ACIT, New Delhi V. M/s. Nagar Dairy Pvt. Ltd., New Delhi

ITA 5474/DEL/2015

AI Insights

The case involves appeals by the Revenue against the order of the CIT(A) which had deleted certain additions made by the Assessing Officer (AO) regarding unexplained purchases and disallowances under Section 40A(3) and Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal examined the merits of the CIT(A)'s decisions, which were based on the genuineness of the transactions and the applicability of exceptions under Rule 6DD for cash payments. The Tribunal found that the purchases made by the assessee were genuine and the payments were made under circumstances that justified cash payments, thus not attracting disallowance under Section 40A(3). The Tribunal also agreed with the CIT(A) that the addition under Section 2(22)(e) was not applicable as the assessee was not a shareholder in the company from which the advance was received.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 122109 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 16-10-2022
• Assessment Year: misc
• Appeal Filed On: 06-05-2017
• Other Referred Cases: Super Malls Pvt. Ltd. vs. ACIT, PCIT Vs. Kabul Chawla, Rainbow Promoters Ltd. vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Search and seizure; Deemed dividend
• Section: 131; 56; 40A(3); 133A; 153A; 2(22)(e); 133(6); 264; 43; 13; 22; 153C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘A’ NEW DELHI BEFORE DR. B. R. R. KUMAR, ACCOUNTANT MEMBER AND SH. YOGESH KUMAR U.S., JUDICIAL MEMBER I.T.A. No. 5474/DEL/2015 : A.Y 2010-11 ACIT Central Circle-15, Room No. 353, E-2, ARA Centre, Jhandewalan Extension, New Delhi (APPELLANT) Vs Nagar Dairy Pvt. Ltd. D-3/10, Paschim Marg Vasant Vihar, New Delhi AABCN7304C (RESPONDENT) I.T.A. No. 5475/DEL/2015 : A.Y. 2011-12 ACIT Central Circle-15, Room No. 353, E-2, ARA Centre, Jhandewalan Extension, New Delhi (APPELLANT) Vs Nagar Dairy Pvt. Ltd. D-3/10, Paschim Marg Vasant Vihar, New Delhi AABCN7304C (RESPONDENT) C.O No. 29/Del/2016 (In I.T.A. No. 5474/DEL/2015 : A.Y. 2010-11) Nagar Dairy Pvt. Ltd. D-3/10, Paschim Marg Vasant Vihar, New Delhi AABCN7304C (APPELLANT) Vs ACIT Central Circle-15, Room No. 353, E-2, ARA Centre, Jhandewalan Extension, New Delhi (RESPONDENT) C.O No. 30/Del/2016 (In I.T.A. No. 5475/DEL/2015 : A.Y. 2011-12) Nagar Dairy Pvt. Ltd. D-3/10, Paschim Marg Vasant Vihar, New Delhi AABCN7304C (APPELLANT) Vs ACIT Central Circle-15, Room No. 353, E-2, ARA Centre, Jhandewalan Extension, New Delhi (RESPONDENT) 2 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. ORDER Per Yogesh Kumar U.S., Judicial Member: These appeals have been filed by the Revenue and the Cross Objections have been filed by the assessee against the order dated 12/06/2015 passed by the Ld. CIT(A) –XVI, New Delhi for Assessment Years 2010-11 & 2011-12 respectively. Since, the issue involved in both the appeals and the Cross Objections are identical, they were heard together and being adjudicated by a common order. 2. In ITA No. 5474/Del/2015, following grounds have been raised by the Revenue: “1. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs. 177,31,37,509/- on account of unexplained purchases while holding that the books of accounts of the assessee were defective. 2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition on account of unexplained purchases of Rs. 177,31,37,509/- and substituting the same with GP addition of 0.23% amounting to Rs.42,13,198/- only, which was without any basis. 3. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in not upholding the action of the AO in disallowance of Rs.108,34,15,088/- u/s 40A(3) of the Act and in holding that no Assessee by Sh. Rajat Jain, CA & Sh. Akashat Jain, CA Revenue by Sh. P Praveen Sidharth, CIT DR Date of Hearing 17.10.2022 Date of Pronouncement 24.11.2022 3 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. addition was made by the AO u/s 40A(3) whereas the AO had categorically mention this addition in the order and also initiated penalty u/s 271(1)(c); though no separate addition was made considering the disallowance of higher amount on account of bogus purchases. 4. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in adjudicating the addition made under section 40A(3) of the Act when the assessee had not taken any ground in this respect. 5. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in misinterpreting the provisions of Rule 6DD of the I.T. Rules read with section 40A(3) of the Act and in observing that no disallowance u/s 40A(3) can be made in case of GP addition, when the AO had not made any GP addition. 6. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in restricting the disallowance of 30% of transportation expense to 10% only without appreciating that the assessee had itself agreed to disallowance of 20% of transportation expense in the regular assessment of A.Y. 2005-06. 7. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs.72,18,137/- made u/s 2(22)(e) of the I.T. Act.” 3. In CO No. 29/Del/2019, following grounds have been raised by the assessee: “1. That in the facts and circumstances of the case, the Ld. CIT(A) erred in law - upholding the validity of assumption of jurisdiction by the AO under section 153C of the Income tax Act, 1961 (hereinafter referred as the “Act”) even without complying with the mandatory requirement of recording of satisfaction by the AO of the searched person as envisaged under section 153C of the “Act” and therefore, the assessment is bad in law and deserves to be quashed. 4 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. 2. That in the facts and circumstances of the case, the Ld. CIT(A) erred in fact and in law as the proceedings for the assessment was not pending before the AO and as the seized document / assets do not reflect any undisclosed income of the assessee for the impugned Assessment Year, therefore the assessment order passed under section 153C /144 of the Act is bad in law and deserves to be quashed. 3. That in the facts and circumstances of the case, the Ld. CIT(A) erred in law that it is beyond the scope of provisions of Section 153C read with Section 153A of the “Act” to make / confirm GP Addition and also confirming additions to income on ad-hoc disallowances of certain expenditure i.e. (a) ad-hoc estimated disallowance of Rs 14,53,659/- being 20% of transportation expenses made by the AO without there being any incriminating material on record. (b) ad-hoc estimated disallowance of Rs 1,01,208/- being 10% of certain administrative expenses made by the AO without there being any incriminating material on record. (c) ad-hoc estimated disallowance of Rs 34,25,826/- being 15% of paddy husk expenses made by the AO without there being any incriminating material on record.” C.O. No.29/Del/2016 : A.Y. 2010-11 (Assessee) Jurisdictional issue. Ground No. 1 & 2 4. The assessee has raised the issue of satisfaction and also assessment of undisclosed income not based on seized document. With regard to the recording of satisfaction note, the matter stands adjudicated in the case of the assessee in CO Nos. 26, 27 & 28/Del/2016 by relying on the Judgment of Hon’ble Apex Court in the case of Super Malls Pvt. Ltd. in CA No. 2006 to 2007 of 2020, by following the very same ratio since the satisfaction recorded by the ACIT, Central Circle-21 who is the common AO of the searched person and the 5 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. other person, the Ground No. 1 raised by the assessee are liable to be dismissed. 5. With regard to the objection that the addition has not been based on seized material, we hold that the instant assessment is not an abated assessment owing to the recording of satisfaction and issue of notice u/s 153C on 26.09.2012 and filing of the regular return of income on 30.09.2011. The assessment cannot be said to be unabated. Hence, the judgment in the case of PCIT Vs. Kabul Chawla 380 ITR 573 is not applicable to the instant case. Accordingly, we do not find merit in the Ground No. 2 of the C.O. Thus, we dismiss the Ground No. 2 of the C.O. In view of the same, the issues are being examined on merits of the case in the appeal of the revenue along with Ground No. 3 of the Cross Objection. ITA No. 5474/Del/2015 : A.Y. 2010-11 (Revenue) ITA No. 5475/Del/2015 : A.Y. 2011-12 (Revenue) 6. Brief facts of the case are that, pursuant to the search and seizure operation u/s 132(1) of the Act dated 17/09/2010 in the case of Nagar Dairy Group covered with Sanya Group of cases, the assessee is one of the group cases of Nagar Dairy and its case was also covered u/s 133A of the Act. However, during the course of the search and seizure operation at the business premises of AIMS Promoters Pvt. Ltd. certain documents relating to the assessee were found and seized as per Annexure A-2 and A-3 are being impact on the income of the assessee. Therefore, the case of the assessee company has been covered u/s 153C of the Act. Accordingly, the assessment proceedings has been initiated for the Assessment Years under consideration. The A.O has passed two separate assessment orders dated 28/03/2013 by making following additions:- 6 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. A.Y 2010-11 Particulars Amount (Rs.) Disallowance out of transportation charges 43,60,977 Unexplained Purchases 177,31,37,509 Administrative Selling and distribution 14,15,900 Out of finance charges as discussed above 75,65,166 Out of purchases and operative expenses 1,38,75,017 Loss on sale of Land 1,07,875 Deemed dividend 72,18,132 Total 1,80,76,80,576 A.Y 2011-12 Particulars Amount (Rs) Disallowance out of transportation charges 62,25,643 Unexplained Purchases 224,99,95,254 Administrative Selling and distribution 