule 6DD of the Rules. 13.We have carefully gone through all the clauses under Rule6DD of the Rules and we find that the assessees cannot bringtheir cases under any one of the clauses as enumerated underRule 6DD of the Rules. The issue before us is whether theAssessing Officer committed an error in not verifying thedetails given by the assessees, explaining the genuineness ofthe transaction, stating that the payees are identifiable, they https://hcservices.ecourts.gov.in/hcservices/ have, in writing, confirmed receipt of payment, disclosed theirPAN numbers and without verifying these details, was theAssessing Officer justified in throwing out the assessee's caseand effecting the deduction under Section 40A(3) of the Act. 14.As rightly pointed out by the learned Standing Counselfor the respondent, the Commercial expediency or businessexpediency has to be decided on the facts of each case. Fromthe decision of the Hon'ble Supreme Court, it appears thatgenuineness may be one of the factors to be taken note of, inour view, while considering as to whether the case would fallwithin any one of the circumstances set out in Rule 6DD of theRules and not otherwise. We have seen the chart showing thepayments effected by the assessees to various parties. Thepayments effected through the year under consideration issubstantial. 15.It is the submission of the learned Senior Counsel forthe appellants that only 25% of the payments effected by theassessees were by cash and the remaining 75% was through bankingchannels, that is, through cheque or demand draft. Thesefactors will work against the assessees because the assesseesare fully aware of the legal position that over and aboveRs.20,000/-, the assessees would not be entitled to effectpayment in cash in a day. Thus, merely because the assesseeswere able to identify the payees, who were more than 20 innumber, would not be a mitigating factor to grant relief to theassessees under the first proviso to Section 40A(3) of the Act. 15.It is the submission of the learned Senior Counsel forthe appellants that only 25% of the payments effected by theassessees were by cash and the remaining 75% was through bankingchannels, that is, through cheque or demand draft. Thesefactors will work against the assessees because the assesseesare fully aware of the legal position that over and aboveRs.20,000/-, the assessees would not be entitled to effectpayment in cash in a day. Thus, merely because the assesseeswere able to identify the payees, who were more than 20 innumber, would not be a mitigating factor to grant relief to theassessees under the first proviso to Section 40A(3) of the Act. 16.On more aspect to be noted is that there has beenperiodical payments in cash. The explanation offered by theassessees is that due to compelling circumstances, they have toeffect cash payments. The Revenue is right in their submissionthat the registered offices of the assessee-firm are in Chennaiand therefore, it is not as if there were no banking facilitiesavailable in Chennai, nor any other exceptional circumstances,which compelled the assessees to make urgent cash payments. Inthe decisions referred to on either side, it is seen that inmajority of the cases, it is a solitary payment or a fewpayments made under extraordinary circumstances. Therefore, thefact that the assessees had been regularly effecting payments incash would be a circumstance which will work against theassessee. 17.The learned Senior Counsel sought to distinguish thedecision in N.Mohammed Ali (supra) by contending that on facts,the Court found that the names of the agencies and agents orretailers were never furnished, contrary to the case of theassessees, where full details have been furnished. However, thecorrect test to be applied is to examine as to whether the expenses would fall under any one of the exceptionalcircumstances set out in Rule 6DD of the Rules. Considering thefacts of the case, the concept regarding business expediency orcommercial expediency can hardly be canvassed by the assessees,as the assessees had been periodically adopting the modes byeffecting cash payments. Therefore, concurrently the twoauthorities and the Tribunal have held against the assessees andwe are not expected to examine the correctness of the impugnedorder as if exercising powers as the third appellate authorityand what we are expected to do is to consider as to whether anysubstantial question of law arises for consideration in theseappeals, while exercising power under Section 260A of the Act. 18.In the light of the above discussion, we find that noquestion of law, much less substantial question of law arisesfor consideration in these appeals. 