Citation Codes

Equivalent Citations

citation codes

Case Number

ITA 48/2011, ITA 49/2011, ITA 56/2011

Attorney(S)

Mr. Kaanan Kapur, Adv.
Mr. Abhishek Maratha, Sr. Standing Counsel.

Judges

Justice R.V. Easwar
Justice Sanjiv Khanna

Acts

provisions of Section 40A(3) of the Income Tax Act, 1961 (Act, for short) read with Rule 6DD(j) of the Income Tax Rules, 1962.5.
Section 40A(3) of the Income Tax Act, 1961 read with Rule 6DD(j) of the Income Tax Rules, 1962.3.
provisions of Sub-Sec. 3 of S.40A read with Rule 6
provisions of Section 40A(3) and Rule 6DD(j)
(j) of rule 6DD of the Income-tax Rules, 1962,
section 40A(3) of the Income-tax Act, 1961,
clause (j) of Rule 6DD of I.T Rules
provisions of S. 40A(3) of I.T Act,

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Smart Summary

Concise Analytical Summary of the Opinion

Factual and Procedural Background

Basu Distributors Pvt. Ltd. filed three appeals against a common impugned order of the Income Tax Appellate Tribunal (Tribunal) dated 07.08.2009 disposing ITA Nos. 4262.Del/2007, 4263.Del/2007 and 4264.Del/2007 relating to assessment years 1992-93, 1993-94 and 1994-95 respectively. The Tribunal had held that certain payments made in cash (each above Rs. 10,000) by the appellant-assessee violated Section 40A(3) of the Income Tax Act, 1961 read with Rule 6DD(j) of the Income Tax Rules, 1962.

The appellant is engaged in the business of film distribution. For the three assessment years the opinion records itemised cash payments made to various parties (e.g., Honey Enterprises, Film Jagat, Bobby Art International and others), with year totals of Rs. 97,500 (1992-93), Rs. 1,58,000 (1993-94) and Rs. 1,60,831 (1994-95).

The central controversy was whether those cash payments offended Section 40A(3) read with Rule 6DD(j), or whether the facts amounted to “exceptional or unavoidable circumstances” (and other requirements) under Rule 6DD(j) such that no disallowance should have been made.

Legal Issues Presented

Whether the Income Tax Appellate Tribunal was right in holding that the payments above Rs. 10,000/- each made in cash by the appellant-assessee violated Section 40A(3) of the Income Tax Act, 1961 read with Rule 6DD(j) of the Income Tax Rules, 1962.

Arguments of the Parties

Appellant's Arguments

The appellant explained the cash payments by reference to its bank statements and ledger accounts, showing liquidity and financial difficulties during the relevant periods.
The appellant said that whenever cash deposits were made in the bank, those amounts were immediately utilized to issue cheques towards expenditure, demonstrating constrained liquidity.
The appellant contended that preparing a bank instrument or issuing a cheque would have caused missed business opportunities or breached agreements with third parties; third parties, given prior bounced cheques and the appellant's liquidity problems, insisted on cash.
The appellant identified the source of cash in part as cash collections held by M/s. Ritz Theatres (P) Ltd. out of hire charges, and submitted that the Assessing Officer did not make an adverse observation on these facts.
Overall, the appellant relied on the illustrative exceptions in Circular No. 220 (Rule 6DD(j)) and on documentary bank and ledger evidence to show the payments were genuine and that exceptional or unavoidable circumstances existed.

Respondent / Tribunal's Arguments and Findings

The Tribunal held that the payments should have been made by account-payee drafts or by depositing cash in the bank to issue bank drafts; the appellants' cheques had bounced and there was no satisfactory explanation why sufficient funds were not available in the bank.
The Tribunal criticised the appellant for failing to explain the source of the cash and whether it was its own funds or borrowed; it observed that if cash loans were taken, that might trigger Section 269SS (prohibition on acceptance of certain loans/advances in cash).
The Tribunal described the assessee's explanation as “fantastic and fanciful” and not bonafide, concluding that the assessee never genuinely intended to make payments by crossed cheques/drafts and had instead intended to make cash payments from the beginning; accordingly it upheld additions under Section 40A(3) and rejected the appellant's grounds.
The respondent-Revenue did not dispute the identity of payees or the genuineness of transactions; rather, it contested whether exceptional or unavoidable circumstances had been established to justify cash payments under Rule 6DD(j).

