Sri Challa Gunaranjan V. Income Tax Department

ITTA/262/2014

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The case involves an appeal by a civil contractor against the order of the Income Tax Tribunal, which upheld the disallowance of certain cash payments made to subcontractors and material suppliers for the assessment year 1997-98. The assessing authority had initially disallowed these payments on the grounds that they were made in violation of Section 40-A(3) of the Income Tax Act, which requires payments exceeding twenty thousand rupees to be made by account payee cheque or demand draft. The appellant argued that there were no banking facilities at the work sites, which justified the cash payments under Rule 6 DD of the Income Tax Rules. However, both the CIT(A) and the ITAT found that there were indeed banking facilities available, and thus the payments did not qualify for the exceptions under Rule 6 DD.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 817061 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 18-10-2014
• Assessment Year: misc
• Other Referred Cases: Attar Singh Gurmukh Singh v. Income Tax Officer, Sri Laxmi Satyanarayana Oil Mill v. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: CHALLA GUNARANJAN
• Keywords: Assessment Year 1997-98; Banking facilities; Cash payments; Income Tax; Rule 6 DD; Section 40-A(3)
• Section: 40(A)(3); 260-A; 6-DD

Judgement Text

"THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHY INCOME TAX TRIBUNAL APPEAL No.262 of 2014 JUDGMENT: (per Hon’ble Sri Justice Ramesh Ranganathan) This appeal, under Section 260-A of the Income Tax Act, 1961 (for brevity, ‘the Act’), has been preferred against the order of the Income Tax Tribunal in I.T.A.No.575/Hyd/01 for the assessment year 1997-98. The appellant is a civil contractor. For the assessment year 1997-98, the assessing authority passed an assessment order on 30.03.2000 disallowing the following three payments: (1) payment to works contractor (Banaganapally site)-Rs.1,92,80,325/-; (2) payment to works contractors (Paruchuri site)-Rs.17,45,000/-; and (3) payment to material suppliers (Paruchuri site)-Rs.71,52,612/-. The assessing authority held that these payments were made to sub-contractors who were shown to have executed works at Banaganapally and Paruchuri i.e. Madhucon Projects Limited (Banaganapally), Sharada Constructions Limited (Banaganapally), B.D.Rao Constructions Company (Banaganapally), and Sharada Constructions (Paruchuri); the assessee had made payments, to M/s B.D.Rao Constructions Company, by cheques drawn on State Bank of India, Banaganapally; from the ledger of Banaganapally it was clear that the assessee had a bank account in Andhra Bank, and in State Bank of Hyderabad, Nandyal during the relevant previous year; the claim of the assessee that there was no banking facility at Banaganapally was factually incorrect; as such the affidavit filed by the Managing Director of the assessee that no banking facility existed at Banaganapally, and other sites, was merely a self-serving document which could not be relied upon; his enquiries revealed that M/s Madhucon Projects Limited had a bank account in State Bank of Hyderabad, Nandikotkur which was near the Banaganapally site; the claim of the assessee, that no banking facility existed at Banaganapally, was far from the truth; with regards payments to Sharada Constructions, and material suppliers also, banking facilities existed both near the Banaganapally site and the Paruchuri site; the bank account, in the ledger of Banaganapally site and Paruchuri site of the books of accounts of the assessee, showed that there were a series of banking transactions; accepting the assessee’s contention would require a banking facility to be available at the work spot itself; that was not the intention of the Legislature while incorporating Rule 6 DD in the Income Tax Rules, 1962 (for brevity, ‘the Rules’); Rule 6 DD was applicable only if there was no banking facility in the immediate vicinity i.e. at a nearby town or a village where the work was being executed; the assessee’s contention, that no banking facility existed at the concerned sites, was not correct, and the payments in question were not covered by the exceptions provided in Rule 6 DD of the Rules. The assessing authority examined the circumstances under which payments were made. He noted that the payments were all made in advance to the assessee; and, subsequently, they were adjusted against the ‘work done’. The assessing authority further held that there was no practical difficulty or unavoidable circumstance, much less an exceptional unavoidable circumstance, which warranted cash payments being made in violation of Section 40-A (3) of the Act; the assessee was neither new to the business nor to the payees, or even to the provisions of the Act; both the assessee and the payees were regular businessmen, and had bank accounts where the payments were made; and it was difficult to believe that the payments in question were made in extenuating circumstances. Aggrieved by the order of the assessing authority, the petitioner carried the matter in appeal to the Commissioner of Income Tax (Appeals) (“CIT(A)” for short) who, by his order dated 21.03.2001, set aside the order of the assessing authority on this score. The CIT (A) held that Rule 6DD would apply if (1) the place at which the payment was made was not served by any bank; and (2) the person to whom the payment was made, ordinarily, resided or carried on business at the place; in the present case, the payments in question were made at the village, or the place of work, where there was no banking facility; that position was clear from the evidence produced