14,56,184 Out of finance charges as discussed above 85,16,323 Out of purchases and operative expenses 1,80,67,134 7. Aggrieved by the above assessment orders dated 28/03/2013 for the years under consideration, the assessee has preferred two separate appeals before the ld. CIT(A). The Ld. CIT(A) vide order dated 12/06/2015, deleted the partial additions made under the different heads. The details of the additions made by the A.O., relief granted by the ld. CIT(A) and the additions sustained by the ld. CIT(A) are as under:- S. No Particulars of the disallowance made by the A.O. A.Y 2010-11 A.Y 2011-12 By order of A.O By order of CIT(A) By order of A.O By order of CIT(A) Addition Relief Sustained Addition Relief Sustained 1 Transportation charges 43,60,977 29,07,31814,53,65962,25, 643 41,50 462 20,75,181 2 Unexplained 1,77,31,37,509 1,76,89,24,31142,13,1982,24,99,95.254 2,23,81 36,837 1,18 58,417 7 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. Purchases 2 Administrative & distribution expenses 14,15,900 13,14,6921,01,20814,56,184 13.21.106 1,35 078 4 Financial Charges 75,65,166 75,65,166 85,16,323 85,16, 323 5 Purchase & Operative expenses 1,38,75,017 1,04,49,19134,25,8261,80,67,134 1, 36,56,961 44,10,173 6. Deemed dividend 72,18,132 72,18,132 Total addition made 1,80,75,72,701 1,79,83,78,81091,93,8912,8,42,60,538 2,26,57,81,689 1,84,78,849 On account of purchases u/s 40A(3) 1,08,34,15,088 1,08,34,15,0881,55,66,86,340 1,55,66,86, 340 20,75,181 8. As against the deletion of the above additions, the Department has filed ITA No. 5474/Del/2015 (A.Y 2010-11) & ITA No. 5475/Del/2015 (A.Y 2011-12) The assessee has also preferred the COs No. 29/Del/2016 & 30/Del/2016 by challenging the order of the Ld.CIT (A) in sustaining partial addition and also on the ground of assumption of jurisdiction u/s 153C of the Act without complying the mandatory requirement of recording satisfaction etc. 9. We have heard the parties perused the material on record and gave our thoughtful consideration. Unexplained purchases: 10. The Ground No. 1 & 2 of the Revenue’s appeal are regarding deleting the addition of Rs. 177,31,37,509/- made on account of unexplained purchases. The assessee has made purchase of milk of Rs. 177, 31, 37,509/- for further processing sold the same for Rs. 183,18,24,469/- during the year under consideration. The A.O. has made disallowance of expense of Rs. 177,31,37,509/- on the basis that the purchaser remained unverified as the supplies to whom notice issued u/s 133(6) of the Act were un-complied and un-replied further, the assessee has also failed to file confirmation of account in respect of supplies of milk along with the bill of vouchers and books of 8 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. accounts for verification. However, the Assessing Officer has also taken altogether contradictory stand while making disallowance u/s 40A(3) of the Income Tax Act, 1961 wherein held that all the said purchases were verified and genuine on the basis of enquiry report of investigation Wing, New Delhi and made disallowance of Rs. 108,34,15,088/- being cash purchases out of total purchases of Rs. 177,31,37,509/-. 11. The Assessing Officer by way of questionnaires asked the assessee to submit party wise details of the purchasers. The notice sent u/s 133(6) of the Income Tax Act, 1961 to the following parties returned undelivered. • Rohit Dairy, Nawada Road, Gajaraula, Uttar Pradesh • Rishi Dairy, Chaudhary Sarai Choki, Adampur Road Malisarai, District Sambhal • Misrar Khan • Prem Dairy • Shrawan Dairy etc. 12. The assessee has provided the new address of the above mentioned parties, which were duly served on the above parties in the given addresses. 13. The issue pertaining to unexplained purchases has been mentioned at page 4 to 7 of the Assessment Order. The Assessing Officer issued notices u/s 133(6) of the Act to various parties for verification of purchases. The said notices have not been complied with. In view of the non-compliance, the Assessing Officer made addition of the total purchases made by the assessee holding that the purchases were unverifiable. For the sake of ready reference, the relevant portion of the Assessment Order is reproduced hereunder: 9 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. “5. Unexplained Purchases During year under consideration the assessee has shown total purchases of milk from milk suppliers amounting to Rs. 1,77,31,37,509/- against the sale of Rs. 1,83,18,25,469/-. To verify the purchases the assessee has been asked to submit copies of account of milk suppliers, bills and vouchers, along with the books of account. The assessee neither filed party wise details of purchases made nor copies of account of suppliers, neither bills and vouchers nor byoks of account have been produced for verification of purchases claimed. Notices u/s 133(6) has been issued to various suppliers. However, they remained un-complied. Vide letter dated 15.03.2013 the assessee was confronted with the fact that the notices u/s 133(6) have been received back unserved in the below mentioned cases along with the remarks mentioned and therefore purchases remains unverified. 