Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act.
HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax (Appeals), Bathinda
AND G.S. SANDHAWALIA, J.
IT APPEAL NO. 413 OF 2014
JULY 16, 2015
Alok Mittal for the Appellant. G.S. Hooda, Adv. for the Respondent.
S.J. Vazifdar, Actg. CJ. – This is an appeal against the order of the Income Tax Appellate Tribunal reversing the order of the CIT (Appeals). The matter pertains to the assessment year 2009-10.
2. The appeal is admitted on the following substantial questions of law:—
|“(I)||Whether the Tribunal rightly held that the appellant was not entitled to the deductions in respect of cash payments in excess of Rs. 20,000/- made to the vendors for land in view of Section 40A of the Income Tax Act, 1961 (for short ‘the Act’).|
|(II)||Whether the Tribunal rightly upheld the addition of an amount of Rs. 7,76,043/- made on account of the appellant not charging interest from his debtors.”|
Re: Question No. 1
3. The appellant is engaged inter alia in trading in properties in his individual name. As noted in the assessment order, during the course of assessment proceedings, the details of the closing stock as on 31.03.2009 alongwith details of sales/purchases were placed on record. The consideration, which in respect of each of the transactions was admittedly in excess of Rs. 20,000/-, was paid in cash. Payment by demand draft was made only in respect of one of the transactions. These payments in cash were disallowed by the Assessing Officer and the order in this regard was upheld by the Tribunal. The CIT(Appeals) had allowed the deductions.
Section 40A(3) of the Act reads thus:—
“40A(3) 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.”
It is important to note the following proviso to the Section:—
“Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section(3) and this sub-section where a payment or aggregate of payment 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, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.”
4. It is important to note some of the findings of fact by the CIT (Appeals). The identity of the payees i.e. the vendors in respect of the lands purchased by the appellant, was established. The sale deeds were produced. The genuineness thereof was accepted. The amount paid in respect of each of these agreements was certified by the Stamp Registration Authority. The CIT (Appeals) held the transactions to be genuine. Accordingly, the CIT held that the bar against the grant of deductions under Section 40A(3) of the Act was not attracted.
5. It is important to note that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions. It is also important to note that the Tribunal noted the contention on behalf of the appellant that there was a boom in the real estate market; that it was necessary, therefore, to conclude the transactions at the earliest and not to postpone them; that the appellant did not know the vendors and obviously therefore, insisted for payment in cash and that as a result thereof, payments had to be made immediately to settle the deals. The Tribunal did not doubt this case. The Tribunal, however, held that the claim for deduction was not sustainable in view of Section 40A(3) as the payments which were over Rs. 20,000/- were made in cash. The Tribunal, therefore, disallowed the same only on a construction of Section 40A(3).
The Tribunal restricted the ambit of the proviso to the circumstances mentioned in Rule 6DD of the Income Tax Rules, 1962. We find it convenient to let the order of the Tribunal speak for itself:—
“There is no intention of the legislature to make a list of nature and extent of banking facilities available and other factors to be drafted by the assessee at their whims and fancies and as suits to the assessee. Therefore, Rules have been prescribed which are Rule 6DD of I.T. Rules, 1962 and nothing beyond that.
The Ld. CIT(A) has not taken the said proviso in the right spirit and has just accepted the submissions and arguments made by the assessee and has deleted the addition, which is against the facts of the case and against the provisions of law.”
6. Rule 6DD(j) is not exhaustive of the circumstances in which the proviso to Section 40A(3) is applicable. It is only illustrative.
7. The respondent/assessee’s case is supported by several judgments. The Rajasthan High Court in Smt. Harshila Chordia v.ITO  298 ITR 349 held as under:—
“14. About this clause, many doubts were raised and enquiries were directed to the Board as to what shall constitute exceptional and unavoidable circumstances within the meaning of Clause (j). That led to issuance of Circular by the Board on May 31, 1977 ( 108 ITR (St.) 8), which is published in Taxmann, Vol. 1, 1988 Edition. Significantly paragraph 4 of the aforesaid Circular shows very clearly that all the circumstances in which the conditions laid down in Rule 6DD(j) could be applicable cannot be spelt out. However, some of them which will seem to meet the requirements of the said rule are as follows:
|a.||the purchaser is new to the seller; or|
|b.||the transactions are made at a place whether either the purchaser or the seller does not have a bank account; or|
|c.||the transactions and payments are made on a bank holiday; or|
|d.||the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from this particular seller ; or|
|e.||the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchase the goods; or|
|f.||specific discount is given by the seller for payment to be made by way of cash.|
15. It was further clarified in paragraph 6 that the above circumstances are not exhaustive but illustrative.
16. Therefore, in our opinion, the Tribunal was clearly in error in not travelling beyond the circumstances referred to in paragraph 4 of the Circular and to consider the explanation submitted by the assessee on its own merit.
17. Significantly paragraph 5 reproduced hereinbelow gives a clear indication that Rule 6DD(i) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and identity of the receiver is established, the requirement of Rule 6DD(i) must be deemed to have been satisfied. Paragraph 5 of the Circular reads as under  108 ITR (St.) 8. 9:
5. It can be said that it would, generally, satisfy the requirements of Rule 6DD(j), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of Rule 6DD(j).