before him; the same was accepted in the earlier assessments; it could not be disputed that the piece rate contractors, to whom the payments were made, normally resided at the worksite as they carried on their activities there; similarly, the labourers always reside at the worksite; payments in such cases could not have been made otherwise than through cash; the piece rate contractors, and the labour, who reside at the worksite, required payment to be made in cash and, therefore, the appellant had to make payment in cash; the assessing authority was not correct in his observation as, in this case, there was no banking facilities in any nearby town; in certain cases, payment to material suppliers was made through demand drafts; this showed that the appellant had made payment at the worksite, and cash payments had to be made when the material suppliers/labourers demanded cash payment; in his opinion, the payments in question were squarely covered by Rule 6 DD; and they had to be excluded from the purview of Section 40-A (3) of the Act. Against the order of the CIT (A), the Joint Commissioner of Income Tax (Assessment) carried the matter in appeal to the Income Tax Appellate Tribunal (“ITAT” for short). In the order under appeal before us, the ITAT noted the explanation of the assessee, with regards the subject payment, that payments were made at the work sites which were not served by banking facilities during the year; the CIT (A) had ignored that there was a branch of the State Bank of India at Banaganapally, and the works contractors had their bank accounts either at Banaganapally or at Paruchuri; he had also ignored that payments through cheques were made to the works contractors on several occasions; the assessing authority had also observed that most of the payments, were advance payments which were later adjusted against the bills raised; according to him no unavoidable or exceptional circumstances existed, or were shown to have existed, for payments to be made in cash; the CIT (A) had considered affidavits from the Managing Director of the assessee company, a certificate from the Executive Engineer, Banaganapally site, and a letter from Konkan Railway Corporation Limited, to the effect that there were no banking facilities at the concerned places; the CIT (A) had also accepted the explanation that the material suppliers were paid through demand drafts, and held that the payments in question were covered by Rule 6 DD of the Rules; the assessing authority had given a categorical finding that State Bank of India had a branch at Banaganapally, and had also given the account code of the bank as shown in the ledger; no concrete evidence was placed on record to disprove this finding; in the light of this fact, the affidavit of the Managing Director cannot be given weightage; the CIT (A) had totally ignored this finding, and had accepted whatever the assessee had stated; while works may be going on at several sites, and some of the sites may be at a far distance from the bank, it had also to be considered that the assessee did not suffer total disallowance; they had suffered only 20% disallowance; no exceptional circumstances were shown by the assessee for making payments in cash; and there was no justification, in the order of the CIT (A), for deleting the disallowance. The disallowance, in respect of the three payments, made to works contractors and material suppliers, was restored by the ITAT. Before us Sri Challa Gunaranjan, learned counsel for the appellant, would reiterate the very same contentions which were urged, on behalf of the appellant, before the ITAT. Learned counsel would further submit that the ITAT has not considered the fact that an affidavit was filed by the Managing Partner of the appellant; the findings of the CIT(A) should not have been perfunctorily brushed aside by the ITAT; Rule 6 DD should be given a wide and liberal construction; the letter submitted by the Managing Director of the assessee should have sufficed; and these issues stand concluded by the judgment of the Supreme Court. In Attar Singh Gurmukh Singh v. Income Tax Officer[1]; and this Court in Sri Laxmi Satyanarayana Oil Mill v. Commissioner of Income Tax[2]. Sri Challa Gunaranjan, learned counsel for the appellant, would fairly state that no appeal has been preferred to this Court, against the order of the ITAT, for the subsequent assessment year 1998-99. Before examining the aforesaid contentions, it is necessary to refer to Section 40-A (3) of the Act and Rule 6 DD of the Rules. Section 40-A (3) of the Act provides that, where the assessee incurs expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. Rule 6 DD of the Rules stipulates that no disallowance, under sub-Section (3) of section 40-A of the Act, shall be made, and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) of section 40-A of the Act 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 payee demand draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely:- “ (g) Where payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town”. As has been noted by the CIT (A) himself, the said Rule applies where (1) the place at which the payment is made is not served by any bank; and (2) the person, to whom the payments was made, ordinarily resides or carries on business at the place. The assessing authority held that Banaganapally was served by a branch of the State Bank of India, and has also noted its account number. The CIT (A) has completely ignored this finding of the assessing authority, and has merely relied on an affidavit filed by the Managing Director of the appellant to the contrary. In the said affidavit, and in the other documents filed by the appellant, it was contended that there was no branch of any bank available near the worksite. These self-serving affidavits and certificates, as has been rightly noted by the ITAT, are contrary to the findings recorded by the assessing authority that a branch of the State Bank of India existed at Banaganapally. The ITAT has rightly reversed the finding of the CIT (A) and restored the order of the assessing authority concurring with the finding that there existed a branch of the State Bank of India at Banaganapally. Reliance placed by Sri Challa Gunaranjan, Learned Counsel for the appellant, on Attar Singh Gurmukh Singh1 is misplaced. In the said judgment, the Supreme Court observed: “………..As to the validity of section 40A(3), it was urged that, if the price of the purchased material is not allowed to be adjusted against the sale price of the material sold for want of proof of payment by a crossed cheque or a crossed bank draft, then the income-tax levied will not be on the income but it will be on an assumed income. It is said that the provision authorizing levy of tax on an assumed income would be a restriction on the right to carry on business, besides being arbitrary. In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions…..” (emphasis supplied). As has been held by the Supreme Court, in the aforesaid judgment, considerations of business expediency, and other relevant factors, are not excluded; genuine and bona fide transactions are taken out of the sweep of Section 40-A(3) of the Act; it is open to the assessee to furnish, to the satisfaction of the assessing authority, the circumstances under which payment, in the manner prescribed in Section 40-A(3) of the Act, was not practicable or would have caused genuine difficulty to the payee; and it was open to the assessee to identify the cash payees who had received the cash payment. It was always open to the assessee to produce evidence before the assessing authority, or before the ITAT, to show that the circumstances were such as to have disabled them from making payment in the manner prescribed in Section 40-A(3) of the Act, or that it would have caused genuine difficulty to the payee. The only contention urged before the assessing authority, by way of the affidavits of the Managing Director and others, was that no banking facility existed near the site. This was rightly disbelieved by the assessing authority and the ITAT, both of whom have noted that there existed a branch of the State Bank of India at Banaganapally. The Central Board of Direct Taxes (CBDT) circular dated 31.05.1977 stipulates that it would, generally, satisfy the requirement of Rule 6DD of the Rules if a letter is produced in respect of each transaction falling within the aforesaid categories from the seller giving full particulars of his address, S.T.No./PAN, if any for the purpose of proper verification; and the ITO should record his satisfaction before allowing the benefit of rule 6DD of the Rules. It is not even the appellant’s case that a letter was produced from the payee furnishing details of all the aforesaid particulars. Reliance placed by Sri Challa Gunaranjan, learned counsel for the appellant, on Sri Laxmi Satyanarayana Oil Mill3 is also misplaced. In the said case, payments were made, for purchase of groundnut, in cash as the seller had not only insisted on cash payment, but also gave incentives, such as the facility of payment within one week, discount etc. This Court also found that there existed some justification for the traders, at the relevant point of time, in insisting on payment of the amounts in cash; the reason was that the banking activity was not that prominent and popular, and instances of cheques issued by agencies or persons, in the course of business, being bounced were not infrequent; and the delay, in receiving the consideration for any material supplied by a trader, would have its own cascading effect on the business activities. It is not even the petitioner’s case that cash payments were insisted upon by the payee or that they did not have a bank account. As noted by the assessing authority, all these contractors had bank transactions with the assessee despite which the assessee had made payment in cash. It must also be borne in mind that the jurisdiction which this Court exercises, under Section 260-A of the Act to entertain an appeal, is only if it is satisfied that it involves a substantial question of law. While a perverse finding, or a finding based on no evidence, would constitute a substantial question of law, it is not even urged on behalf of the appellant that the findings recorded by the ITAT suffer from perversity or are based on no evidence. It is not even the appellant’s case that the ITAT had failed to take into consideration relevant material or had failed to eschew irrelevant material. No substantial question of law arises for consideration in this appeal. It is also necessary to note that this appeal has been preferred only for the assessment year 1997-98, though the Joint Commissioner had preferred appeals, against the order of the CIT (A) for both the assessment years 1997-98 and 1998-99, and a common order was passed by the ITAT for both the assessment years. As the only contention urged before us is on the disallowance of payment made under Section 40-A(3) of the Act, and as no substantial question of law arises for consideration, the Appeal fails and is, accordingly, dismissed. The miscellaneous petitions pending, if any, shall also stand disposed of. There shall be no order as to costs. ______________________________ RAMESH RANGANATHAN, J __________________________________ M.SATYANARAYANA MURTHY, J 18th October, 2014. Tsy/Usd [1] (1991) 191 ITR 0667 [2] (2014) 367 ITR 200 (AP) "