Disallowance under Section 40A(3) Remanded for Fresh Examination Considering Bank Holiday, Payment by Agent

ORDER

Prashant Maharishi, Vice President.- This appeal is filed by Smt. Chandra Moolchand Jain (the assessee/appellant) for the assessment year 2015-16 against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 12.4.2024 wherein the appeal filed by the assessee against the assessment order u/s. 143(3) of the Income-tax Act, 1961 [the Act] dated 28.12.2017 passed by the ITO, Ward 6(2)(4), Bangalore [ld. AO] was dismissed.

2. The assessee is aggrieved with the appellate order and has raised the following grounds:-

” 1. This is an Appeal against the orders passed by the learned commissioner of Income Tax (Appeals) for the Assessment Year 2015-16.

2. That the orders passed by the learned commissioner of income tax (Appeals) is bad in law.

3. That the learned commissioner (Appeals) had passed the order without considering the facts of the case.

4. That the facts & Grounds of appeal is not considered while passing the order u/s 250 of the Income Tax Act 1961.

5. That the cash purchases are made within the purview of section 40 A (3) and the said section would have not been revoked in the case of the Assessee.

6. That where ever it was possible for Assessee to get credit, she utilized and where ever it was not possible (practicable) she made cash purchases.

7. That the case of the Assessee is clearly covered under Rule 6DD of the Income Tax Rules.

8. That the Assessee is being lady, the business is carried by employing persons who are also utilized for going and making purchases on her behalf.

9. That most of the purchases are made in the evening time only when the requirement for the next working day is ascertained. This generally will be after the Banking hours.

10. That for making cash payments for purchases, the Assessee was given discount.

11. That the purchases varies from Rs. 28,000/- to within Rs. 2,00,000/-, Hence no transaction exceeding Rs. 2 Lakhs in cash is made.

12. That the Assessee’s case is covered under Rule 6 DD (f) where in the Assessee is given specific discounts of Rs.1,05,353/- by the seller for the payments made in cash.

13. That at the time of hearing before the learned ITO and learned Commissioner of Income Tax (Appeals) the detailed list with copies of Invoices were submitted where in the Assessee had get specific discounts, as specified under Rule 6 DD (f) which is ignored by both the learned ITO as well as the learned Commissioner of Income Tax (Appeals).

14. That as stated above a sum of Rs. 1,09,13,444/- should have been allowed under Rule 6 DD and section 40 A (3) should have not been revoked.

15. That the Interest u/s 234 (B) and u/s 234 (C) shall be waived off as Tax itself is not payable.

16. That penalty u/s 271 (1) (c) shall not be applicable as there is no concealment of Income.

In the light of the above facts the Assessee prays the Honorable Bench to allow Rs. 1,09,13,444/- as added to the total income by setting aside the orders passed by the learned Commissioner of Income Tax (Appeals) for the above Assessment Year 2015-16.

For these and any other such grounds which may be urged at the time of hearing.it is prayed that the relief as prayed before the Honorable Bench may please be allowed in the interest of law and natural justice.”

3. The brief facts of the case show that assessee is an individual, deriving income from business, house property and other sources. Assessee is also carrying on wholesale dealing in gold and silver bullion. She filed her return of income on 30.9.2015 declaring income of Rs.8,82,840.

This return was selected for scrutiny under CASS and notices u/s. 143(2) & 142(1) were issued.