18. It appears that fulfilment of the conditions of paragraph 5 of the circular has clearly escaped the attention of the Tribunal. The circular clearly indicates that ordinarily where the Income-tax Officer is satisfied about the genuineness of the transaction and payment and identification of the cash payment is established, the Income-tax Officer shall record his satisfaction about the fulfilment of the conditions for allowing the benefit of Rule 6DD(j). Apparently, Section 40A(3)was intended to penalize the tax evader and not the honest transactions and that is why after framing of Rule 6DD (j), the Board stepped in by issuing the aforesaid circular.
19. This clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO v.Swastik Roadways as noticed above.
20. In this case, there is no dispute about the genuineness of the transactions and the payment and identity of the receiver are established. Therefore, the case clearly fell within the parameters of paragraphs 4 and 5 of the aforesaid circular read together.”
8. The respondent’s case is also supported by the judgment of the Supreme Court in Attar Singh Gurmukh Singh v. ITO 191 ITR 667 . After referring to Rule 6DD, the Supreme Court held:—
“7. In our opinion, there is little merit in this contention. Section 40-A(3) must not be read in isolation or to the exclusion of Rule 6-DD. 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 40-A (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 disclosed sources. The terms of Section 40-A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The 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 40-A(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 6-DD 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 40-A(3) and Rule 6-DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. [See: Mudiam Oil Company v. ITO [(1973) 92 ITR 519 (AP)] ]. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.”
9. At the cost of repetition, the Tribunal has not disbelieved the transactions or the genuineness thereof. Nor has it disbelieved the fact of payments having been made. More important, the reasons furnished by the appellant for having made the cash payments, which we have already adverted to, have not been disbelieved. In our view, assuming these reasons to be correct, they clearly make out a case of business expediency.
10. In the circumstances, the order of the Tribunal in this regard is set aside. The payments cannot be disallowed under Section 40A(3) of the Act.
Re: Question No. 2
11. The appellant had admittedly advanced an aggregate amount of Rs. 97,79,200/- between the period 01.04.2008 and 04.12.2008. The amounts were repaid in the year 2009. The appellant contended that he had at his disposal substantial amounts of interest free funds. This fact has been accepted by the Assessing Officer. The Tribunal has not found otherwise. The assessment order sets out the details of the amounts advanced by the appellant as well as the interest free funds received by the appellant. The Tribunal however, upheld the addition made by the Assessing Officer observing that “nothing has been brought on record how the interest free funds which have been claimed to have been available for advancing these loans to various persons were actually available for advancing to these persons”. The Tribunal further observed that it had not been pointed out as to how interest free funds available were advanced to the said persons.
12. It is a little difficult to understand these observations. It has not been denied that interest free funds were available. Nor has it been denied that interest free advances were made by the appellant. In fact, the latter has been accepted by the Assessing Officer. The contention that the appellant has not established that it was the interest free funds that were actually advanced as interest free advances is without substance. Money has no identity. So long it is established that the interest free advances are made by an assessee who has adequate free reserves, it is sufficient to establish that the amounts advanced interest free cannot be added to the assessee’s income. It was not contended that the interest free advances exceeded the interest free funds available with the appellant. Nor was it established that a particular advance received was in turn advanced by the assessee interest free.
13. In the circumstances, the order of the Tribunal upholding the addition is also set aside.
14. Both the questions are, therefore, answered in favour of the appellant/assessee. The appeal is accordingly allowed. There shall be no order as to costs.
15. We pronounced the judgment in open Court on the conclusion of the arguments. While finalizing the judgment, we noticed a discrepancy between Rule 6-DD as downloaded from the internet which was tendered in Court and Rule 6-DD reproduced in several judgments including in Attar Singh Gurmukh Singh (supra), Smt. Harshila Chordia (supra), CIT v.Ashoka Steel Industries and Flour Mills  293 ITR 192 (Punj. & Har.), CIT v. Brij Mohan Singh & Co.  209 ITR 753 (Punj. & Har.) and Girdhari Lal Goenka v. CIT  179 ITR 122 (Cal.).
The material difference really is in clause 6-j of Rule 6-DD. On further research we found that Rule 6-DD was amended by the Income Tax (7th Amendment Rules), 2008. Sub Rule 2 of Rule 1 states that the same shall come into force with effect from the assessment year 2009-10 which is the assessment year in question in this case. The amendment appears to have been by a notification dated 10.10.2008 issued by the Ministry of Finance (Department of Revenue) CBDT. The opening part of the notification reads as follows:—
“S.O. 2431 (E) – In exercise of the powers conferred by section 295 read with proviso to sub section (3A) of Section 40A of the Income Tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income Tax Rules, 1962, namely: —
1. (1) These rules may be called the Income tax (7th Amendment) Rules, 2008.
(2) They shall come into force with effect from assessment year 2009-10.
2. In the Income Tax Rules, 1962, for rule 6DD, the following rule shall be substituted, namely:—
“Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank on account payee bank draft.”
As we had already pronounced the judgment in open court, it is not open to us at this stage to examine the effect of the amendment to Rule 6-DD. We express no opinion in regard thereto except to state that the relevant clause appears to have been amended. It is always open to the parties to adopt appropriate proceedings with regard thereto. Needless to say we express no opinion regarding any proceedings that may be adopted including for a review of the judgment.