5.1 Further on 19.03.2013 notices u/s 133(6) has been issued again on the above mentioned parties at the new addresses provided by the assessee for verification of purchases. However, these notices also remained un-complied. In the form no. 3CA the auditor has mentioned that the purchases made from the above mentioned party were in cash. Accordingly, the disallowance of purchases made in cash are being considered in the later part of the order u/s 40(A)(3). Name of the person to whom letter u/s 133(6) sent Postal remarks Rohit Dairy, Nawada Road, Gajraula U.P. No such dairy in the name of Rohit Dairy is functioning at the address given Village Level Connection (VLC), Village Shakarpur, Hapur, Ghaziabad No such person at the address given. Rishi Dairy, No such person at the address given. Misrar Khan No such person at the address given. Prem Dairy No such person at the address given. 10 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. 5.2 Apart from the above parties, letters u/s 133 (6) have been sent to following parties also. i. Malook Food Industries ii. Himalaya Food Industries iii. Malook Milk Plant iv. Sarvan Dairy v. Lakshya Dairy Pvt. Ltd. However, no reply has been received. It is also seen that the purchases from these parties are also in partly cash which is also being considered for disallowance u/s 40(A)(3). Notwithstanding, disallowance of purchases made in cash u/s 40(A)(3) it is necessary to verify the genuineness of the purchases. 5.3 In view of the fact that notices u/s 133(6) issued to suppliers remained un- complied/ un-replied and that the assessee has not submitted confirmed copy of the account in respect of suppliers of the milk along with the bill of vouchers and books of account for verification. The purchases made by the assessee remained unverified. The assessee has also not furnished party wise details of the purchases neither replied show cause notice dated 15.03.2013. The only information available on record is that the assessee has made total purchase of milk amounting to Rs. 177,31,37,509/- out of which Rs. 108,34,15,088/- have been made in cash through following 10 parties as per the amounts mentioned below:- S. No. Party Name Amount 1 Himalaya Foods Industries 104774168.00 2 Lakshya Dairy (P) Ltd. 55646170.00 3 Malook Foods Industries 100958317.00 4 Malook Milk Plant 103126618.00 5 Misrar Khan 134729142.00 11 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. 6 Prem Dairy 121597148.00 7 Rishi Dairy 70447135.00 8 Rohit Dairy 91552444.00 9 Sarvan Dairy 126887839.00 10 VLC Shakarpur 173696107.00 1083415088.00 5.4 The payments made in cash for the purchases claimed by the assessee attracts the provisions of section 40(A)(3) and therefore being considered for disallowance in the later part of this order. Notwithstanding disallowance of the same u/s 40A(3), these purchases remain unverified, and therefore purchases made in cash as mentioned in the audit report amounting to Rs. 108,34,15,088/- is being disallowed along with the remaining purchases, which comes out to Rs. 177,31,37,509/- totaling to Rs. remain unverified as discussed above and therefore being disallowed.” 14. The ld. CIT(A) has summoned all the parties u/s 131 who did not turn up during the proceedings u/s 153C before the AO. The statement of the parties were recorded on oath in the presence of the AO concerned. All the parties have deposed that they had indeed supplied milk to the assessee and payments have been received in cash as well as cheque. Hence, the ld. CIT(A) came to a conclusion that the purchases as alleged by the Assessing Officer, cannot be treated as bogus. For the sake of ready reference, the order of the ld. CIT(A) is reproduced as under: “(xvii) All the parties who did not turn up during 153C proceedings were summoned u/s 131 by the undersigned and their statements were recorded in the presence of the AO concerned AO, Shree Rajesh Kumar, ACIT, Central Circle-15, New Delhi who could not find any anomalies or falsities or contradictions in their statements even though all such parties deposed on oath that they had supplied milk to the appellant both in cash as 12 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. well as cheque. Thus the identity, genuineness and creditworthiness of all the parties in respect of whom sales (purchase by appellant) were held to be bogus by the AO u/s 153C became accomplished facts. (xviii) Since under the overall circumstances, the correctness of the appellant’s claim had been established by furnishing relevant bills, bank statements