4. The assessee was issued a show cause notice during the assessment proceedings proposing for addition of Rs.1,09,13,444 being purchases through cash payment u/s. 40A(3) of the Act and also to substantiate the proof of acceptance of loan and repayment of loan respectively. Assessee appeared through her son and furnished the details of purchase ledger where cash payments along with bills and proof of repayment of loan and acceptance of loan was submitted. Assessee was asked to furnish total purchase and sales ledger and proof for exemption u/s. 40A(3) where assessee has made cash payments for purchase of goods. It was found from Form 3CD report that assessee herself has disallowed cash purchases of gold & silver for sum of Rs.1,09,13,144 through cash payments exceeding Rs.20,000 in the return of income. The AO show caused the assessee why cash payment exceeding Rs.20,000 should not be disallowed u/s. 40A(3) of the Act and Rule 6DD of the I.T. Rules. The assessee failed to substantiate with proof for claim of applicability of section 40A(3) of the Act. The total turnover of assessee is Rs.18.44 crores, cash purchases of gold & silver bullion worth Rs.1,09,13,444 was made. Cash purchases were in violation of section 40A(3) of the Act and accordingly the entire amount was disallowed as the assessee did not come forward with documentary proof in support of exceptions covered under Rule 6DD of the I.T. Rules. Accordingly total income of assessee was computed at Rs.1,17,96,284 against returned income of Rs.8,82,840. The only addition of Rs.1,09,13,444 being cash purchases in excess of Rs.20,000 in violation of provisions of section 40A(3) of the Act was made and as no exception as provided in Rule 6DD of the Rules were shown.

5. The assessee aggrieved with the same preferred appeal before the ld. CIT(A). The assessee submitted that business of bullion is volatile, assessee is new to the business and she did not have any contacts in the market, therefore she has to make cash purchases from the parties. The assessee also relied upon several judicial precedents wherein it has been held that if the cash purchases are covered by specific exceptions as provided by Rule 6DD of the Rules, disallowance cannot be made. Assessee also relied upon decision of coordinate Bench in ITA No.313/Bang/2012 wherein it was held that if the purchaser is new to seller, transaction is done on a bank holiday, seller is acting as a commission agent, specific discount is given, then no disallowance for cash purchases in violation of section 40A (3) can be made. The assessee also relied on the order of the ld. CIT(A) in her own case for AY 2014-15 wherein identical disallowance was deleted. It was also the claim of assessee that purchases of Rs.1,09,13,444 is beyond the banking hours and assessee has received total discount of Rs.1,05,353 and therefore disallowance u/s. 40A(3) r.w. clause (f) of Rule 6DD of the I.T. Rules could not have been made.

6. The ld. CIT(A) reproduced the provisions of section 40A(3) along with Rule 6DD and stated that assessee has violated the same and therefore disallowance is required to be confirmed. The ld. CIT(A) noted that in the instant case Auditor has identified 61 transactions attracting mischief of section 40A(3) of the Act. These payments are spread throughout the previous year and all these payments could not have ben made on days where banks were closed on account of holiday/strike. Therefore the statement of the Auditor in Form 3CD that 61 transactions happened on the day when the banks are closed/holiday cannot be accepted. He held that it is a stringent condition and assessee has not furnished any proof to this effect. He further stated that several judicial precedents relied by the assessee are also on different facts. He held that the case of cash payment in violation of section 40A(3) is not one of events, but series of events and assessee’s case is not covered by any of the exceptions covered under Rule 6DD and therefore disallowance was upheld. Accordingly appeal was dismissed.

7. The assessee is in appeal before us. The ld. AR filed written submissions containing 8 pages along with supporting documentary evidence. He further submitted the details of sale & purchase bills, daily stock register of gold & bullion, details of stock register of silver bullion as well as ledger account. The ld. AR submitted that in ITA No.313/Bang/2012 identical disallowance was deleted as the purchaser is new to the seller and further specific discount is given by seller for payment of cash. He submitted that assessee was new to the business, did not have any contact in the market and further because of volatile nature of business the buyers demanded cash payment and therefore assessee has made cash payment for purchase of goods. He further submitted that purchase of goods have been entered into the stock register which has been held by assessee and resultant Gross Profit / Net Profit has already been offered for taxation. He further submitted that Rule 6DD has to be liberally construed and genuineness of the transaction is required to be seen before making any disallowance u/s. 40A(3). He further submitted that such purchases are genuine and entered into stock register as purchase and resultant profit has been shown on sale of these goods, therefore disallowance could not have been made. To prove the genuineness of the transaction of purchases, assessee submitted details of purchases and sales with purchase invoices from the dealers who filed confirmation of their accounts. The assessee also stated that there are several transactions where the customers approached the appellant to purchase gold on bank holidays. Tax audit report of the assessee has shown that 61 transactions happened at the time when the banks were closed and therefore disallowance to that extent should not have been made. He further stated that for making cash payments to the sellers, assessee is offered cash discount and that should also be considered as a reasonable cause for making cash payment. It was further contended that as the assessee is a women, she has given the amount for purchase to her employee, who in turn made payment for purchase of goods from the seller and therefore the situation is clearly covered by clause (k) of Rule 6DD as agent has made payment on behalf of the assessee. It was the contention that where payment is made by a person to his agent who is required to make payment in cash for goods or services on behalf of such person, then no disallowance could have been made. Accordingly it was submitted that disallowance made by the AO of Rs.1,09,13,144 u/s. 40A(3) of the Act is incorrect.

