BASU DISTRIBUTOR PVT LTD V. ASST COMMISSIONER OF INCOME TAX

ITA/49/2011

AI Insights

Basu Distributor Pvt Ltd appealed against the order of the Income Tax Appellate Tribunal which had confirmed the disallowance of certain cash payments made during the assessment years 1992-93, 1993-94, and 1994-95 under Section 40A(3) of the Income Tax Act, 1961. The Tribunal had rejected the appellant's explanation that the payments were made in cash due to the urgency of business transactions and the impracticality of making such payments through bank drafts or crossed cheques. The High Court, after examining the bank statements and the nature of the transactions, concluded that the appellant had faced genuine liquidity issues and the payments were necessary to secure business opportunities, thus allowing the appeal.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 765606 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 06-02-2012
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: ABHISHEK MARATHA
• Assessee Lawyers: KAANAN KAPUR
• Keywords: Assessment years; Cash payments; Income tax appellate tribunal; Section 40A(3); Rule 6 DD (i)
• Section: 40A(3); 6 DD (i)

Judgement Text

"Y t $-33 * IN THE HIGH COURT OF DELHI AT NEW DELHI Date of decision' d' February, 2012 + ITA 49I2OTI BASU DISTRIBUTOR PVT LTD ..... Appellant Through: Mr. Kaanan Kapur, Adv. versus ASST COMMISSIONER OF INCOME TAX ..... Respondent Through: Xdr. Abhishek Maratha, Sr. Standing Counsel. CORAM: HON'BLE MR. JUSTICE SANJIV KI{ANNA HON'BLE MR. JUSTICE R.V.EASWAR JUDGMENT SANJIV KTIANNA. J: (ORAL) For orders see ITA No.48l20ll. ll !- SANJIV KTIANNA, J l.r [ \"'\"\"a' n.v.naswAR, J FEBRUARY 06,2012 hs rrA49t20tl Page I ofl Digitally Signed By:AMULYA Signature Not Verified ??,73 &34 . i IN TIIE : 'i $; *' I fi , t ,,- r'.' $, .11 i'.' T' .: IIIGH ITA 48/2011 ITA 49I2OIT TryA 56/2OLT BASU DISTRIBUTOR PVT LTD ..... Appellant Through: Mr. Kaanan Kapur, Adv. versus ASST COMMISSISNER OF INCOME TAX ..... Respondent Through: Mr. Abhishek Maratha, Sr. Stnnding Counsel. CORAM: HON'BLE MR. JUSTICE SAN.TIV KHANNA HON'BLE MR. JUSTICE R.V.EASWAR. JUDGMENT W:(oRAn) 1li + 1; Basu Distributors Pvt. Ltd. has filed the above noted three appeals rl against the common irnpugned order of the Incorne Tax Appellate Tribunal (''Tr[bunal', - for short) dated 07.08.2009 disposing of ITA No.4262lDeIl2007. ITA No.4263lDeIl2007 and ITA No.4264.lDell2007 pertaining to assessment years lgg2-93 , Lgg3-94 and 1 gg4-95 respectively. 2. After hearing counsel for both the parties, we hereby frame the COURT OF' DELHI AT NEW DELTII Date of decision: 6't' Februarl;, 2012 Page I of9 rTA 48/2011,49t20r1 & s6t20r1 i -}TTrr\"_--tF-'.'--\"_-:.!_l : ; t ID sgb*tpntial question of law, being cofiunon to the three appeals, as under: - ': *6) Whether Income Tax Appellate Tribunal was right in holding that the payments above Rs.10,000/- each made in ca.sh. by the appellant assessee violated Section 40A (3) of the Income T'crx Act, 1961 readwith Rule 6 DD (i) of the Income Tax Rules, 1962.\" 4, The appellant-assbssed is engaged in the business of film distr.ibution. During the three relevant assessment years, the appellant- assessee made payments in cash, the details of which are given as under: - DESCNPTION OF CASH TRANSACTION FOR ASSESSMENT I YEARS 1gg2-g3, Igg3-g4 & Igg4-gs INVOLVED IN TI'IE APPEALS'' ASSESSMENT YEAR 1992-93: - L Rs.50,000/- on 13.09.1991 to fuI/s: Haney Enterprises 2. Rs.25,000/- on 20.11.1991 to ItI/s. Honey Enterprises 3. Rs.22,500/- on 01.01.1992 to IWs. Honey Enterprises Total : Rs.97,500/- ASSESSMENT YEAR 1993-94: - t fi I : i ? !,?,'l ; \"\":',1; !'l:',ili\" i\" ffi ,: f'Z::i,';';::,;' ;z: 3. Rs.15, 000/- on I I.OS.lggZ to Ir[/s. Honey Enterprises 4. Rs.20,000/- on 13.07.1992 to IWs. Bedi Associates i 5. Rs. 1i,000/- on 13.06.1992 to A[/s. Film Jagat 6. Rs.25,000/- on 02.09.1992 to IWs. Chipu Pictures Total.'Rs./,5& 000/- ASSESSMENT YEAR 1994-95: - rTA 4?