THE COMMISSIONER OF INCOME TAX V. M/S PANDURANGA ENTERPRISES

ITA/752/2007

AI Insights

The case involves the Commissioner of Income Tax and the Assistant Commissioner of Income-Tax as appellants against M/s. Panduranga Enterprises, the respondent. The core issue was whether the cash payments made by the assessee for bottling charges, which amounted to Rs.50,86,307, were allowable deductions under Section 40A(3) of the Income Tax Act, 1961, despite being mandated by Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967. The appellate authorities had previously ruled in favor of the assessee, citing exceptions under Rule 6DD(j) of the Income Tax Rules, 1962, which allows for non-disallowance of certain cash payments under specific circumstances. However, the High Court found that Rule 14 applies only to sales and not to purchases, and thus, the exceptions in Rule 6DD(j) did not apply to the assessee's case.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701541 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 22-09-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961, Karnataka Excise (General Conditions) Rules, 1967, Income Tax Rules, 1962
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: K V ARAVIND
• Keywords: Bottling Charges; Cash payment; Excise Rules; Income tax deduction; Exception to rule
• Section: 132; 40A(3); 260-A; 6DD(j)

Judgement Text

" : : 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 22ND DAY OF SEPTEMBER 2014 PRESENT: THE HON'BLE MR.JUSTICE N.KUMAR AND THE HON'BLE MRS.JUSTICE RATHNAKALA ITA NO.752 OF 2007 BETWEEN: 1. The Commissioner of Income Tax Central Circle C.R.Building Queens Road Bangalore. 2. The Assistant Commissioner of Income-Tax Central Circle – IV C.R.Building Queens Road Bangalore. …APPELLANTS (By Sri.K.V.Aravind, Advocate) AND: M/s.Panduranga Enterprises No.200/1, R.V.Road, : : 2 Bangalore. ...RESPONDENT (respondent – served) This ITA is filed under Section 260-A of I.T.Act, 1961 arising out of Order dated 18.05.2007 passed in ITA No.1688/BAN/1992, for the Assessment Years 1988-89 praying to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA No.1688/BAN/1992 dated 18.05.2007 confirming the order passed by the Appellate Commissioner & confirm the order passed by the Asst., Commissioner of Income Central Circle-IV, Bangalore. This Appeal coming on for Hearing, this day, N.KUMAR, J., delivered the following: J U D G M E N T The Revenue has preferred this appeal against the order passed by the appellate authorities holding that Rule 14 of the Karnataka Licenses General Condition Rules, 1967 mandates cash payment and therefore, Section 40A(3) of the Income Tax Act, 1961 is not attracted. 2. Assessee is an arrack contractor and arrack was distributed by the Government of Karnataka for sale in : : 3 bottled format. The Karnataka Government has appointed bottlers for this purpose and the asseessee was required to collect the arrack duly filled in bottles for onward sale. The assessee incurred an expenditure of Rs.50,86,307/- towards bottling charges. He paid the said amount by cash. When the same was noticed in a search conducted under Section 132 of the Act, he was asked to show cause as to why the said amount should not be disallowed as the payment of cash was in contravention of Section 40A(3) of the Income Tax Act. His reply was that the cash payments were made only whenever the managing partner was not available in the station or when the assessee goes late in the evening to collect arrack, cash had to be sent along with permits for taking delivery. Some times the Government authorized bottling agents wanted only cash for supply of arrack and therefore the assessee had no choice as it had to buy arrack only from the bottling agent appointed by the Government. He also contended that the liquor cannot be sold except for : : 4 cash in accordance with the Karnataka Excise (General Conditions) Rules, 1967. The Assessing Authority on consideration of the said explanation held that the assessee being a regular customer of the bottling agent, the payment of bottling charges should have been made in accordance with Section 40A(3) of the Act. The stipulation that no liquor shall be sold except for cash would apply only in respect of sales effected by the licensees and not in relation to purchases effected either from Government or its authorized bottling agents. Therefore, he disallowed the said cash payment of Rs.50,86,307/- under Section 40A(3) of the Act. In the appeal preferred by the assessee challenging the said finding, it was held that under Rule 6DD(j), no disallowance under Section 40A(3) shall be made if the assessee satisfies the Assessing Authority that the particular payment could not be made by way of a crossed cheque or demand draft due to exceptional or unavoidable circumstances, provided he also furnishes the : : 5 evidence regarding the genuineness of the payment and the identity of the payee. Under Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967, no liquor shall be sold except for cash and it appears that this would apply even in respect of bottling charges paid to the licencees. Therefore, he was of the view that the circumstances narrated clearly indicate that the provisions of Section 40A(3) are not applicable in the assessee’s case as the case is covered by Rule 6DD(j) and therefore, disallowance was set aside. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal held that Rule 14 of the Rules permits cash transactions in regard to arrack trade between the government and persons like the assessee. When the supplier insisted on payment of cash in terms of the Rules for the business of arrack, the assessee had no say. Therefore, the case falls under the exceptions in rule 6DD(j) of the Income Tax Rules, 1962 and therefore the appeal : : 6 came to be dismissed. Aggrieved by these orders, the revenue is in appeal. 