SREE MUTHU DYERS,ERODE V. DCIT,CIRCLE-1, ERODE

ITA 1381/CHNY/2023

AI Insights

The case revolves around the disallowance of certain expenses claimed by Sree Muthu Dyers in their income tax returns for the assessment years 2015-16 to 2017-18. The expenses in question were payments made for water, which were not made through account payee cheques as required under Section 40A(3) of the Income Tax Act. The AO and CIT(A) had disallowed these expenses, citing a violation of Section 40A(3) due to the use of crossed cheques instead of account payee cheques. The Tribunal examined whether the use of crossed cheques, which are not self-cheques and ensure payment directly to the payee's account, constituted a breach of the statutory requirement. The Tribunal concluded that the appellant's method of payment did not violate the provisions of Section 40A(3), leading to the allowance of the appeals.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 46400 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-08-2024
• Assessment Year: 2015-2016
• Appeal Filed On: 28-11-2023
• Other Referred Cases: ITA No.6115 / Del / 2018, ITA No.4618 / Del / 2019
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMUEL PITTA
• Assessee Lawyers: S. SRIDHAR
• Keywords: Set aside; Commercial expediency
• Section: 250; 40A(3)

Judgement Text

"आयकर अपीलीय अधिकरण, ‘ए’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH: CHENNAI श्री एबी टी. वर्की, न्याययर्क सदस्य एवं श्री अमिताभ शुक्ला, लेखा सदस्य क े समक्ष BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.1381, 1382 & 1383 /Chny/2023 निर्धारण वर्ा /Assessment Years: 2015-16, 2016-17 & 2017-18 Sree Muthu Dyers, No.1, Bhavani Road, R.N.Pudur Post, Erode, Tamil Nadu-638005. [PAN: ACIFS5299K] The Deputy Commissioner of Income Tax, Circle-1, Erode (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Appellant by : Shri S.Sridhar, Advocate प्रत्यर्थी की ओर से /Respondent by : Shri Dr.Samuel Pitta, JCIT सुनवाई की तारीख/Date of Hearing : 21.08.2024 घोषणा की तारीख /Date of Pronouncement : 25.10.2024 आदेश / O R D E R PER AMITABH SHUKLA, A.M : These appeals are filed against the order bearing DIN & Order No.ITBA / NFAC / S / 250 / 2023-24 / 1056617279(1), No.ITBA / NFAC / S / 250 / 2023-24 / 1056616852(1), No.ITBA / NFAC / S / 250 / 2023-24 / 1056617069(1) dated 27.09.2023 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment years 2015-16, 2016-17 and 2017-18. Through the aforesaid appeals the assesse has challenged order u/s 250 dated 27.09.2023 passed by NFAC, Delhi. ITA No.1381, 1832 & 1383/Chny/2023 :- 2 -: 2.0 It is noted that there is a common issue of disallowance u/s 40A(3) r.w. Rule-6DD of the act in ITA Nos.1381 to 1383 relevant for AY- 2015-16 to 2017-18 and hence all the above appeals adjudicated with this common order. For the purposes of clarity and adjudication of the matter, figures for the year AY-2015-16 are taken as the same is considered as the lead year. 3.0 The Ld. Counsel for the assesse informed that the assesse had filed its return of income for AY-2015-16 declaring an income of Rs.45,55,591/-. The Ld. AO noted that the assesse had incurred an amount of Rs.69,62,000/- as water expenses out of which Rs.36,80,000/- was paid during the year. It was claimed that the water was purchased from five parties. The Ld. AO called three parties and recorded their statements. The parties could not give any information as to how water was arranged by them or details of their water supply business. Two parties stated that they were brokers. The Ld. AO noted that even though appellant claimed to have made them payments through banking, it had never reached their bank accounts. In response to the query the deponents informed that they had accepted post dated cheques and discounted the same for their personal needs. The Ld. AO concluded that even though water is critical to assesse’s business and the incurring of expenses cannot be doubted but as the payments were not made by ITA No.1381, 1832 & 1383/Chny/2023 :- 3 -: account payee cheque, a presumption of violation of section 40A(3) was established in the case. The Ld. Counsel submitted that on account of crossed cheques the assesse has been held guilty of violation of provisions of 40A(3) which bars payment of moneys otherwise then by account payee cheques and treats such payments as cash payments. The Ld. Counsel submitted that the Ld. AO also held the view that the exceptions indicated in section 40A(3) were not attracted in assesse’s case. The Ld. First Appellate Authority confirmed