19.It is noteworthy to point out that the Hon'ble SupremeCourt in the case of Attar Singh Gurmuk Singh (supra), whiletesting the constitutional validity of Section 40A(3) of theAct, took note of Rule 6DD of the Rules as it stood then, whichread as follows:- 18.In the light of the above discussion, we find that noquestion of law, much less substantial question of law arisesfor consideration in these appeals. 19.It is noteworthy to point out that the Hon'ble SupremeCourt in the case of Attar Singh Gurmuk Singh (supra), whiletesting the constitutional validity of Section 40A(3) of theAct, took note of Rule 6DD of the Rules as it stood then, whichread as follows:- “In our opinion, there is little merit inthis contention. Section 40A(3) must not be readin isolation or to the exclusion of Rule 6DD. TheSection must be read along with the Rule. If readtogether, it will be clear that the provi- sionsare not intended to restrict the businessactivities. There is no restriction on theassessee in his trading activities. Section 40A(3) only empowers the assessing officer todisallow the deduction claimed as expenditure inrespect of which payment is not made by crossedcheque or crossed bank draft. The payment bycrossed cheque or crossed bank draft is insistedon to enable the assessing authority to ascertainwhether the payment was genuine or whether it wasout of the income from disclosed sources. Theterms of Section 40A(3) are not absolute.Consideration of business expediency and otherrelevant factors are not excluded. The genuineand bona fide transactions are not taken out ofthe sweep of the Section. It is open to theassessee to furnish to the satisfaction of theassessing officer the circumstances under whichthe payment in the manner prescribed in Section40A(3) was not practicable or would have causedgenuine difficulty to the payee. It is also opento the assessee to identify the person who has received the cash payment. Rule 6DD provides thatan asses- see can be exempted from therequirement of payment by a crossed cheque orcrossed bank draft in the circumstances specifiedunder the rule. It will be clear from theprovisions of Section 40A(3) and rule 6DD thatthey are intended to regulate the businesstransactions and to prevent the use ofunaccounted money or reduce the chances to useblack- money for business transactions. See:Mudiam Oil Company v. ITO, [1973] 92 ITR 519 A.P.If the payment is made by a crossed cheque drawnon a bank or a crossed bank draft then it will beeasier to ascertain, when deduction is claimed,whether the payment was genuine and whether itwas out of the income from disclosed sources. Ininterpreting a taxing statute the Court cannot beoblivious of the proliferation of black-moneywhich is under circulation in our country. Anyrestraint intended to curb the chances andopportunities to use or create black-money shouldnot be regarded as curtailing the freedom oftrade or business.” 20.Taking note of Clause (j) in Rule 6DD as it stood then,the Hon'ble Supreme Court held that when Section 40A(3) is readalong with Rule 6DD of the Rules, it gives adequate protectionto the assessees. This decision was referred to in ChromeLeather Co. (P) Ltd. (supra), as the case pertained to theassessment year 1974-75, when the old Rule 6DD(j) was inexistence. However, the assessment years under consideration inthese appeals are 2014-15 and 2015-16 when the said Rules stooddeleted and therefore, the Revenue is right in contending thatthe genuinity of the transaction is hardly a matter, whichshould weigh in the minds of the Assessing officer whileexamining as to the whether the assessees had violated Section40A(3) of the Act. 21.For the above reasons, the appeals stand dismissedholding that no substantial question of law arises forconsideration in these appeals. No costs. Consequently,connected miscellaneous petition is closed. Sd/- Assistant Registrar(CCC) //True Copy// abr Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Income Tax Appellate Tribunal 'C' (SMC) Bench, Chennai.Chennai. 21.For the above reasons, the appeals stand dismissedholding that no substantial question of law arises forconsideration in these appeals. No costs. Consequently,connected miscellaneous petition is closed. Sd/- Assistant Registrar(CCC) //True Copy// abr Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Income Tax Appellate Tribunal 'C' (SMC) Bench, Chennai.Chennai. 2.The Commissioner of Income Tax (Appeals)-14,Chennai-34.Chennai-34. 3.The Income Tax Officer, Non Corporate Ward – 20(5), Chennai-34. +3cc to Mr.B.Raveendran, Advocate, S.R.No.31250 to 31252 T.C.A.Nos.645, 646 & 647 of 2019 LN(CO)CS/02/11/2020