and considering the fact that without purchases of such material and job charges incurred, the manufacture could not have been possible, the impugned addition treating purchases as bogus was not justified. (xix) The erstwhile AO forgot to reject the books of account of the appellant. Similarly, the sales were also not doubted. It is an admitted position that substantial amount of sales made were found to be genuine upon verification in the earlier and immediately succeeding AY i.e. 2012-2013. (xx) There were confirmation letters filed by the suppliers alongwith copies of invoices for sale. (xxi) There is substance in the argument of the Id. A/R that after completion of the transactions the appellant was having no control over the suppliers from whom claimed purchases were made nor was it justified to expect control of the appellant over the suppliers. (xxii) The AO did not come up with any positive evidence to establish that the goods were not purchased from those parties but from someone else and that the amount paid by the appellant in consideration against the supply of milk to them were ultimately returned by them to the appellant. Merely because the appellant could not produce the suppliers on an earlier occasion during the course of assessment proceedings u/s 153C or in some cases the parties did not respond to the summons served upon them, it did not automatically lead to the conclusion beyond doubt that the purchases claimed and the suppliers were not genuine. 13 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. (xxiii) It was in the knowledge of the revenue that the said suppliers were the income- tax assessees. The revenue, apart from issuing notices under section 131 at the instance of the appellant did not pursue the matter further. There was no effort made by the AO erstwhile to pursue the so-called alleged suppliers. In those circumstances, the appellant could not do any further. In the premises the appellant had discharged the burden that lay on him during 153C proceedings. (xxiv) In respect of suppliers upon whom notices could not be served, it was found that they had changed their places of business and new addresses had been furnished along with full particulars as to purchase.etc. Thus, the identities of all the parties had been proved. In respect of non-compliance with notices under section 133(6) of the Act, the Assessing Officer could have taken appropriate action against the defaulters. It was not the case of the Assessing Officer that the Appellant did not make any purchases. Nothing was pointed out to show that any purchases were inflated, or bogus.” 15. During the hearing before us, the fact of production of the parties by the ld. CIT(A) in the presence of the Assessing Officer has not been in dispute. The fact that the parties supplied milk to the assessee company could not be disputed. The AO has also held that milk purchases were made not from farmers but through the intermediaries of the milk traders, thus contradicted the fact that the purchases remain unverifiable. Under such circumstances, the action of the Assessing Officer resorting to disallowance of entire purchases is bad in law. Since, the identity, genuineness and supply-worthiness of all the parties has been proved by the way of statement recorded u/s 131 of the Act and all the suppliers were duly paid, we refrain from interfering with the order of the ld. CIT(A) on this issue. Accordingly, Ground No. 1 & 2 of the Revenue’s Appeal are dismissed. 14 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. Disallowance Section 40A(3) of the Act: 16. Ground No. 3 to 5 are directed against action of the Ld. CIT(A) in deleting the disallowance of Rs.108,34,15,088/- u/s 40A(3) of the Act made by the Ld. A.O. 17. While disallowing the purchases to the tune of Rs.177,31,37,509/-, the Assessing Officer has also resorted to disallowance of Rs.108,34,15,088/- u/s 40A(3) on account of cash payments made to milk suppliers. The AO held that the provisions of Rule 6DD(e) were not applicable to the facts of the assessee’s case. However, while computation of the total income, the Assessing Officer has considered the disallowance on account of purchases only and owing to that no separate disallowance u/s 40A(3) has been made. 18. The ld. CIT(A) after examination of the details of cash payments and bank payment held that the payments made in excess of Rs.20,000/- were covered by provisions of Rule 6DD of the Income Tax Rules, 1962. The ld. CIT(A) asked the assessee at the appellate stage to elaborate the payments made by it in cash to the suppliers of milk to corroborate its claim that the said cash payments were covered under the exceptions provided in the Rule 6DDof the I.T. Rules 1962. In reply thereto the assessee prepared the details on the basis of the submissions made during the 153C proceedings as under to substantiate its claim that all the payments in excess of Rs.20,000/- were made on holidays as per Rule 6DD. The assessee furnished the total purchases of milk in cash under the exemption provided by Rule 6DD of the Income Tax Rules, 1962 in a tabular form before the ld. CIT(A) which could not be disputed by the Assessing Officer. 