the findings of Ld. AO. While doing so, it was concluded that the element of business exigencies enshrined as an exception in Rule-6DD was unavailable in the present case and he proceeded to sustain the addition. The Ld. CIT(A) also rejected the judicial citation relied upon by the assesse. The Ld. Counsel for the assesse argued that its case is fully covered by the exceptions qua business exigencies enshrined as an exception in Rule-6DD and therefore the disallowance made by the Ld. AO is unwarranted. In support of its contentions, it relied upon the amendment made taxation laws (amendment) Act- 2006 and the CBDT circular No.1 of 2007 dated 27.04.2007. Providing a copy thereof it was argued that only the words “a Cross cheque drawn on a bank or a crossed bank draft” had been substituted by the words “an account payee cheque drawn on a bank or a account payee bank draft”. The Ld. Counsel urged that pertinently the ITA No.1381, 1832 & 1383/Chny/2023 :- 4 -: genuineness of the expenses have not been doubted by the Ld. AO or the CIT(A). The Ld. Counsel informed that the account payee cheque issued by him meant inscribing two transverse lines on the top left corner of the cheque as against the alternative practice of writing “account payee only”. The appellant assesse submitted that the amounts issued to the respective parties have been mentioned in the debit side of its bank statement by the bank thus evidencing that there were no cash withdrawals and that the amounts have been transferred from assesse’s account to parties accounts. In support of its contentions provided through paper book copies of bank statements having customer ID 852525896 maintained with Axis Bank Erode, Tamil Nadu which showed that on different dates the cheques issued by the assesse qua the impugned water supplying parties were debited. In support of its contentions the appellant assesse has also placed reliance upon the decision of the Hon’ble Coordinate Bench of the Delhi Tribunal in ITA No.6115 / Del / 2018 and ITA No.4618 / Del / 2019 dated 15.06.2023 postulating that “business expediency” is inherent in Rule-6DD. 4.0 The Ld. DR insisted that to avoid extension of section 40A(3) the assesse was required to have issued account payee cheques and not crossed cheques. It is not a case of assesse issuing self cheques which were encashed by way of cash withdrawals by any person so as to attract ITA No.1381, 1832 & 1383/Chny/2023 :- 5 -: disallowance u/s 40A(3). It was accordingly argued that the appellant has not violated any provisions of section 40A(3) of making any cash payments and that therefore the disallowance made by the AO Rs.36,80,000/- be deleted. The Ld. DR stated that the cheques issued were only crossed cheques (containing two transverse lines on the top left) and not account payee cheques (containing inscription a/c payee on the top left) and therefore the disallowance u/s 40A(3) is correct. 5.0 We have heard rival submissions in the light of material available on records. The only controversy germane to the issue is that the assesse had issued cheques to the impugned parties by making two transverse lines on the top left corner of the cheque and deems the same as a conduct not violative of section 40A(3). On the other hand the Ld. AO has made the addition on the premise that the assesse was required to have made two transverse lines on the top left corner of the cheque and writing account payee. Thus the issue is as to what is the correct practice. We deem it fit to go into the principles of law which we think always takes precedence over everything else when there is a question of judicial interpretation. This brings us to the very question of placing section 40A(3) on the statute. We consider it necessary to reproduce the exact statutory provisions herein below:- ITA No.1381, 1832 & 1383/Chny/2023 :- 6 -: “…Where the assessee incurs any expenditure in respect of which 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 payee bank draft, 2[or use of electronic clearing system through a bank account, exceeds ten thousand rupees], no deduction shall be allowed in respect of such expenditure….” (the amount amended to Rs.20000/- subsequently) 6.0 A bare reading of the statute above says that in the event of a taxpayer incurring an expenditure exceeding Rs.20,000/- by a mode other than by an account payee cheque or bank draft or by way of an electronic clearing system no deduction shall be allowed qua the impugned expenses. The reverse logic embedded in the said statute is that