3. The appeal was admitted to hear the following substantial questions of law as framed in the appeal memo:- (i) Whether the Appellate Authorities were correct in holding that a sum of Rs.50,86,307/- cash payments made by the assessee on account of bottling charges being contrary to Section 40A(3) of the Act was held to be an allowable deduction in view of Rules 6DD(j) of the Rules as the assessee was bound to make only cash payments in accordance with Rule-14 license General Condition rules, 1967? (ii) Whether the Appellate Authorities were correct in not considering that the cash payment contemplated under Rule-14 of the Karnataka Linceses General Condition Rules, 1967 would mean that credit payments will not be received? (iii) Whether the provisions of the Income Tax Act contemplating Section 40A(3) of the Act restriction would prevail over Rule 14 of the : : 7 Karnataka Linceses General Condition Rules, 1967 being a special enactment? (iv) Whether the Appellate Authorities were correct in holding that a sum of Rs.50,86,307/- cash payments had been made as the assessee’s Managing Directors were not available and the purchasers insisted on cash payments which explanation is not covered under Rule 6DD(j) of the Rules?” 4. Section 40A(3) of the Income Tax Act reads as under:- “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, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.” : : 8 5. Rule 6DD(a) and (j) of Income Tax Rules, 1962 reads as under:- “6DD. (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 as defined in clause (cii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or any primary credit society as defined in clause (civ) of that section ; (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956) ; (vi) the Industrial Finance Corporation of India established under section 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948) ; (vii) the Industrial Credit and Investment Corporation of India Ltd. ; : : 9 (viii) the Industrial Development Bank of India established under section 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964) ; (ix) the Unit Trust of India established under section 3 of the Unit Trust of India Act, 1963 (52 of 1963) ; (x) the Madras Industrial Investment Corporation Ltd., Madras ; (xi) the Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad ; (xii) the Kerala State Industrial Development Corporation Ltd., Trivandrum ; (xiii) the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay ; (xiv) the Punjab State Industrial Development Corporation Ltd., Chandigarh ; (xv) the National Industrial Development Corporation Ltd., New Delhi ; (xvi) the Mysore State Industrial Investment and Development Corporation Ltd., Bangalore ; (xvii) the Haryana State Industrial Development Corporation Ltd., Chandigarh ; : : 10 (xviii) any State Financial Corporation established under section 3 of the State Financial Corporations Act, 1951 (63 of 1951) ; 6DD(j) in any other case, where the assessee satisfies the [Assessing Officer] that the payment could not be made by a cross cheque drawn on a bank or by a crossed bank draft – (1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the [Assessing Officer] as to the genuineness of the payment and the identity of the payee].” 6. From the aforesaid two provisions, it is clear that where the assessee incurs any expenditure in respect of which a payment is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or : : 11 account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. Rule 6DD of the Income Tax Rules, 1962 is in the nature of exception to the said section. Rule 6DD (j) provides that where payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft due to exceptional or unavoidable circumstances or because the payment in the manner aforesaid was not practicable or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof and also furnishes evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and the identity of the payee, then the said amount shall be treated as a valid expenditure and Section 40A(3) is not attracted. 7. In the instant case, to fall within that exception, the assessee relies on Rule 14 of the Karnataka Excise : : 12 Licences (General Conditions) Rules, 1967. Section 2 of the said rules explicitly makes it clear that the said rules applies to all the licences issued under the Karnataka Excise Act, 1965 for sale of liquors and every such licence shall be deemed to include the conditions prescribed by these rules as general conditions. In other words, the said rules applies to the sale effected by assessee who has a licence to sell the arrack under the provisions of the Karnataka Excise Act, 1965. It has no application to the purchase made by such licences, that is the assessee. 8. Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967 reads as under:- “14. Sales only for cash – No liquor shall be sold except for cash.” Therefore, the said provision do not apply to the purchase of liquor but it applies only to sale of liquor by the assessee to its customers and therefore, the said rule do not : : 13 fall within Section 6DD(j) of the Income Tax Rules so as to get exemption from application of Section 40A(3). Both the appellate authorities have not properly looked into the said provisions and erred in applying the said provision and in holding that the exemption applies to the assessee. Therefore, the said orders are illegal, erroneous and requires to be set aside. Hence, we pass the following: ORDER The impugned orders are hereby set aside. The substantial questions of law are answered in favour of the revenue and against the assessee. The order passed by the Assessing Authority is restored. Sd/- JUDGE Sd/- JUDGE Prs* "