15 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. 19. During the arguments before us, the ld. DR argued that in case the purchases have been proved genuine, still the assessee is liable to be taxed as per the provisions of Section 40A(3) and Rule 6DD is not applicable to the facts of the assessee’s case. 20. Rule 6DD reads as under: “6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account 2 [account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA, exceeds ten thousand rupees] (a) where the payment is made to— (i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949); (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956); (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender; 16 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. (c) where the payment is made by— (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank; (v) to (vii) 3 [ *** ] Explanation.—For the purposes of this clause and clause (g), the term “bank” means any bank, banking company or society referred to in sub- clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)], whether incorporated or not, which is established outside India; (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; (e) where the payment is made for the purchase of— (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; 17 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. 21. Rule 6DD of the I.T. Rules, 1962 provides that an assessee can be exempted from the payment by a crossed cheque or crossed bank draft in the circumstances specified in the rule. The CBDT has issued certain guidelines giving certain circumstances and those circumstances are illustrative and not exhaustive and the underlying idea of the circular is that if the identity of the payee is known, it would be possible for the ITO to cross check whether the transaction had in fact taken place CIT vs. K.K.S.K. Leather Processor P. Ltd (2007) 292 ITR 669, 693(Mad.). 22. While adjudicating the issue, the ld. CIT(A) held as under: “In cases where the authorities are satisfied about the genuineness of the transaction and the identity of the payee, there would be no occasion to disallow such kind of payment in the circumstances of acute financial stringency. Thus, where the transaction is found to be genuine and the identity of the payee is established, a liberal view of compelling and mitigating circumstances would be taken - Walford Transport (Eastern India) Ltd vs. CIT (1999) 240 ITR 902, 907 (Gauh.) Sub-sections (3) and (4): Payments Exceeding Rs 20,000. The provisions of s. 40A(3) are not attracted where the parties are identified and there is no material on record to doubt the genuineness of the payment. These exceptions are not exhaustive and where the genuineness of the, transaction, the payment and identity o receiver is established, the requirements of Rule 6DD(j) must be deemed to have been satisfied. In order to get the shelter of this exception, the genuineness of the transaction and the existence of circumstances warranting payment by cash has to be proved by the assessee. But, while considering the exceptional circumstances, the business exigencies, convenience and security should also be looked into. Further, where a transaction's found to be genuine and the identity of the payee is established, a liberal view of compelling and mitigating circumstances should be taken. Payments made after the 18 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. close of banking hours or payments made to new parties" or payments where the seller or the purchaser did not have a bank account are held to fall within this exception. Similarly, when the supplier insists for cash payment since the earlier cheques given were dishonored, such cash payment fall within this exception. The principal contactor’s cash payment to the sub-contractor could not be treated as an expenditure and s. 40A(3) will not be applicable. Likewise, where the assessee was dealing with a party for the first time and the party insisted for cash payment, the situation was held to fall within the exception. Payment of market fee in cash when the market committee filed a letter to the effect that it was not accepting market fee by cheque was held to be falling within this exception and hence, allowable. Cash payment due to financial stringency to genuine parties in genuine transactions could be held to fall within this exception. Payments of cash to lorry drivers were held not disallowable. When income of an assessee is assessed by applying a gross profit