8. The ld. DR vehemently supported the orders of ld. lower authorities and submitted that assessee has made cash payment for purchase of goods and therefore provisions of section 40A(3) of the Act clearly apply. The assessee has failed to show any reasonable cause or any exception under which the above transaction falls as per provisions of Rule 6DD of the I.T. Rules. Hence there is no infirmity in the disallowance made by the ld. AO and confirmed by the ld. CIT(A). It was stated that decision relied up on by assessee are distinguishable and on different facts. It was stated that discount, new customers are not exception provided u/r 6DD of the IT Rules, 1962.

9. Having carefully considered the rival contentions and perused the orders of ld. lower authorities, the facts clearly show that assessee is an individual who started her business in gold & bullion. She was found to have purchased the gold & bullion in cash. There were 61 transactions entered into by assessee for purchase of gold & bullion amounting to Rs.1,09,13,444 where cash payment is made and same is hit by provisions of section 40A(3) of the Act. Before the ld. AO, assessee could not show that cash payments are covered by exceptions provided by Rule 6DD of the Rules. Therefore it resulted into disallowance u/s. 40A(3) of the Act.

10. On appeal before the CIT(A), assessee contested that all these payments have been made on a bank holiday and therefore disallowance of the same could not have been made as it is covered by provisions of exceptions provided under Rule 6DD of the I.T. Rules. The ld. CIT(A) did not accept the above contention and held that assessee has failed to show that date on which purchases were made and cash is deposited happens to be a bank holiday. Even before us, assessee has though provided details of cash payment, but did not show the date on which cash is paid and that date happens to be a bank holiday. If that be so, disallowance could not have been made. Therefore if transactions is executed on a day on which there is a bank holiday, disallowance should not have been made u/s. 40A(3) of the Act. Further, the assessee has claimed that she has hired a person as she is a women and amount was given to that person who has made cash payment to the sellers of gold & bullion and therefore the situation is covered clearly by clause (k) of Rule 6DD of the I.T. Rules. These argument was not examined by the ld. CIT(A). On careful consideration of the arguments and judicial precedents cited before us, the claim of assessee is that assessee has given cash to her employee who is the supervisor or the agent who in turn made payment to the sellers of the gold and therefore the same would not fall within the scope of section 40A(3) of the Act in view of the decision of Hon’ble Calcutta High Court in the case of S.K. Joynal Abedin v. CIT. It was also the claim of assessee that part of jewellery and bullion is purchased by assessee was shown as stock in trade and the provisions of section 40A(3) were not applicable. For this proposition assessee relied on the decision of Delhi High Court in the case of PCIT v. Prosperous Buildcon Pvt. Ltd. The assessee has further relied on the decision of Delhi High Court in the case of Rajesh Kumar v. CIT ITR 320 (Delhi) stating that if the assessee proves the genuineness of the transaction, disallowance could not have been made u/s. 40A(3) of the Act. On careful consideration, all these issues have not been considered by the ld. lower authorities, therefore, we restore the whole issue back to the file of ld. AO with a direction to the assessee to substantiate that the payment made to 61 parties on bank holiday, the payment was made by the agent and further the business exigency also demanded payment of cash. The ld. AO may examine the above contentions of the assessee for which onus would be on the assessee to prove so and then the AO will decide the issue afresh. Accordingly all the grounds of appeal of the assessee are restored back to the file of the ld. AO with the above direction.

11. In the result, the appeal of the assessee is allowed for statistical purposes.