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court proceeded by framing the substantial question of law common to all three appeals concerning the correctness of the Tribunal's finding under Section 40A(3) read with Rule 6DD(j).

It reviewed the content of Rule 6DD(j) (as set out in Circular No. 220 dated 31.05.1997), which provides that no disallowance under Section 40A(3) shall be made where the assessee satisfies the Income-tax Officer that payment could not be made by way of crossed cheque or draft due to exceptional or unavoidable circumstances or because payment by cheque/draft was not practicable or would have caused genuine difficulty to the payee, together with satisfactory evidence of genuineness and payee identity. The Circular further lists illustrative circumstances and advises that a letter from the seller with identifying particulars would generally assist the Income-tax Officer in being satisfied.

The court noted the Tribunal's reasons for rejecting the appellant's explanation: bounced cheques without explanation for insufficient bank balance, failure to explain source of cash, absence of use of bank drafts by depositing cash, and the possibility of a breach of Section 269SS if cash loans had been taken. The Tribunal concluded the appellant's explanation was not bona fide.

The court then examined the material the appellant had placed before the Tribunal: bank account statements and ledger accounts of the payees, which the court found showed the appellant was facing liquidity problems and that cash deposits in the bank were promptly used to issue cheques. The appellant's explanation was that cheques or preparing bank instruments would have caused loss of business opportunities; third parties were reluctant to accept cheques in light of earlier bounced cheques and insisted on cash.

The court observed that the Revenue did not contest the identity of the payees or the genuineness of the transactions. It found that the Tribunal had overlooked relevant documentary aspects (bank statements and ledger accounts) and that an aspect concerning cash collections held by M/s. Ritz Theatres had earlier been the subject of a remittal by the Tribunal and that the Assessing Officer made no adverse observation on that matter.

Having considered these materials and the nature of the explanatory evidence, the court concluded that the appellant had satisfied the indicia relevant under Rule 6DD(j) (i.e., exceptional/unavoidable circumstances or impracticability of payment by cheque/draft and evidence of genuineness and payee identity) to the extent necessary to answer the substantial question against the Tribunal's conclusion. The court therefore answered the framed question in the negative (i.e., the Tribunal was not right in the finding of violation) and allowed the appeal.

Holding and Implications

Holding: The appeal is allowed. The substantial question of law was answered in the negative and in favour of the appellant and against the Revenue. No costs were awarded.

Implications: The direct consequence is that the Tribunal's conclusion that the cash payments violated Section 40A(3) read with Rule 6DD(j) was set aside for the facts and documents in this case; the appellant's position on the relevant payments succeeds. The opinion does not purport to lay down a broader binding precedent beyond the facts considered, and no new precedent or expansive rule was articulated in the text of the opinion.

Note: This summary is strictly confined to the content and reasoning found in the provided opinion and does not add or infer facts not present in that text.

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Basu Distributor Pvt. Ltd. v. Income Tax

Sanjiv Khanna, J: (Oral):— Basu Distributors Pvt. Ltd. has filed the above noted three appeals against the common impugned order of the Income Tax Appellate Tribunal (‘Tribunal’, for short) dated 07.08.2009 disposing of ITA No. 4262.Del/2007, ITA No. 4263.Del/2007 and ITA No. 4264.Del/2007 pertaining to assessment years 1992-93, 1993-94 and 1994-95 respectively.

2. After hearing counsel for both the parties, we hereby frame the substantial question of law, being common to the three appeals, as under: -

“(i) Whether Income Tax Appellate Tribunal was right in holding that the payments above Rs. 10,000/- each made in cash by the appellant assessee violated Section 40A(3) of the Income Tax Act, 1961 read with Rule 6DD(j) of the Income Tax Rules, 1962.”

3. The appellant-assessee is engaged in the business of film distribution. During the three relevant assessment years, the appellant-assessee made payments in cash, the details of which are given as under: -

DESCRIPTION OF CASH TRANSACTION FOR ASSESSMENT YEARS 1992-93, 1993-94 & 1994-95 INVOLVED IN THE APPEALS”

ASSESSMENT YEAR 1992-93: -

1. Rs. 50,000/- on 13.09.1991 to M/s. Honey Enterprises

2. Rs. 25,000/- on 20.11.1991 to M/s. Honey Enterprises

3. Rs. 22,500/- on 01.01.1992 to M/s. Honey Enterprises

Total: Rs. 97,500/-

ASSESSMENT YEAR 1993-94: -

1. Rs. 50,000/- on 04.05.1992 to M/s. Honey Enterprises

2. Rs. 35,000/- on 08.05.1992 to M/s. Honey Enterprises

3. Rs. 15,000/- on 11.05.1992 to M/s. Honey Enterprises

4. Rs. 20,000/- on 13.07.1992 to M/s. Bedi Associates

5. Rs. 13,000/- on 13.06.1992 to M/s. Film Jagat

6. Rs. 25,000/- on 02.09.1992 to M/s. Chipu Pictures

Total: Rs. 1,58,000/-

ASSESSMENT YEAR 1994-95: -

1. Rs. 41,000/- on 08.04.1993 to M/s. Bobby Art International

2. Rs. 12,500/- on 15.05.1993 to M/s. Film Jagat

3. Rs. 15,000/- on 22.05.1993 to M/s. Film Jagat

4. Rs. 30,000/- on 01.06.1993 to M/s. Film Jagat

5. Rs. 12,500/- on 22.05.1993 to M/s. MKD Film Enterprises

6. Rs. 11,831/- on 03.03.1994 to M/s. Ekta Films

7. Rs. 38,000/- on 23.06.1993 to M/s. Honey Enterprises

Total: Rs. 1,60,831/-

4. The issue raised is whether the aforesaid cash payments made by the appellant-assessee violated provisions of Section 40A(3) of the Income Tax Act, 1961 (‘Act’, for short) read with Rule 6DD(j) of the Income Tax Rules, 1962.

5. It is an admitted position that the Circular No. 220 dated 31.05.1997 was applicable to clause (j) of the said Rule, which reads as under: -

“Clause (j) of rule 6DD of the Income-tax Rules, 1962, provides that no disallowance under section 40A(3) of the Income-tax Act, 1961, shall be made where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft -

(a) due to exceptional or unavoidable circumstances; or

(b) because 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 Income-tax Officer as to the genuineness of the payment and the identity of the payee.

xxxx xxxx xxxx

4. All the circumstances in which the conditions laid down in rule 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are: -

(i) The purchaser is new to the seller; or

(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or

(iii) The transactions and payments are made on a bank holiday; or

(iv) 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

(v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or

(vi) Specific discount is given by the seller for payment to be made by way of cash.

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).

6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule 6DD(j).”

6. The Tribunal has rejected the explanation given by the appellant-assessee, inter alia holding that the said payments should have been made through account payee drafts and by depositing cash in the bank account in order to issue the drafts. The reasoning given by the Tribunal in the impugned order reads as under: -

“12. The general rule is that the explanation offered by the assessee should not be vague, fantastic or fanciful. It must be an explanation acceptable to the fact finding authority. It must be supported with cogent reliable and relevant evidence only then the explanation offered by the assessee could be called genuine and bonafide. In the instant case in order to get out of the clutches of the provisions of Sub-Sec. 3 of S.40 A, the assessee first time made the payments by crossed cheques. However, there is no explanation as to why sufficient amount was not available in the bank account of the assessee which led to the bouncing of the cheques. Even if the cheques bounced as to what prevented the assessee from issuing crossed bank drafts in favour of the principal by depositing cash in the bank for making the bank drafts in case the assessee actually and genuinely wanted to create confidence in the principals for maintain good business relation in future. Further, the assessee has not explained as to where from it obtained the cash for making the payments in cash and whether it was its own cash or it was an amount borrowed from someone. In case the assessee had obtained the amount as loan in cash for making payment to the principals, then the assessee has again violated provisions of S.269 SS by obtaining loan in cash and not by account payee cheques or account payee bank draft.