cash payments only upto Rs.20000/- are allowed. The only logical legislative intent behind section 40A(3) appears to be to control or put a check upon rampant cash transactions which are beyond any effective and documented regulatory system. Thus when a payment is made by a mode of an account payee cheque or bank draft or by way of an electronic clearing system there is always a verifiable trail of two persons who are payer and payees of a transaction. These transactions are clear, candid and transparent transactions available for any verification for a long period of time. Contrary to this, in cash transactions there can ITA No.1381, 1832 & 1383/Chny/2023 :- 7 -: always be an element of a difference between actual and reality. To illustrate a person can always claim to have paid someone an amount of money by cash, but in reality the same may not be true. Viewed in the above background it is noted that the provisions of 40A(3) has been made with the solitary objective of encouraging transactions through banking channels for establishing their authenticity. Thus 40A(3) presumes only two situation i.e either the expenditure has been incurred by cash or by a mode of an account payee cheque or bank draft or by way of an electronic clearing system. There cannot be a third proposition unless one ventures into the helm of system of barter. 7.0 We would now like to examine the banking provisions qua transactions undertaken through cheques. There are only two types of cheques, self or bearer cheques or account payee or crossed cheques. The former are basically cash withdrawal cheques which can be given to anybody with inscription “Bearer” or name of some person without making two transverse lines on the cheque. These cheques can be presented to the bank by the “Bearer” or named person and amount indicated can be encashed by way of cash withdrawal. In the case of account payee or crossed cheques which necessarily would require to have two transverse lines on the cheque or at least written “account payee” along with name ITA No.1381, 1832 & 1383/Chny/2023 :- 8 -: of some person, and amount can only be credited to the account of the person. There would not be any cash disbursal. 8.0 With the above understanding of the matter we do not find that the conduct of the appellant assesse falls into the mischief of provisions of section 40A(3). It is an admitted fact by the revenue that a cheque was issued which had two transverse lines on the cheque. The law mandates that the assesse for amounts exceeding Rs.20000/- and, with the objective of not falling into the mischief of provisions of section 40A(3), is required to incur its expenses by way of an account payee cheque or bank draft or by way of an electronic clearing system. Thus, there is no scope for any confusion in this case. We would also like to mention that the Ld. AO has neither doubted the genuineness of the expenditure nor the commercial expediency thereof. Accordingly in view of the fact that the Ld. AO has neither doubted the genuineness of the expenditure nor the commercial expediency thereof and the assesse has made payments by way of cheque having two transverse lines on top left and also the fact that the amounts of cheque have been credited, by the Bank, to the parties account by debiting assesse’s own account, we hold that there has been no violation of section 40A(3) by the appellant assesse. We therefore set aside the order of Ld.AO and the Ld. CIT(A) with directions to the Ld. AO to delete the impugned addition of Rs.36,80,000/- for AY- ITA No.1381, 1832 & 1383/Chny/2023 :- 9 -: 2015-16. Accordingly, all the grounds of appeal raised by the assesse are allowed. 9.0 As stated above, ITA no. 1382 & 1383 for AY’s 2016-17 & 2017-18 respectively have identical facts save for variations in figures. Accordingly, the decision taken in ITA no. 1381 for AY 2015-16 supra shall apply mutatis mutandis. Accordingly, all the grounds of appeal raised by the assesse qua these appeals are also allowed. 10.0 In the result the appeal raised by the assesse for ITA no 1381, 1382 & 1383 for AY’s 2015-16, 2016-17 & 2017 respectively are allowed Order pronounced on 25th, October-2024 at Chennai. Sd/- ( एबी टी. वकी) (ABY T VARKEY) न्याययक सदस्य / Judicial Member Sd/- (अमिताभ शुक्ला) (AMITABH SHUKLA) लेखा सदस्य /Accountant Member चेन्नई/Chennai, ददनांक/Dated: 25th , October- 2024. KB/- आदेश की प्रयतललपप अग्रेपषत/Copy to: 1. अपीलार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Coimbatore 4. पवभागीय प्रयतयनधि/DR 5. गार्ड फाईल/GF "