/2011 ,49/20rr &. s6t20rr Page2 of9 .ai t' Ir I. Rs.41,000/- on 08.04.1993 to ltr[/s. Bobby Art International 2. Rs.12,500/- on 15.05.1993 to lr[/s. Film Jagat 3. Rs.15,000/- on 22.05.1993 to IUI/s. Film Jagat 4. Rs.30,000/- on 01.06.1993 to IWs. Film Jagat 5. Rs.12,500/- on 22.05.1993 to IWs. MKD Film Enterpri.ses 6. Rs. I l,B3 I/- on 03.03. Igg4 to IWs. Bkia Films 7. Rs.-3E 000/- on 23.06.1993 to ArI/s. Honey Enterprises0 Total.'Rs.1, 60,831/- 5. The issue raised is whethpr the aforesaid cash payments made by the appellant-assessee violated provisions of Section 40A (3) of the Incotne T4x Act, 196I ('Act', for short) read with Rule 6 DD fi) of the Income Tax Rules, 1962. 6. It is an adnitted position that the Circular No.220 dated 31.05.1997 wap applicable to clause (j) of the said Rule, which reads as under: - \"Clause (j) of rule 6 DD of the Income-tax Rules, 1962, provides that no disallowance under section 40A(3) of the Income-tax Act, 1961, shall be made where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque draytn on a banlc or by a crossed banlc draft - (a) due to exceptional or unavoidable circuntstances; or\" (b) because payment in the manner aforesaid was not practicable, or would have cattsed genutne dfficultlt to the payee, having regard to the nature .of the transaction and the necessity for expedttious settlement thereof; , and also furnishes evidence to the satisfaction of the rTA 48t2011,49t2011 & s6t20tl Page 3 of9 I2-- Income-tax Officer as to the identity of the pa)lee. XXXX the genuineness of the payment and XXXX 4. Atl the circumstances in which the conditions loitd dorm in rule 6DD(j) would be applicable cannot be spelt out. However, some of them which woulC seem 'to meet the requirements of the said rule are: - (, The purchaser is new to ihe seller; or (ii.) The transactions are maCe at a place where either the purchaser or the seller does not have a bankaicount; or (iit) The transactions and payments are made on a banlc holiday; or (ir) The seller is refusing to accept th'e payment by way of crossed cheque/ draft and the purchaser's business interest would suffer due to non- availability of goods othenuise than froru this particular seller; or (\") The seller, acting as a commission agent, i.q requtred to pay cash in turn to persons from whom he has purchased the goods; or ful Specific discount zs given by the seller for payment to be made by way of cash. 5. It can be said that it would genlerally satisfy the requirements of rule 6DD 0, tf o letter to the above effect is produced in respect of each transaction falling within the categories listed above .fro* the seller giving full particulars of his address, sales tax number/ pennanent account number, ,f ony, for lhe purposes of proper identification to enablb the I.TA 481201t,4912071 & tr6/2011 Page 4 of9 1f Income-tax Officer to satisfy himself about the gentdneness oJ' the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of rule 6DD(i). 6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other ,. than those faUing within the above categories which would t ako meet the requirements of rule 6DDG).