rate no disallowance can be made under this sub-section in respect of cash purchases. In addition to the above the appellant also insisted that the AO was totally unwarranted in ignoring the following extenuating circumstances: i) The AO did not dispute the cash transactions relating to purchases at any point of time. ii) From the above it was clear that the AO did not impugn the genuineness of the transactions. iii) The identities of all the suppliers were established facts as the Investigation Wing had already examined them to ascertain their genuineness and creditworthiness. iv) The competitive environment in the milk industries was also overlooked by the AO. The payments and receipts were all reflected in the payers and the payees accounts. v) The money paid in cash to the village level collectors or suppliers by the appellant was all given for the dhoodies of the milk who insisted on immediate settlement of the accounts. 19 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. vi) The suppliers accounts also revealed that the dhoodies creditors were almost nil. The reason was the immediate payment of cash given by the appellant to the suppliers for the dhoodies who refused to accept cheques. vii) The AO overlooked the fact that the appellant gave incentives to the suppliers for supplying bulk of the milk to it in the form of payment within short notice to them (suppliers). viii) In the end it was concluded that the AO invoked section 40A(3) for academic purposes only as he did not make any addition thereon. The adverse remarks concering 40A(3) in the case of the appellant proceeded from the hyper technical view taken by the AO in the process of which he failed to discern the sprit underlying the relevant provisions. ix) The factors of business expediency, exceptional/extraordinary circumstances, financial stringency of the dhoodies who insisted on cash payments against supply of milk to the suppliers. x) In earlier and subsequent years similar position in relation to 40A(3) prevailed which on scrutiny was not disturbed by any of the AOs in the past. xi) Finally reliance was placed by the appellant on the following cases:- 1. Anupam Tele Services v s. ITO (2014) 43 taxmann.com 199 (HC Gujarat) 2. Sri Laxmi Satyanarayana Oil Mill vs. C1T. A.P. Hyderabad (2014) 49 taxmann.com 363 (Andhra Pradesh) 3. CIT vs. C. V. Sebastian (2014) 45 taxmann.com 349 (Kerala) 4. CIT, Aligarh vs. Sunil Kumar Agarwal (2013) 38 taxmann.com 386 (Allahabad) 5. CIT-II vs. Hindustan Equipment (P) Ltd (2013) 30 taxmann.com 295 (Madhya Pradesh) 6. CIT(Central) Ludhiana vs. S.A. Builders Ltd. (2013) 38 taxmann.com 255 (Punjab & Haryana) 7. CIT vs. Balaji Engineering & Construction Works (2010) 323 ITR 351 (Kar.) 8. CIT-II1, Ludhiana vs. Smt. Shelly Passi (2013) 31 taxmann.com 173 (Punjab & Haryana) 9. CIT-I vs. Magnificent Construction (P) Ltd (2013) 40 taxmann.com 306 20 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. (Madhya Pradesh) 10. R.C. Goel vs. CIT (2013) 29 taxmann.com 406 (Delhi) 11. CIT vs. Sri Shanmuga Ginning Factory (2013) 37 taxmann.com 422 (Madras) 12. CIT vs. Kishor Project (P) Ltd (2013) 36 taxmann.com 94 (Gujarat) 13. ITO vs. Navjivan Synthetics (2013) 32 taxmann.com 125 (Ahmadabad - Trib.) 14. CIT, Jaipur-II, Jaipur vs. Precious Jewels Corporation (2012) 17 taxmann.com 264 (Raj) 15. C1T-IV vs. Shree Rama Multi Tech Ltd (2013) 34 taxmann.com 329 (HC Gujarat) 16. CIT-1, Mumbai vs. Nikunj Eximp Enterprises (P) Ltd (2013) 35 taxmann.com 384 (HC Bombay) 17. Hilux Automotive (P) Ltd. Vs. ITO Ward 12(2), New Delhi (2007) 163 taxmann 90 (Delhi) (Mag.) 18. DCIT Vs. Hanuman Sugar (Khandsari) Mills (P) Ltd. (2013) 38 taxmann.com 53 (Allahabad)” 23. We have gone through the entire facts on record, the ld. CIT(A) has gone to the root cause of the disallowance u/s 40A(3) and owing to the genuineness of the purchase, provisions of the rules and dates/days on which the payments have been made and the purpose thereof, has cogently held that the provisions of Section 40A(3) are not attracted in this case, the decision of which, we decline to interfere with the order of the ld. CIT(A). As a consequence, the ad- hoc estimation @ 0.23% of the sales made by the ld. CIT(A) is also liable to be deleted. 24. In the result, the Ground No. 3 to 5 of the Revenue on the grounds of purchase u/s 40A(3) is dismissed. 21 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. Ad-hoc Disallowances: 25. The Revenue’s Grounds of Appeal No. 6 is regarding ad-hoc disallowance which has been restricted by the CIT (A) to 10%. And the Assessee has raised Ground No. 3 on sustaining ad-hoc estimated disallowances. Since, both the Grounds are on the very same issue, the same are dealt together as under. 