12. From the facts explained hereinabove, it is evident that in fact the assessee never genuinely intended to make the payments initially by crossed cheques/drafts in compliance with the provisions of Sub-Sec. 3 of S.40A read with Rule 6 DD and simply adopoted this route to get protection under clause (j) of Rule 6DD of I.T Rules by ultimately succeeding in making the payments in cash to the principals, which appears to be the real intention of the assessee right from the beginning. From the facts narrated above, we conclude that the explanation offered by the assessee is fantastic and fanciful but does not appeal to reason in view of the circumstances, as detailed hereinabove, and, hence, the same cannot be accepted being not bonafide and genuine and is accordingly rejected. For the reasons stated above the consolidated order of CIT(A), confirming the order of AO in making the impugned addition under provisions of S. 40A(3) of I.T Act, is upheld. The ground nos. 1 to 3 of the instant appeals of the assessee are rejected.”

7. There is no dispute in the present case regarding the identity of the payee and genuineness of the transaction/payment and the respondent-Revenue has not denied and/or contested the same. The respondent-Revenue, accepts the identity of the payee and genuineness of the transaction/payments. The contentions raised before us, pertain to whether or not the appellant-assessee has been able to establish exceptional or unavoidable circumstances why the payment made in cash or was justified as it was not practicable to make such payment by a crossed cheque or bank draft.

8. In the present case, the appellant assessee had filed before the Tribunal a copy of their bank account statements as well as ledger account of the parties to whom the payment was required to be made. It is apparent that the appellant-assessee was not doing well in its business and was facing liquidity and financial crunch. An examination of the bank account statement shows that whenever cash deposit was made in the bank account, it was immediately thereafter utilized to issue cheques towards the expenditure. The explanation of the appellant-assessee was that payments were made in cash, as preparation of a bank instrument or issue of cheque would have resulted in a missed opportunity or failure of a favourable or good business deal with the third parties. The provisions of Section 40A(3) and Rule 6DD(j) have been incorporated in the Act in order to check the incurring of bogus and fictitious expenses to non existing parties. In the present case, the appellant-assessee had furnished explanations on the basis of the bank statements as well as the ledger accounts of the payees to show that the appellant-assessee did not have sufficient cash balance. This position is clear and cannot be doubted. The appellant-assessee had submitted that if they had failed to make cash payments, they would have breached terms of the agreements entered into with the third parties or would have missed out on the business opportunity. In cases of earlier bounced cheques and when a party is facing liquidity problem, it can get difficult as third parties are reluctant to accept cheques and insist on cash payments. Arranging funds is also a problem and not easy. It is submitted that the Assessing Officer did not doubt the funds and no addition on this ground and reason was made. The stand of the appellant was that the cash was made available since M/s. Ritz Theatres (P) Ltd. was holding the cash collection out of the hire charges. On the said aspect an order of remit was passed by the tribunal and no addition or adverse observation was made by the Assessing Officer. These were relevant and material aspects which were required to be considered and examined by the tribunal but have been overlooked. Keeping in view the quantum of the total amount, we were initially inclined to remit the matter. However, looking at the averments made, the assessment years in question and explanation given, we refrain from issuing the said direction and accept the contention of the appellant.

9. In view of the aforementioned, the answer to the above question is in negative and in favour of the appellant and against the Revenue. The appeal is allowed. No costs.

Basu Distributor Pvt. Ltd. v. Income Tax

Concise Analytical Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent / Tribunal's Arguments and Findings

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Basu Distributor Pvt. Ltd. v. Income Tax

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