\" 7. The Tribunal has rejected the explanation given by the appellant- assessee, inter alia holding that the said payrhents should have been made through account payee drafts and by depositing cash in the bank account in order to issue the drafts. The reasoning gi-'-ren by the Tribunal in the impugned order reads as under: ' \"12. The general rule is that the explanation offured by the assessee should not be vague, fantastic or fanciful. It must be an explanation acceptable to the fact ,rindtng authority. It must be supported with cogent reliable and relevant evidence only then the explanation offered by the assessee could. be called genuine'and bctnafi.de. In the in,gtant case in order to get out of the clutches of the provisions of Sub-Sec. 3 of 5.40 A, the assessee first time made the payments by crossed cheques. However, there rJ no explanation as to why sfficient annount was not available in the banlc account of the assessee which led to the bouncing of the cheques. Even if the cheques bounced as to what prevented the assessee front tssuing crossed bank drafts i4 favour of the principal by depositing cash in the banlcfor making the banlc drafts in case the assessee actually and genuinely wanted to create . confidence in the prihcipals for maintain good business relation in future, Further, the assessee has not explained as to wherefrom it obtained the cashfor making the payments in rTA 481201t,49/2011 & 56/2011 Page 5 of9 1.1 cash and whether it was its own cash or it was an annount borrowed fro* someone. In Aase the assessee had obtai.ned the amount as loan in cash for making payment to the principals, then the assessee has again'violated provisions of 5.269 SS by obtatning loan in cash and not by account payee cheques or account payee bank droft. 12. From the facts explained hereinabove, it is evident that in fact the assessee never. genuinely iTttended to ntalce the payments initially by crossed cheques/.:,drafts in compliance with the provistons of Sub-Sec. 3 of 5.40A read with Rule 6 DD and simply adopoted thts route to' get protectiory under clause (j) of Rule 6DD of I.T. Rules by.ultimately succeeding in making the payments in cash to the principals, which appears to be the real tntention of the a.ssessee right from the beginntng. From the facts,narrated above, we conclude tlcal the explanation offered by the assessee is fantastic a.nd fanciful but does not appeal to reason in view of the circumstances, as detailed hereinabove, and, hence, the sanxe cannot be accepted being not bonafide and genu.ine and is accordingly rejected. For the reasons stated above the consolidated order of CIf@), confirming the order of AO in making the impugned addition under provistons of S. 40A(3) of LT. Act, is upheld. The ground nos.l to 3 of the instant appeals of the assessee are reiected.\" 8. There is no dispute in the present case regarding the identity of the payee and genuineness of the transaction/ payment and the respondent- Revenue has not denied and/ or contested the same. The respondent- ) Revenue, accepts the. identity of the payee and genuineness of the transaction/ payments. The contentions raised before us, pertain to vvhether or not the appellant-assessee has been able to. establish ,#Z*\"\"Otional or rT A 4812011, 49/201t & s6l20rr Page 6 of9 I r- I unavoidable circumstances why the payment made in fq $t was not practicable to make such payrnent by bank draft. cash or,was justified a crossed cheque or 9. In the present case, the appellant assessee had filed before the Tribunal a copy of their bank account statements as well as ledger account of the parties to whom the payment was required to be made. It is apparent that the appellant-assessee was not doing well in its business and was facing liquidity. and financial crunch. An examination of the bank account statement shows that whenever cash deposit w4p made in the bank account, it was immediately thereafter utiliZed to issue cheques torvarcls the expenditure. The explanation of the appellant-assessee was that payments were made in cash, as preparation of a bank instrument or issue of cheque would have resulted in a missed opportunity or failure of a favourable or gqod business deal with the third parties. The provisions of Section 40A (3) and Rule 6 DD fi) have been incorporated in the Act in order to check the incurring of bogus and fictitious expenses to non existing parties. In the present case, the appellant-assessee had furnished explanations on the bbsiq of the bank staternents as well as the ledger accounts of the payees to show that the appellant-assessee did not have sufficient cash balance. This rTA 48/2011,49/20t1 & 56/2011 Page'l of 9 LL position is clear and cannot be doubted. The appellant-assessee had submitted that if they had failed to make cash payrnents, they would have breached terms of the agreements entered into with the third pafiies or would have missed out on the busin.r, opportunity. In cases of earlier bounced cheques and when a party is facing liquidity problem, it can get difficult as third parties are reluctant to accept cheques and insist otr cash payments. Arranging funds is also a problern and not easy. It is submitted that the Assessing Officer did not doubt the funds and no addition on this ground and reason was made. The stand of the appellant was that the cash was made available since Az7s. Ritz Theatres (P) Ltd. was holding the cash i collection out of the hire charges. On the said aspect an order of renr.it was passed by the tribunal and no addition or adverse observation was made by the Assessing Officer. These were relevant and material aspects which rryere required to be considered and examined bl the tribunal but have been overlooked. Keeping in view the quanturn of the total amount, we were initially inclined to remit the matter.' However, looking at the aveunents made, the assessment years in question and explanation given, we r:efi'ain from issuing the said direction and accept the contention of the appellant. 1 1. In view of the aforementioned, the answer to the above question is in rrA 48/201t.49/201r & s6/2011 Page B of 9 t? negative and in fuvour of the appellant and against the Revenue. The appeal is arl0wed' No costs' /4 , lt (* / t' SANJIV KTIAIVNA, J I n' @l-,*t, R..V.EASWA.R, J FEB4UARY 06,2012 hs -- l- - - -/ ( **)rtaA t ca^Et v?*A l( (rr't^ sf+ln (6\" $;,^N't) . ITA 48/201t.49/2011 & s6/2011 Page 9 of9 T $-29 to 31. *IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA Nos. 4812011. 4912011 & 5612011 BASU DISTRIBUTOR PW LTD ... Appellant Through Mr. Kaanan Kapur, Advocate. VETSUS ASST COMMISSIONER OF INCOME TAX. Respondent Through Nemo. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V.EASWAR ORDER 27.03.2012 CM No. 572512012 in ITA No. 48/2011 CM No. 5723/2012 in ITA No. 49/2011 GM No. 572412012 in ITA No. 56/2011 By mistake, Private Secretary of one of us (R.V. Easwar, J.) had included the draft, uncorrected and unsigned version in the folder of the daily order sheets transmitted/sent to the website and had also senUtransmitted the correct and signed judgment to the judgment folder of the web site. The copying agency also by mistake did not down load and examine the judgment folder of the web site and issued certified copy on the basis of the down load available on the daily order sheet website. We have verified from the copying agency and it transpires that the copy agency without examining ll lItu: , the original file had issued the certified copy. we clarify that the judgment in the judgment folder of the website is correct and the final judgment. lt is identical and same as the signed judgment. The draft uncorrected order available on the daily order sheet website should be blocked and cancelled. Counsel for the parties should be issued a fresh certified copy on the basis of the correct final judgment available in the judgment folder. The cerlified copy will be given and sent free of cost to the counsel for the parties along with this order. The applications are disPosed of. -./ /c., . J( . L- UL SANJIV KHANNA, J. l''l Y '*t '' R.V. EASWAR, J. MARCH 27,2012 vKR ,.. A "