26. The AO made ad-hoc disallowance of 30% on the power fuel, packing material and repairs & maintenance. The Ld. CIT (A) restricted it to 10% on ad- hoc basis. Similarly, the AO made 30% disallowance on administrative & distribution expenses and also on finance charges. The ld. CIT(A) has restricted the disallowances to 10% and deleted the disallowance made on financial charges. We hold that no disallowance is called for on financial charges owing to submission of complete documentary evidences. Hence, the order of the ld. CIT(A) deleting the financial expenses is affirmed. With regard to the ad-hoc disallowances on account of transport and administrative expenses, since they are ad-hoc in nature and indistinct rather than a generalized solution adaptable to collateral instances, we restrict to disallowance to 5% on ad-hoc basis. Accordingly, the Revenue’s Ground No. 6 in ITA and Assessee’s Ground No. 3 in the C.O are partly allowed. Addition on account of Deemed Dividend u/s 2(22)(e) of the Act. 27. The Ground No. 7 is regarding the action of the Ld. CIT(A) in deleting of addition of Rs. 72,18,132/- made by the A.O. u/s 2(22)(e) of the Act. 28. The AO has made an addition of Rs. 72,18,132/- on account of deemed dividend under section 2(22)(e) of Income Tax Act, 1961 for the reason that on perusal of annexure 12 of the balance sheet, assessee company has to pay Rs. 1,15,40,789/- to M/s AIMS Promoters Private Limited as advance taken from 22 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. said concern and Shri Malook Nagar was having 84.11% share holding in M/s AIMS Promoters Private Limited and 66.81% in the assessee company. 29. On appeal, the CIT(A) has deleted the addition on account of deemed dividend u/s 2(22)(e) in the hands of the appellant. The CIT(A) has observed on Page No. 344 of the appellate order that, “..........the AO was totally unwarranted in adding the unsecured loan, treating It as deemed dividend u/s 2(22)(e) when the appellant company was not a registered shareholder in M/s AIMS Promoters Pvt. Ltd. Even otherwise the above issue was decided by me against the appellant’s company director Shree Malook Nagar, upholding the addition in the hands of Shree Malook Nagar, Having regard to the above fact the same amount is not considered fit for addition in two hands ” 30. The ld. DR vehemently relied on the Assessment Order. 31. It is found from the balance sheet the assessee company has to pay Rs. 1,15,40,789/- to M/s AIMS Promoters Private Limited as advance taken from said concern and Shri Malook Nagar was having 84.11% share holding in M/s AIMS Promoters Private Limited and 66.81% in the assessee company. The assessee company did not hold any shares in the AIMS Promoters Pvt. Ltd. Therefore, the assessee Company neither the registered nor the beneficial share holders of M/s AIMS Promoters Pvt. Ltd. In this regard the assessee has relied upon the judgment rendered in the case of Rainbow Promoters Ltd. vs. ACIT [2022] 139 taxmann.com 332 (Delhi - Trib.) wherein it has been held that, “36...............As the assessee is not share holder of payer group companies who paid loan/advance to the assessee and considering the legal position that dividend is to be received by shareholder only, the amount received by the assessee is not to be treated as deemed dividend in the hands of assessee. 23 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. Moreover, this view is fully supported by decision of the Hon'ble Delhi High Court in case of Ankitech (P.) Ltd. (supra).’’ 32. In view of the above discussion, we do not find any infirmity or error committed by Ld. CIT(A) in deleting the addition on account of deemed dividend u/s 2(22)(e) of the Act. Accordingly, we dismiss the Ground No. 7 of the Revenue. 33. In the result, Appeal of the Revenue in ITA No. 5474/Del/2015 and the Cross Objection No. 29/Del/2016 filed by the Assessee are partly allowed. ITA No. 5475/Del/2015 (A.Y 2011-12) and C.O. No. 30/Del/2016 34. The Revenue has raised the similar grounds that of raised in ITA No. 5474/Del/2015 (A.Y 2010-11) and the assessee has also raised the similar grounds in C.O No. 29/Del/2016. In view of the reasoning given in the order made in ITA No. 5474/Del/2015 (Supra) and C.O No. 29/Del/2016, by applying the same ratio the present appeal filed by Revenue ITA No. 5475/Del/2015 and C.O No. 30/Del/2016 are disposed off by partly allowing the Appeal and the Cross Objection in terms of the order made in ITA No. 5474/Del/2015 and C.O No. 29/Del/2016. 35. In the result, the appeals of the Revenue in ITA No. 5475/Del/2015 & and C.O No. 30/Del/2016 filed by the Assessee are partly allowed. Order pronounced in the Open Court on this 24 th Day of November, 2022 Sd/- Sd/- (Dr. B. R. R. KUMAR) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 24/11/2022 Subodh Kumar, Sr. PS/R. Naheed * 24 ITA Nos. 5474 & 5475/Del/2015 C.O. Nos. 29 & 30/Del/2016 Nagar Dairy Pvt. Ltd. Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI