S.R. Sharma (CA) & Rajnikant Bhatra (CA) for the Assessee. B.K. Gupta (CIT) for the Revenue.

M/S VIJAYETA BUILDCON PVT. LTD. VS ASSISTANT COMMISSIONER OF INCOME TAX-(ITAT)

This is an appeal filed by the assessee against the order of ld. CIT(A)- 4, Jaipur dated 30.08.2016 wherein the assessee has challenged the action of the ld CIT(A) in confirming the addition of Rs 42,50,000/- made by the Assessing Officer under section 40A(3) of the Act pertaining to A.Y 2007-08.

2. At the outset, it is noted that there has been a delay in filing the present appeal by 654 days. In its petition for condonation of delay, the assessee company has submitted that the assessment u/s 153A read with 143(3) was completed on 25.03.2015 by ACIT, Central Circle-1, Jaipur against which the assessee moved an appeal before the ld. CIT(A) on 17.04.2015. Thereafter, the ld. CIT(A) passed the order on 30.08.2016 which was served on the assessee company on 05.09.2016. It was further submitted that there was a change in management of the assessee company in year 2014 wherein Sh. Hari Mohan Dangayach and Smt. Kamlesh Dangayach transferred their entire shareholding to Sh. Akshya Gupta and Mrs Anju Gupta. It was further submitted that as per the mutual understanding between the old and new management, it was decided that the subject tax matter, which pertains to year prior to transfer of ownership and management of the assessee company, would be handled by the erstwhile management group. It was further submitted that Sh. Jagdish Narain Khandelwal an employee of the erstwhile management who looks after the income tax matters collected the duly filled Form No. 36 and other papers from the Counsel and he handed over the said papers to his subordinate accountant Sh. Naveli Sharan Mittal to get it signed from new management. However, Sh. Naveli Sharan Mittal after collecting the papers misplaced the same somewhere in bunch of papers and forgot all about the same. The matter came to notice of the current management on 11.07.2018 when an enquiry was made by the Assessing officer regarding payment of outstanding demand and thereafter, the papers were searched including the original appellate order and dully filled up Form 36 and appeal was thereafter filed before the Tribunal. In support, the affidavits of outgoing Director Shri Hari Mohan Dangayach and present director Shri Akshay gupta along with affidavits of Sh. Jagdish Narain Khandelwal and Sh. Naveli Sharan Mittal were placed on record. It was accordingly submitted that the assessee company was prevented by sufficient cause from filing the appeal within the prescribed period due to change of management and given that there is no mala fide involved in delayed filing of the appeal, in the interest of justice,the delay in filing may be condoned and the appeal may be admitted for adjudication on merits. In support, reliance was placed on the Coordinate Bench decision in case of Shri Ram Bharose Sharma vs ITO (ITA no. 1066/JP/2016 dated 14.06.2018) wherein delay of 636 days was condoned. Further, reliance was placed on the Hon’ble Supreme Court decision in case of Senior Bhosale Estate (HUF) vs ACIT (Civil appeal no. 6671-6676 of 2010 dated 7.11.2019) wherein delay in filing appeal by 1754 was condoned.

3. Per contra, the ld. CIT/DR submitted that there is a substantial delay of 703 days as computed by the assessee company, it is therefore important that the assessee should come forward and explain each and every day of delay which has happened in filing the present appeal. It was further submitted that the affidavits so filed by the former director, the employee and accountant of the erstwhile management as well as affidavit of the current director are self-serving document and cannot thus provide any assistance to the assessee company in explaining the delay in filing the present appeal. He accordingly opposed condoning the delay in filing the present appeal.

4. We have heard the rival contentions and purused the material available on record. There is no dispute that there has been a delay in filing the present appeal and the period of delay as computed by the Registry comes to 654 days. There is also no dispute that under section 253(5) of the Act, the Tribunal may admit an appeal filed beyond the period of limitation where it is satisfied that there was sufficient cause on the part of the assessee for not presenting the appeal within the prescribed time. The explanation of the assessee therefore becomes relevant to determine whether the same reflects sufficient cause on its part in not presenting the present appeal within the prescribed time. In the instant case, it has been stated in the affidavits so submitted that there has been a change in the management of the company and the present tax matter pertaining to the period prior to change of management, it was decided that the same would be handled by the erstwhile management, however, due to change of management and lack of diligence on part of ershwhile employees, the appeal could not be filed. It has been further stated that the matter came to light of the present management on 11.07.2018 when an enquiry was made by the Assessing officer for payment of outstanding demand and thereafter,the appeal papers were prepared and appeal was submitted before the Registry on 20.08.2018 though with a delay of 654 days. We therefore find that there is no culpable negligence or malafide on the part of the assessee company in delayed filing of the present appeal and as soon as it came to know of the old tax matter pertaining to the period prior to change of the management, it took steps and filed the present appeal. Therefore, in the factual matrix of the present case, we find that there exists sufficient and reasonable cause for condoning the delay in filing the present appeal and as held by the Hon’ble Supreme Court, where substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserved to be preferred. Therefore, in exercise of powers under section 253(5) of the Act, we hereby condone the delay in filing the present appeal as we are satisfied that there was sufficient cause for not presenting the appeal within the prescribed time and the appeal is hereby admitted for adjudication on merits.

5. The assessee company has submitted an application praying for raising the following additional ground of appeal which reads as under:-

“That on the facts and in the circumstances of the case the Ld. Assessing Officer has grossly wrong and erred in law in making addition of Rs. 42,50,000/- under section 40A(3) of the I. T. Act, 1961 in assessment made under section 153A r.w.s. 143(3) of the I.T. Act, 1961 in as much as no incriminating material was found during the course of search which could suggest any undisclosed income so as to initiate proceedings u/s 153A of the Act.”

6. It was submitted by the ld AR that the additional ground is purely a legal ground which was inadvertently not taken at the time of filing the original appeal. However, no new facts are required to be examined or brought on record and being a legal ground, the same may kindly be admitted for adjudication. In support, the reliance was placed on the Hon’ble Supreme Court decision in case of NTPC Ltd. vs. CIT 229 ITR 38 and Jute Corporation of India Ltd. vs CIT 187 ITR 688.

7. Per contra, the ld. CIT/DR opposed the prayer of the assessee company for admitting the additional ground of appeal. It was submitted that the assessee had ample opportunity to raise the ground of appeal before the ld. CIT(A). However, having failed to take said ground of appeal before the ld. CIT(A) or advancing any contentions in this behalf before the lower authorities, the assessee cannot be allowed to raise this ground of appeal for the first time before the Tribunal.

8. We have heard the rival contentions and purused the material available on record. We find that search and seizure operations u/s 132(1) were carried on 25.04.2012 at various premises of Dangayach Group and assessee company was also covered in the said search operations. Subsequently, notice u/s 153A was issued on 27.12.2012 and in response, the assessee company furnished its return of income on 15.01.2013 declaring total income at Nil and reiterating the income as per the return of income originally filed u/s 139 on 08.02.2008. Thereafter, the notice u/s 143(2) was issued on 08.08.2013 and assessment was completed u/s 143(3) read with section 153A dated 25.03.2015. During the course of assessment proceedings, the Assessing Officer observed that the assessee company has purchased certain pieces of land vide six separate registered sale deeds and the sale consideration has been discharged partly in cash. Thereafter, a show cause was issued u/s 40A(3) and after considering the submission of the assessee, 25% of total expenditure incurred in cash amounting to Rs. 42,50,000/- was disallowed invoking the provisions of section 40A(3) of the Act. We therefore find that the impugned assessment order has been passed without any reference to any incriminating material found during the course of search in case of the assessee and thus, no fresh facts are required to be examined nor any findings on facts are required to be recorded in the instant case. Given the existing facts as emanating from the assessment order, the additional ground of appeal where the assessee has challenged the impugned assessment order for want of any incriminating material is therefore purely a legal ground of appeal and even though the same has not been taken before the ld CIT(A), it can be taken up before the Tribunal for the first time as held by the Courts from time to time and is hereby admitted for adjudication.

9. We now refer to the contentions advanced by the ld AR on merits of the additional ground of appeal. During the course of hearing, the ld. AR submitted that the assessee company got incorporated on 13-07-2006 and is engaged in the business of real estate. It did not have any sale/receipts/income during the year. The company purchased few parcels of agricultural land during the year which is shown as stock-in-trade and all expenses incurred during the year has been added in stock in trade. The assessee company filed its original return of income u/s 139 on 08-02-2008 declaring total income at NIL. A search action thereafter had taken place at various premises of Dangayach group on 25-04-2012 and assessee company was also covered therein. It was submitted that no document/loose paper was found /seized during the course of search at the business premises of the assessee company indicating any on-money receipt/investment/advances made and any unexplained/overstated expenditure etc. in its books of account pertaining to the year under appeal thus the mode and manner of the additions made in the orders passed u/s 153A deserves to be held bad in law. It was submitted that the reading of provisions of section 153A would reveal that the time limit for issuance of notice u/s 143 (2) stood expired for the year under appeal and therefore, no assessment was pending at the time when search was conducted in this case and therefore additions, if any, to be made via assessment u/s 153A would be restricted to incriminating documents found during the course of search. In other words, no routine additions would be permitted to be made having no nexus with any incriminating documents found during the search. In support, the reliance was placed on the following decisions:-

• All Cargo Global Logistic Ltd. Vs. DCIT 137 ITD 287 (Mum)(SB)

• CIT vs Kabul Chawla (2016) 380 ITR 573 (Delhi)

• Jai Steel (India) vs ACIT 259 CTR (Raj) 281

It was further submitted that the Hon’ble Supreme Court has also dismissed the SLP filed by the Revenue in case of Meeta Gutgutia vs. Pr. CIT (96 Taxmann.com 468).

10. Per contra, the ld. CIT/DR submitted that in case of Meeta Gutgutia, though SLP of the Department has been dismissed by the Hon’ble Supreme Court, however, merely dismissal of the SLP cannot be read as affirmation of the view taken of the Hon’ble Delhi High Court. It was further submitted that there are two subsequent SLPs which have been admitted by the Hon’ble Supreme Court on similar matters and therefore, the Department is not accepting the position taken in case of Meeta Gutgutia and other decisions cited by the ld. AR.

11. We have heard the rival contentions and purused the material available on record. A search and seizure action was carried out in case of the assessee’s group on 25.04.2012. The original return of income was filed u/s 139 on 08.02.2008 and the last day of issuing notice section 143(2) had thus expired on 30.09.2008 before the date of search and the assessment proceedings therefore were not pending as on 25.04.2012 i.e. the date of search. As per section 153A of the Act, once a search and seizure action is carried out, the AO has to assess or reassess the total income of the assessee in respect of 6 years immediately preceding the assessment year relevant to the previous year in which a search is conducted or requisition is made. In case the assessment is pending on the date of search, the same shall be abated as per proviso to section 153A(1) of the Act and the AO is free to assess the income of the assessee as regular assessment. However, in case of completed assessment and not abated due to initiation of search u/s 132 or making of requisition u/s 132A, the AO has to reassess the total income of the assessee and therefore, the assessment already completed can be tinkered with or distrusted where any incriminating material is found and seized during the course of search or requisition as case may be indicating undisclosed income of the assessee. Therefore, the scope and jurisdiction of the AO to reassess the total income of the assessee u/s 153A is limited only to the extent of the income disclosed by the incriminating material found and seized during the search and seizure action. As we have noted above, the Assessing Officer has reassessed the income of the assessee by making the disallowance u/s 40(A)(3) without making any reference to any incriminating material found during the course of search. There is no finding of the Assessing officer or any other material brought on record that the six registered sale deeds were found and seized during the course of search or the transactions so represented by such sale deeds were not recorded in the books of accounts as on the date of search. Once these transactions are duly recorded in the books of accounts and basis the same,the return of income has been furnished before the date of search, the said transactions were duly disclosed to the department and thus, doesn’t represent any undisclosed transactions so as to constitute incriminating material found during the course of search in case of the assessee. Therefore, the disallowance/addition made by the AO and reassessment completed u/s 153A is undisputedly not based on any incriminating material found or seized during the course of search and seizure action u/s 132 of the Act. Once, the Assessing Officer has completed the reassessment u/s 153A without any reference to the incriminating material found, then no addition can be made to the returned income of the assessee.

12. The Hon’ble Delhi High Court in case of CIT v. Kabul Chawla (supra) while considering an identical issue has held as under:-

i. Once a search takes place under Section 132 of the Act, notice under Section 153 A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place.

ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.

iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax".

iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made

under this Section only on the basis of seized material."

v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made.

The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings.

vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.

vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.

39. The question framed by the Court is answered in favour of the Assessee and against the Revenue.”

13. A similar view has been taken by the Hon’ble Jurisdictional High Court in case of Jai Steel India v ACIT (supra) as held in para 22 to 30 as under:-

(a) the assessments or reassessments, which stand abated in terms of II proviso to Section 153A of the Act, the AO acts under his original jurisdiction, for which, assessments have to be made;

(b) regarding other cases, the addition to the income that has already been assessed, the assessment will be made on the basis of incriminating material and

23. The reliance placed by the counsel for the appellant on the case of Anil Kumar Bhatia (supra) also does not help the case of the assessee. The relevant extract of the said judgment reads as under:—

"19. Under the provisions of Section 153A, as we have already noticed, the Assessing Officer is bound to issue notice to the assessee to furnish returns for each assessment year falling within the six assessment years immediately preceding the assessment year relevant to the previous year in which the search or requisition was made. Another significant feature of this Section is that the Assessing Officer is empowered to assess or reassess the "total income" of the aforesaid years. This is a significant departure from the earlier block assessment scheme in which the block assessment roped in only the undisclosed income and the regular assessment proceedings were preserved, resulting in multiple assessments. Under Section 153A, however, the Assessing Officer has been given the power to assess or reassess the 'total income' of the six assessment years in question in separate assessment orders. This means that there can be only one assessment order in respect of each of the six assessment years, in which both the disclosed and the undisclosed income would be brought to tax.

20. A question may arise as to how this is sought to be achieved where an assessment order had already been passed in respect of all or any of those six assessment years, either under Section 143(1)(a) or Section 143(3) of the Act. If such an order is already in existence, having obviously been passed prior to the initiation of the search/requisition, the Assessing Officer is empowered to reopen those proceedings and reassess the total income, taking note to the undisclosed income, if any, unearthed during the search. For this purpose, the fetters imposed upon the Assessing Officer by the strict procedure to assume jurisdiction to reopen the assessment under Sections 147 and 148, have been removed by the non obstante clause with which sub-section (1) of Section 153A opens. The time-limit within which the notice under Section 148 can be issued, as provided in Section 149 has also been made inapplicable by the non obstante clause. Section 151 which requires sanction to be obtained by the Assessing Officer by issue of notice to reopen the assessment under Section 148 has also been excluded in a case covered by Section 153A. The time-limit prescribed for completion of an assessment or reassessment by Section 153 has also been done away with in a case covered by Section 153A. With all the stops having been pulled out, the Assessing Officer under Section 153A has been entrusted with the duty of bringing to tax the total income of an assessee whose case is covered by Section 153A, by even making reassessments without any fetters, if need be.

21. Now there can be cases where at the time when the search is initiated or requisition is made, the assessment or reassessment proceedings relating to any assessment year falling within the period of the six assessment years mentioned above, may be pending. In such a case, the second proviso to sub-section (1) of Section 153A says that such proceedings "shall abate". The reason is not far to seek. Under Section 153A, there is no room for multiple assessment orders in respect of any of the six assessment years under consideration. That is because the Assessing Officer has to determine not merely the undisclosed income of the assessee, but also the 'total income' of the assessee in whose case a search or requisition has been initiated. Obviously there cannot be several orders for the same assessment year determining the total income of the assessee. In order to ensure this state of affairs namely, that in respect of the six assessment years preceding the assessment year relevant to the year in which the search took place there is only one determination of the total income, it has been provided in the second proviso of sub-Section (1) of Section 153A that any proceedings for assessment or reassessment of the assessee which are pending on the date of initiation of the search or making requisition "shall abate". Once those proceedings abate, the decks are cleared, for the Assessing Officer to pass assessment orders for each of those six years determining the total income of the assessee which would include both the income declared in the returns, if any, furnished by the assessee as well as the undisclosed income, if any, unearthed during the search or requisition. The position thus emerging is that the search is initiated or requisition is made, they will abate making way for the Assessing Officer to determine the total income of the assessee in which the undisclosed income would also be included, but in case where the assessment or reassessment proceedings have already been completed and assessment orders have been passed determining the assessee's total income and such orders subsisting at the time when the search or the requisition is made, there is no question of any abatement since no proceedings are pending. In this latter situation, the Assessing Officer will reopen the assessments or reassessments already made (without having the need to follow the strict provisions or complying with the strict conditions of Sections 147, 148 and 151) and determine the total income of the assessee. Such determination in the orders passed under Section 153A would be similar to the orders passed in any reassessment, where the total income determined in the original assessment order and the income that escaped assessment are clubbed together and assessed as the total income. In such a case, to reiterate, there is no question of any abatement of the earlier proceedings for the simple reason that no proceedings for assessment or reassessment were pending since they had already culminated in assessment or reassessment orders when the search was initiated or the requisition was made." (Emphasis supplied)

24. The said judgment also in no uncertain terms holds that the reassessment of the total income of the completed assessments have to be made taking note of the undisclosed income, if any, unearthed during the search and the income that escaped assessments are required to be clubbed together with the total income determined in the original assessment and assessed as the total income. The observations made in the judgment contrasting the provisions of determination of undisclosed income under Chapter XIVB with determination of total income under Sections 153A to 153C of the Act have to be read in the context of second proviso only, which deals with the pending assessment/reassessment proceedings. The further observations made in the context of de novo assessment proceedings also have to be read in context that irrespective of the fact whether any incriminating material is found during the course of search, the notice and consequential assessment under Section 153A have to be undertaken.

26. The plea raised on behalf of the assessee that as the first proviso provides for assessment or reassessment of the total income in respect of each assessment year falling within the six assessment years, is merely reading the said provision in isolation and not in the context of the entire section. The words 'assess' or 'reassess' have been used at more than one place in the Section and a harmonious construction of the entire provision would lead to an irresistible conclusion that the word 'assess' has been used in the context of an abated proceedings and reassess has been used for completed assessment proceedings, which would not abate as they are not pending on the date of initiation of the search or making of requisition and which would also necessarily support the interpretation that for the completed assessments, the same can be tinkered only based on the incriminating material found during the course of search or requisition of documents.

27. The Allahabad High Court in Smt. Shaila Agarwal's (supra) has held as under:—

"19. The second proviso to Section 153A of the Act, refers to abatement of the pending assessment or re-assessment proceedings. The word 'pending' does not operate any such interpretation, that wherever the appeal against such assessment or reassessment is pending, the same along with assessment or reassessment proceedings is liable to be abated. The principles of interpretation of taxing statutes do not permit the Court to interpret the Second Proviso to Section 153A in a manner that where the assessment or reassessment proceedings are complete, and the matter is pending in appeal in the Tribunal, the entire proceedings will abate.

20. There is another aspect to the matter, namely that the abatement of any proceedings has serious causes and effect in as much as the abatement of the proceedings, takes away all the consequences that arise thereafter. In the present case after deducting bogus gifts in the regular assessment proceedings, the proceedings for penalty were drawn under Section 271(1)(c) of the Act. The material found in the search may be a ground for notice and assessment under Section 153A of the Act but that would not efface or terminate all the consequence, which has arisen out of the regular assessment or reassessment resulting into the demand or proceedings of penalty." (Emphasis supplied)

The said judgment which essentially deals with second proviso to Section 153A of the Act also supports the conclusion, which we have reached hereinbefore.

28. It has been observed by the Hon'ble Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 that "it is well recognized rule of construction that a statutory provision must be so construed, if possible that absurdity and mischief may be avoided."

29. The argument of the counsel for the appellant if taken to its logical end would mean that even in cases where the appeal arising out of the completed assessment has been decided by the CIT(A), ITAT and the High Court, on a notice issued under Section 153A of the Act, the AO would have power to undo what has been concluded up to the High Court. Any interpretation which leads to such conclusion has to be repelled and/or avoided as held by the Hon'ble Supreme Court in the case of K.P. Varghese (supra).

30. Consequently, it is held that it is not open for the assessee to seek deduction or claim expenditure which has not been claimed in the original assessment, which assessment already stands completed, only because a assessment under Section 153A of the Act in pursuance of search or requisition is required to be made.”

14. In light of above discussions and in the entirety of facts and circumstances of the case where the reassessment completed u/s 153A without any reference to the incriminating material, following the binding precedents as cited above including that of the Jurisdictional High Court, the addition made by the AO u/s 40(A)(3) is not sustainable and the same is hereby deleted. In the result, the additional ground of appeal is allowed.

15. Now coming to the original ground of appeal taken by the assessee company which reads as under:

“That on the facts and in the circumstances of the case the Ld. CIT(A) is wrong, unjust and has erred in law in confirming invoking of provisions of section 40A(3) of the I.T. Act, 1961 by the assessing officer in respect to payment of Rs. 2,12,50,000/- made by the appellant in cash for purchase of agricultural land hold as stock-in- trade resulting in disallowance and consequent of addition of Rs. 42,50,000/- being 20% of said amount of Rs. 2,12,50,000/- to the income of the appellant.”

16. In this regard, the ld. AR submitted that the assessee company during the year purchased vide six separate registered sale deeds, following parcels of land:

Date Area Amount

13-09-2006 2.63 Hectare 3,00,00,000/-

27-09-2006 0.69 Hectare 1,08,00,000/-

11-10-2006 0.78 Hectare 87,90,000/-

11-10-2006 1.04 Hectare 1,15,10,000/-

30-10-2006 0.79 Hectare 89,00,000/-

01-02-2007 0.63 Hectare 71,00,000/-

17. It was submitted that the assessee company out of above total six purchases of land made cash payments in part in following five purchases of land:

Date Total amount paid

To whom paid Amount paid in cash

13-09-2006 3,00,00,000/- Jangal Ram, Badri Narayan, Banna Lal and Tija 1,00,00,000/-

27-09-2006 1,08,00,000/- Birdhi Chand 38,00,000/-

11-10-2006 87,90,000/- M/s N.R. Buildcom Pvt. Ltd. 27,90,000/-

11-10-2006 1,15,10,000/- M/s N.R. Buildcom Pvt. Ltd. 25,10,000/-

30-10-2006 89,00,000/- Sitaram NIL

01-02-2007 71,00,000/- Govindi Bai 21,50,000/- 2,12,50,000/-

The assessee company furnished its explanation which is reproduced in para 5.4 of assessment order. The A.O. however held the explanation as unacceptable for the following reasons:

(ii) The assessee has submitted that land has been purchased from farmers who demand payment in cash, but no any such evidence has been furnished by the assessee in support of its submission.

(iii) Out of total cash payments, Rs. 53 lacs have been paid in cash to one company M/s. N.R. Buildcom Pvt. Ltd. while the assessee is submitting that cash payments have been made to farmers on their demand.

(iv) In the case of Shri Birdhi Chand, part payment has been made by cheque and part payment has been made in cash. Likewise, in the case of Smt. Govindi Bai also, part payment has been made by cheque and part payment has been made in cash. Hence, the submission regarding cash demands of the farmers cannot be accepted.

(v) The assessee has made expenditure in cash which has become the part of its stock-in-trade which will ultimately be used by the assessee to earn income.

(vi) The facts of the case laws narrated by the assessee are different from the facts of this case.

The A.O. accordingly held that assessee has contravened provisions of section 40A(3) and there is no escape through rule 6DD therefore he disallowed 20% part of total expenditure (Rs. 2,12,50,000) incurred in cash amounting to Rs. 42,50,000/- and added the same to total income in the hands of the assessee company. The addition so made has been confirmed by the ld CIT(A) and against the said findings, the assessee company is in appeal.

The income is result of receipts of business and other receipts as per section 28, deducted therefrom the outgoings permissible expenditures/deductions in accordance with provisions of section 30 to 43D. In case there is no receipt chargeable u/s 28 of I.T. Act, 1961 nothing can be assessed under the head profits and gains of business or profession and provisions of section 30 to 43D cannot be invoked. It is clear from the facts appearing from copy of Audited accounts submitted herewith that assessee in this previous year neither has any receipt of business assessable u/s 28 of the Act, and so has not claimed any ‘expenditure’ the purchase cost of agricultural land (treated as stock-in-trade at close of year) in the year under consideration but the entire ‘expenditure’ of said stock-in-trade was carried forward to next accounting year as opening stock. This position of facts has been accepted by Ld. A.O. in assessment order as no such receipts of business has been assessed in assessment order. In order to invoke provisions of section 40A(3), the amount of ‘expenditure’ incurred in cash must be claimed as expenditure either while working gross profit or while working net profit. It is where a claim for allowance of expenditure is made in computing business income of the year then there could be any disallowance out of the expenditure. There cannot be disallowance of expenditure only without any claim of allowance of expenditure having been made. The legal view is fully supported with the judgement in case of Saral Motors & General Finance Ltd.Vs. ACIT Cir-2, Meerut (2009) 121 ITD 50 (Delhi) and decision of ITAT, Jaipur Bench, Jaipur in case of Salasar Overseas P. Ltd. vs. ACIT. It is thus submitted that Ld. A.O. has wrongly invoked provisions of Section 40A (3) in case of assessee company.

20. It was further submitted that the object of the provisions of section 40A(3) is to check evasion of taxes so that the payment is made from the disclosed sources. Both the payer and the payee would be showing in the respective account the payments made and received. It presupposes that the transactions must be genuine transactions [Girdharilal Goenka v. CIT (1989) 179 ITR 122, 127 [(Cal)]. In other words, the object of enacting section 40A (3) is to ensure that payments in respect of which deductions are claimed by the taxpayers are genuinely made and accommodation payments are not claimed as deductions [Late Smt. Jyothi Chellaram v. CIT, (1988) 173 ITR 358, 363 (A.P.)]. In the case of assessee who is a colonizer, it has to purchase land from farmers who are group of persons being relatives or family members wherein some people have Bank Account and others do not have bank account. The group of persons sign sale deeds simultaneously and therefore all person demands payments in cash and colonizer/developer has no choice but to accept their demand if land holdings are to be acquired.

The farmers are illiterate and do not sign sale deeds of land sold and present them for registration unless receive payment in cash due to fear that they will be deprived from their land holding soon after signing sale deed and later on account payee cheque or draft may not be got encashed and, therefore, they do not agree to sale their land holdings without receiving payment in cash.

The colonizer/developer once starts acquiring land holdings in a particular area, he has to acquire all adjacent lands necessarily as without that a township colony project cannot be brought into existence and in such constrained circumstances, he is not in a position to enforce the term of payment by crossed account payee cheque or drafts. The payments in cash made by assessee company have been accepted as genuine by Ld. A.O. and said payments for purchase of agricultural land from farmers have been made from explained sources of funds which are shown in Balance Sheet of company duly audited by Auditors under Companies Act, 1956. Thus genuineness of payments were established and intention of provisions of section 40A (3) have not been defeated and, therefore provisions of section 40A(3) cannot be invoked in the case of assessee. The reliance is placed on the judgement of jurisdictional High Court in case of Kantilal Purshottam & Co. Vs. CIT (1985) 155 ITR 519 (Raj.). In CIT Vs. Chaudhary & Co. (1996) 217 ITR 431, 433 (All), it was held that where the seller has insisted on cash payment and the payment was genuine disclosing the identity of seller, the provisions of section 40A (3) cannot be invoked. The similar views have been held by various High Courts and various Benches of the Tribunal including the Jaipur Bench which supports the case of assessee. In view of the above legal position, the provisions of section 40A(3) cannot be invoked.

“In view of the above facts and circumstances, we hold that since assessee has not claimed any expenditure, therefore, no disallowance can be made during the year under consideration.”

“In this case also it has been held that where payment has been made in villages, the provisions of section 40A(3) cannot be applied.”

As the facts of the case and position of law are same in the case of assessee company, the issue raised in ground of appeal is fully covered in its favour from said decision in case of Ace India Abodes Ltd. and so ground deserves to be decided in favour of assessee company. It is, therefore, prayed that addition of Rs. 42,50,000/- made u/s 40A(3) in the hands of assessee company may kindly be deleted.

22. It was further submitted that section 40A(3) does not in blanket manner mandate disallowance in respect of all situations where cash payment has been made. It is submitted that the cash payments were made on the specific condition put up by the seller. It is further submitted that the lands were purchased through registered sale deeds, identity of the sellers and genuineness of the transactions is fully established and the AO has not raised any doubt over the genuineness of the payments and it was accordingly submitted that where the genuineness of the payments which are as per the registered sale deeds are not doubted by the AO, no disallowance could be made. In support, reliance is placed on the decision of Hon’ble Punjab and Haryana High Court in case of Gurdas Garg vs. CIT [2015] 63 taxmann.com 289. It was submitted that the provisions of section 40A(3) have been enacted as one of the measures for countering evasion of tax. The provisions were enacted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. Genuine and bona fide transactions are taken out of the sweep of Section 40A(3).

23. It was submitted that in the present case, the assessee company has not made use of black money for purchase of land in cash. It was just on the insistence of the sellers, cash was withdrawn from bank and the payment was made in cash keeping in mind the business exigencies. This fact is clear from perusal of assessment order and from Bank Statements of the assessee firm. The assessee company has withdrawn cash from Bank on very same day or previous day before the date of payment made in cash. For ready reference, the details of cash withdrawn from bank and payments made to sellers are as follow:-

Date of Amt. paid

Amount Name of seller Date of withdrawal made from bank

Amount withdrawn

13-09-2006 1,00,00,000/- Jangal Ram, Badri Narayan, Banna Lal and Mr. Tija

11.09.2006 1,00,00,000/-

27-09-2006 38,00,000/- Birdhi Chand 26-09-2006 38,00,000/-

11-10-2006 27,90,000/- N.R. Buildcom P.Ltd.

11-10-2006 55,00,000/-

11-10-2006 25,10,000/- M/s N.R. Buildcom P. Ltd.

01-02-2007 21,50,000/- Govind Bai 31-01-2007 22,00,000

Total 2,12,50,000 2,15,00,000/-

24. It was further submitted that after introduction of section 40A(3), certain exceptions were allowed to be provided by way of delegated legislations. Accordingly, Rule 6DD was notified in the year 1969 setting out the exceptions. The Hon’ble Jurisdictional Rajasthan High Court in the case of Harshila Chordia vs. ITO 298 ITR 349 has held that list of exceptions provided under rule 6DD is not exhaustive. Meaning thereby that more could be read into it, if the same does not violate the reason for which section 40A(3) was introduced. Thus, the contention of AO and ld. CIT(A) that the appellant was unable to specify under which clause of Rule 6DD its case fall is not correct.

25. Lastly, reliance was placed on the Hon’ble Supreme Court decision in case of Attar Singh Gurmukh Singh vs ITO reported in 59 taxmann.com 11 and the decision of the Coordinate Bench in case of M/s Daga Royal Arts, Jaipur vs. ITO Ward-2(2), Jaipur (ITA no. 1065/JP/2016 dated 15.05.2018).

26. Per contra, the ld. CIT/DR submitted that the assessee company has purchased land from farmers and it has been contended the farmers have demand payment in cash. However, in support of the said claim, no evidences have been furnished by the assessee at the assessment stage or even during the appellate proceedings. It was accordingly submitted that these are merely contentions which are not supported by any evidence and the contention which remain unsubstantiated cannot be accepted. Further, referring to the individual transactions, it was submitted that two transactions have been executed with M/s N. R. Buildcom Pvt. Ltd and thereafter, the contention regarding demand of payment in cash by the farmers cannot be applied in these two transactions. It was further submitted that the payments have been made on days which were working days and there were no banking holidays or strike on those days, therefore, assessee’s case is also not falling under Rule 6DD. Further, referring to the bank statement furnished by the assessee company, it was submitted that there are two transactions on 11th Oct, 2006 and 31st Jan, 2007 wherein the payments have been shown to be made to Mr. Santosh. It was submitted that it is not clear whose Mr. Santosh is and what linkage, he has with assessee company or with the transactions under consideration. Further, reliance was placed on the decision of AO as well as ld. CIT(A) and submitted that there is no infirmity in the said orders where the disallowance has been made on account of cash payment invoking provisions of section 40A(3) and the same may accordingly be confirmed.

27. We have heard the rival submissions and perused the material available on record. The first contention which has been advanced by the ld AR is that the provisions of section 40A(3) cannot be invoked in absence of any claim of the expenditure in the profit/loss account as the expenditure incurred on purchase of land has been carried forward as stock-in-trade to the subsequent year. We find that the said issue is no more res integra and is covered against the assessee by the decision of the Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh (supra) confirming the decision of the Rajasthan High Court in case of Kanti Lal Purshottam & Co. v. CIT [1985] 155 ITR 519 (Raj) and Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj) and the relevant findings read as under:

The rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials. This is also the view taken by several High Courts. - Sajowanlal Jaiswal v. CIT [1976] 103 ITR 706 (Ori.), U.P. Hardware Store v. CIT [1976] 104 ITR 664 (All.), Raton Udyog v. 1TO [1977] 109 ITR 1 (AIl), PH. Textiles v. CIT [1980] 121 ITR 237 (Ker.), CIT v. Kishan Chand Maheshwari Dass [1980] 121 ITR 232 (Punj. & Har.), Kanti Lal Purshottam & Co. v. CIT [1985] 155 ITR 519 (Raj.), CIT v. New Light Tin Mfg. Co. [1980] 121 ITR 229 (Punj. & Har.), Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj.), Venkata Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253 (AP), and Akash Films v. CIT [1991] 190 ITR 32 (Kar.). The decisions of the High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab & Haryana, Rajasthan and Patna are to the effect that the payments made for purchasing stock-in-trade or raw materials should also be regarded as expenditure for the purpose of section 40A(3). The only discordant note struck on this aspect is by the Gauhati High Court in CIT v. Hardware Exchange [1991] 190 ITR 61. The Gauhati High Court has observed that section 40A(3) applies only to payments made on account of 'expenditure incurred' and the payment made for purchase of stock-in-trade cannot be termed as 'expenditure incurred' since money does not go irretrievably in such cases. We are unable to agree with the view taken by the Gauhati High Court.”

28. Now, coming to other contentions of the ld AR which are centred around the intention of the legislature behind introduction of section 40A(3),genuine and bonafide transactions not covered within the sweep of section 40A(3) and exceptions provided in Rule 6DD are not exhaustive and various authorities quoted in support thereof, this Bench had an occasion to examine the same at length in case of M/s A Royal Daga Arts vs ITO Ward-2(2),Jaipur (supra) in light of decision of the Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh vs. ITO and the decisions of various High Courts including the decisions of the jurisdictional High Court and the relevant findings reads as under:

“18. We have heard the rival contentions and perused the material available on record. It would be relevant to refer to the provisions of section 40A(3) of the Act which reads as under:

“(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.

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 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, 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 : Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words "twenty thousand rupees", the words "thirty- five thousand rupees" had been substituted.

(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.”

19. The aforesaid provisions have to be considered and interpreted in light of various authorities which have been quoted at the Bar and relied upon by the ld AR and ld DR in support of their respective contentions.

20. In case of Attar Singh Gurmukh Singh v. ITO (supra), the matter which came up for consideration before the Hon’ble Supreme Court, the facts of the case were that assessee had made payment in cash exceeding a sum of Rs. 2,500/- for purchase of certain stock-in-trade. Payments were not allowed as deductions in the computation of income under the head “profits and gains of business or professions” as the same were held to be in contravention of section 40A(3) read with that 6DD of the Income rules. In that factual background, the question regarding validity of section 40A(3) and applicability of the said provisions to payment made for acquiring stock- in-trade came up for consideration before the Hon’ble Supreme Court.

21. The Hon’ble Supreme Court referring to the provisions of section 40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant point in time, has held as under:-

“6. 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 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 tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary.

7. 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 disclosed sources. The terms of section 40A(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 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. – Mudiam Oil Co. v. ITO [1973] 92 ITR 519 (AP). If the payment is made by a crossed cheque 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.”

22. Further, the Hon’ble Supreme Court upheld the applicability of section 40A(3) to payment made for acquiring stock-in-trade and raw materials and also affirmed the decision of Hon’ble Rajasthan High Court in case of Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj) to the effect that the payments made for purchasing stock-in-trade or raw material should also be regarded as expenditure for the purposes of section 40A(3) of the Act.

23. The Hon’ble Supreme Court has therefore upheld the constitutional validity of section 40A(3) of the Act and has held that the provisions are not intended to restrict the business activities and restraint so provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. The Hon’ble Supreme Court has thus laid great emphasis on the intention behind introduction of these provisions and it would therefore be relevant to examine whether in the present case, there is any violation of such intention and if ultimately, it is determined that such intention has been violated, then certainly, the assessee deserves the disallowance of the expenditure so claimed.

24. The Hon’ble Supreme Court referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee has held that:

“The terms of section 40A(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 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.”

25. Here, it is relevant to note that there has been no change in the provisions of section 40A(3) in so far as considerations of business expediency and other relevant factors are concerned, as existed at relevant point in time and as considered by the Hon’ble Supreme Court and the provisions of section 40A(3) as exist now and relevant for the impunged assessment year i.e. AY 2013-14. However, Rule 6DD(j) has been amended and by notification dated 10.10.2008, it now provides for an exception only in a scenario where the payment was required to be made on a day on which banks were closed either on account of holiday or strike. A question which arises for consideration is whether the legal proposition so laid down by the Hon’ble Supreme Court regarding consideration of business expediency and other relevant factors has been diluted by way of delegated legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to which such delegated legislation is subservient has been retained in its entirety. Alternatively, can it be said that what has been prescribed as exceptional circumstances in Rule 6DD as amended are exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations.

26. If we look at the legislative history of section 40A(3) and Rule 6DD, we find that initially, section 40A(3) provides for disallowance of 100% of the expenditure unless the matter falls under exception as provided in Rule 6DD(j) Later on, section 40A(3) has been amended to provide for disallowance of 20% of the expenditure incurred in cash and Rule 6DD(j) was omitted. Thereafter, by virtue of another amendment, disallowance under section 40A(3) was increased from 20% to 100%, however, Rule 6DD(j) was not reintroduced in original form to provide for exceptional and unavoidable circumstances rather it was restricted to payment by way of salary to employees and thereafter, by virtue of lastest amendment in year 2008 to payments made on a day on which the banks were closed on account of holiday or strike.

27. We do not believe that by virtue of these amendments, the legal proposition so laid down by the Hon’ble Supreme court regarding consideration of business expediency and other relevant factors has been diluted in any way. At the same time, we also believe that Rule 6DD as amended are not exhaustive enough and which visualizes all kinds and nature of business expediency in all possible situations and it is for the appropriate authority to examine and provide for a mechanism as originally envisaged which provides for exceptional or unavoidable circumstances to the satisfaction of the Assessing officer whereby genuine business expenditure should not suffer disallowance.

28. Further, the Courts have held from time to time that the Rules must be interpreted in a manner so as to advance and not to frustrate the object of the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions.

29. We refer to the decision of the Hon’ble Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (supra), where the facts of case were that the assessee had made certain cash payments towards purchase of scooter/mopeds which exceeded Rs. 10,000/- in each case to the principal agent instead of making payment through the cross cheques or bank draft. The Assessing Officer invoked the provisions of section 40A(3) and held that they were no exceptional circumstances falling under rule 6DD which could avoid consequences of the provisions of section 40A(3) of the Act. The ld. CIT(A) held that such exceptional circumstances did exist. However, the findings of the ld. CIT(A) were reversed by the Tribunal and the matter came up for consideration before the Hon’ble High Court.

30. The Hon’ble High Court observed that the principal reason which weighed with the Tribunal in discarding the explanation furnished by the assessee was that the case of the assessee did not fall in any of the clauses enumerated in the circular issued by the CBDT about the explanatory note appended to clause (j) was to operate as it was existing at the relevant time and enumerated circumstances in the circular was exhaustive of exceptional circumstances. The Hon’ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the provisions of clause (j) under rule 6DD would operate to be exhaustive of such circumstances and had not been properly understood its implication. It was further observed by the Hon’ble High Court that primary object of enacting section 40A(3) in its original incarnation was two-fold, firstly,putting a check on trading transactions with a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community. The consequence which was provided was to disallow of deduction of such payments/expenses which were not through bank either by crossed cheques or by demand draft or by pay order. It was further held by the Hon’ble High Court that:

“..Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration which has been overlooked by the Tribunal.

31. It was accordingly held by the Hon’ble High Court that it is the relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in light of Rule 6DD as clarified by circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. This is particularly so, because the consequence provided u/s 40A(3) for failure to make payments through bank is not absolute in terms nor automatic but exceptions have been provided and leverage has been left for little flexing by making a general provision in the form of clause (j) in rule 6DD. Thereafter, the Hon’ble High Court refers to the clause 6DD(j) and the circular dated 31st May, 1977 issued by the Board in the context of what shall constitute exceptional and unavoidable circumstances within the meaning of section Clause (j). The Hon’ble High Court observed that the circular in paragraph 5 gives a clear indication that rule 6DD(j) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and the identity of the receiver is established, the requirement of rule 6DD(j) must be deemed to have been satisfied. The Hon’ble High Court observed that 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 and this clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO vs. Swastik Roadways reported in [2004] 2 RC 539; [2004] 3 SCC 640.

32. The legal proposition that arises from the above decision of the Hon’ble Rajasthan High Court is that the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration and which should be examined before invoking the rigours of section 40A(3) of the Act.

“17. Rule 6DD of the IT Rules, 1962 provides for situations under which disallowance under s. 40A(3) shall not be made and no payment shall be deemed to be the profits and gains of business or profession under the said section. Amongst the various clauses, cl. (j) which is relevant, read as under:

(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;

18. It could be appreciated that s. 40A and in particular sub-cl. (3) thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of account payee cheque drawn on a bank or account payee bank draft.

19. As held by the Apex Court in case of Attar Singh Gurmukh Singh (supra). "..In our opinion, there is little merit in this contention. Sec. 40A(3) must not be read in isolation or to the exclusion of r. 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. Sec. 40A(3) only empowers the A.O. 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 s. 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 A.O. the circumstances under which the payment in the manner prescribed in s. 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 s. 40A(3) and r. 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:”

20. It was because of these considerations that this Court in case of Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the payment and the identify of the payee are the first and foremost requirements to invoke the exceptions carved out in r. 6DD(j) of the IT Rules,1962.

21. In the present case, neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the CIT(A). The Tribunal also did not disturb such facts but relied solely on r. 6dd(j) of the rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of r. 6DD, consequences envisaged in s. 40A(3) of the Act must follow.

22. In our opinion, the Tribunal committed an error in coming to such a conclusion. We would base our conclusions on the following reasons:

(a) The paramount consideration of section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of the Act does not eliminate considerations of business expediencies.

(b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow-

(i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time;

(ii) the assessee was, therefore, required to make cash payments only;

(iii) Tata Tele Services Ltd. assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee;

(iv) It is not disputed that the Tata Tele Services Ltd. did not act on such promise;

(v) if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. We would find that the payments between the assessee and the Tata Tele Services Ltd. were genuine. The Tata Tele Services Ltd. had insisted that such payments be made in cash, which Tata Tele Services Ltd. in turn assured and deposited the amount in a bank account. In the facts of the present case, rigors of s. 40A(3) of the Act must be lifted.

23. We notice that the Division Bench of the Rajasthan High Court in case of Smt. Harshila Chordia vs. ITO (2007) 208 CTR (Raj) had observed that the exceptions contained in r. 6DD are not exhaustive and that the said rule must be interpreted liberally.”

34. In case of M/s Ajmer Food Products Pvt. Ltd., Ajmer vs. JCIT (supra), a similar issue has come up before the Co-ordinate Bench and speaking through one of us, it was held as under:

“4.5 The genuineness of the transaction as well as the identity of the payee are not disputed. Further, the appellant has explained the business expediency of making the cash payments to both the parties which has not been controverted by the Revenue. Following the decision of Gujarat High Court in case of Anupam Tele Services (supra) and Rajasthan High Court in case of Harshila Chordia (supra), the addition of Rs. 45,738/- under section 40A(3) is deleted.”

35. In case of Gurdas Garg vs. CIT(A), Bathinda (supra), the matter which came up for consideration before the Hon’ble Punjab & Haryana High Court, the facts of the case are pari materia to the instant case and the ratio of the said decision clearly applies in the instant case. In that case, the facts of the case were that the assessee was engaged in trading in properties and during the course of assessment proceedings, the AO observed that there are transactions where the payments have been made in excess of Rs. 20,000/- in cash which were disallowed u/s 40A(3) of the Act. The Hon’ble High Court held that rule 6DD(j) is not exhaustive of the circumstances in which the proviso to section 40A(3) is applicable and it only illustrative. The Hon’ble High Court refers to the decision of the Hon’ble Rajasthan High Court in case of Smt. Harshila Chordia v. ITO (Supra) and the decision of Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh v. ITO (Supra). The High Court further observed that the ld. CIT(A) has given a finding that the identity of the payee i.e. vendors in respect of land purchase by the appellant was established, the sale deeds were produced, the genuineness thereof was accepted and the amount paid in respect of each of these agreement was satisfied before the Stamp Registration Authority and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not attracted. The Hon’ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the correctness of the transactions and 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 and therefore 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 Hon’ble High Court accordingly observed that “the Tribunal has not disbelieved the transactions or the genuineness thereof nor has it disbelieved the fact that payments having been made. More importantly, 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.”

36. The Co-ordinate Bench in case of M/s Dhuri Wine vs DCIT (ITA No. 1155/chd/2013 & others dated 09.10.2015) has held that the proposition so laid down by the Hon’ble High Court in case of Gurdas Garg (supra) is quite unambiguous to the effect that even if the case of the assessee does not fall in any of the clauses of Rule 6DD of the Income Tax Rules, invoking the provisions of section 40A(3) of the Act can be dispensed with if the assessee is able to prove the business expediency because of which it has to make the cash payments, the genuineness of the transactions have also to be verified.

37. The Co-ordinate Bench in case of Rakesh Kumar vs. ACIT (ITA No. 102(Asr)/2014 dated 09.03.2016) relying on the decision of Hon’ble Punjab and Haryana High Court in case of Gurdas Garg (supra) has held that the genuineness of the payment has not been doubted as the Assessing Officer himself has held that sale deeds of properties were registered with the Revenue department of the Government. Therefore, following the decision of Hon’ble Punjab and Haryana High Court, the payment for purchase of land was allowed.

38. We further note that in case of M/s ACE India Abodes limited (DB Appeal No. 45/2012 dated 11.09.2017), a similar issue has come up before the Hon’ble Rajasthan High Court regarding payment for purchase of land from various agriculturist for which the assessee has paid consideration in cash and shown the land as its stock-in-trade. The Hon’ble Rajasthan High Court referring to the intent behind introduction of section 40A(3) and catena of decisions right from Attar Singh Gurmukh Singh, Smt. Harshila Chordia,Gurdas Garg, Anupam Tele Services referred supra has decided the issue in favour of the assessee and against the department.

40. From perusal of the assessment order, it is further noted that the AO, on perusal of the details of the properties purchased, as per copies of the sale deed furnished, held that the assessee had made cash payments regularly and no specific circumstances have been brought to his knowledge that the cash payments were made due to some unavoidable circumstances.

It was held by the AO that maximum cash payments were made to persons residing in Jaipur city and in single family, repeated cash payments were made which itself shows that there were no unavoidable circumstances to make cash payments to the sellers. What is therefore relevant to note that the AO has appreciated the necessity of determining the unavoidable circumstances which could have led the assessee to make cash payments. During the course of assessement proceedings, it was submitted by the assessee that the payment for purchase of land has been made in cash because the sellers were new to the assessee and refused to accept the cash. It was submitted that the delay in making the cash payment, it could have lost the land deals. In this regard, the ld AR submitted before us that the assessee had purchased the lands both through cash and cheques. Based on the requirement of the seller, assessee had selected the mode of payment. For the sellers, who had insisted the payments in cash, assessee had withdrawn the cash from bank on the same date of registry and made the payments to seller accordingly. The withdrawals from bank and payments to seller have been tabulated below as per dates below:-

Date Bank Grand Total Cumulative balance

Utilization Net Balance

ICICI Bank Yes Bank Date Amount 18,00,000

5-Apr-12 14,50,000 3,50,00 18,00,000 18,00,000 5,07,00

9-Apr-12 - 9,00,000 9,00,000 27,00,000 9-Apr-12 21,93,000 3,34,000

11-Apr-12 - 2,00,000 2,00,000 29,00,000 11-Apr-12 3,73,000 3,34,000

12-Apr-12 - - - 29,00,000 - - 3,34,000

13-Apr-12 - - - 29,00,000 - - 11,97,100

19-Apr-12 - 30,00,000 30,00,000 59,00,000 23-Apr-12 21,36,900 11,57,000

24-Apr-12 30,00,000 25,00,000 55,00,000 1,14,00,000 24-Apr-12 55,40,100 11,57,000

25-Apr-12 - - - 1,14,00,000 - - 11,57,000

30-Apr-12 - - - 1,14,00,000 - - 11,57,000

4-May-12 - - - 1,14,00,000 - - 11,57,000

7-May-12 - - - 1,14,00,000 - - 11,57,000

8-May-12 19,00,000 23,00,000 42,00,000 1,56,00,000 8-May-12 38,55,000 15,02,000

12-May-12 - - - 1,56,00,000 - - 15,02,000

14-May-12 - - - 1,56,00,000 - - 15,02,000

15-May-12 - - - 1,56,00,000 - - 15,02,000

16-May-12 - 15,00,000 15,00,000 1,71,00,000 - - 30,02,000

17-May-12 - 15,00,000 15,00,000 1,86,00,000 17-May-12 30,69,000 14,33,000

Total 63,50,000 1,42,50,000 1,86,00,000 1,71,67,000

42. We find force in the contentions so raised by the ld AR. The transactions have been executed by the assessee within a span of one and half month and there are transactions where the payment has been made through cheque and there are transactions where the payment has been made through cash. The said contentions are supported by the fact that on the same day, there are cash and cheque payments as evidenced from the details of the transactions appearing at page 7 and 8 of the assessment order. It is therefore clear that the assessee was having sufficient bank balance and only at the insistence of the specific sellers, the assessee has withdrawn cash and made payment to them and wherever, the seller has insisted on cheque payments, the payment has been made by cheque. This makes out a case that the assessee has business expediency under which it has to make payment in cash and in absence of which, the transactions could not be completed. The second proviso to section 40A(3) refers to “the nature and extent of banking facility, consideration of business expediency and other relevant factors” which means that the object of the legislature is not to make disallowance of cash payments which have to be compulsory made by the assessee on account of business expediency. Further, the source of cash payments is clearly identifiable in form of the withdrawals from the assessee’s bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making the cash payments.

43. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts and Coordinate Benches referred supra, we are of the view that the identity of the persons from whom the various plots of land have been purchased and source of cash payments as withdrawals from the assessee’s bank account has been established. The genuineness of the transaction has been established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by the Hon’ble Rajasthan High Court in case of Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub- section (3) of section 40A must have nexus to the failure of such object.

Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration. The intent and the purpose for which section 40A(3) has been brought on the statute books has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act.”

29. In the instant case, we find that the identity of the persons from whom the purchase of various land parcels have been made by the assessee has been established and the source of cash payments is clearly identifiable in form of the withdrawals from the assessee's bank accounts and the said details were submitted before the lower authorities and have not been disputed by them. It is not the case of the Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making the cash payments. The genuineness of the transaction has been established as evidenced by registered sale deeds wherein the payments through cheque as well as cash has been duly mentioned and lastly, the test of business expediency has been met as the initial payments as insisted by the sellers most of whom are farmers have been made in cash to secure the transaction. Further, as held by the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration for which section 40A(3) has been brought on the statute books and which has been satisfied in the instant case. Similar view has been taken by the Hon'ble Rajasthan High Court in case of CIT vs Solutions reported in 80 Taxmann.com 246 wherein it was held as under:

"The terms of section 40A(3) are not absolute. Consideration 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."

12. The aforesaid observation does apply in the instant case. The Assessing Officer on the facts noticed has been unable to make out a case of involvement of unaccounted money.

13.It is also a finding of fact recorded by the Commissioner of Income- tax (Appeals) that copies of the ledger accounts were produced before the Assessing Officer who has not found any discrepancy in such books of account and no unaccounted transaction has been reported/noticed by the Assessing Officer.”

30. In the entirety of facts and circumstances of the case and respectfully following the legal proposition laid down by the various Courts including that of the Jurisdictional High Court and the Coordinate Benches referred supra,no disallowance is called for under section 40A(3) of the Act and the same is directed to be deleted. In the result, the ground of the assessee’s appeal is allowed.

In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 27/10/2020.

Sd/- Sd/-

(Vijay Pal Rao) (Vikram Singh Yadav)

Judicial Member Accountant Member Jaipur

Dated:- 27/10/2020

Similar Ripples

Section - 153A, Assessment in case of search or requisition (IT Act, 1961)

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Section - 40A, Expenses or payments not deductible in certain circumstances (IT…

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This is an appeal filed by the assessee against the order of ld. CIT(A)-
4, Jaipur dated 30.08.2016 wherein the assessee has challenged the action
of the ld CIT(A) in confirming the addition of Rs 42,50,000/- made by the
Assessing Officer under section 40A(3) of the Act pertaining to A.Y 2007-08.

2. At the outset, it is noted that there has been a delay in filing the
present appeal by 654 days. In its petition for condonation of delay, the
assessee company has submitted that the assessment u/s 153A read with
143(3) was completed on 25.03.2015 by ACIT, Central Circle-1, Jaipur
against which the assessee moved an appeal before the ld. CIT(A) on
17.04.2015. Thereafter, the ld. CIT(A) passed the order on 30.08.2016 which
was served on the assessee company on 05.09.2016. It was further
submitted that there was a change in management of the assessee company
in year 2014 wherein Sh. Hari Mohan Dangayach and Smt. Kamlesh
Dangayach transferred their entire shareholding to Sh. Akshya Gupta and
Mrs Anju Gupta. It was further submitted that as per the mutual
understanding between the old and new management, it was decided that
the subject tax matter, which pertains to year prior to transfer of ownership and management of the assessee company, would be handled by the
erstwhile management group. It was further submitted that Sh. Jagdish
Narain Khandelwal an employee of the erstwhile management who looks
after the income tax matters collected the duly filled Form No. 36 and other
papers from the Counsel and he handed over the said papers to his
subordinate accountant Sh. Naveli Sharan Mittal to get it signed from new
management. However, Sh. Naveli Sharan Mittal after collecting the papers
misplaced the same somewhere in bunch of papers and forgot all about the
same. The matter came to notice of the current management on 11.07.2018
when an enquiry was made by the Assessing officer regarding payment of
outstanding demand and thereafter, the papers were searched including the
original appellate order and dully filled up Form 36 and appeal was thereafter filed before the Tribunal. In support, the affidavits of outgoing Director Shri Hari Mohan Dangayach and present director Shri Akshay gupta along with affidavits of Sh. Jagdish Narain Khandelwal and Sh. Naveli Sharan Mittal were placed on record. It was accordingly submitted that the assessee company was prevented by sufficient cause from filing the appeal within the
prescribed period due to change of management and given that there is no
mala fide involved in delayed filing of the appeal, in the interest of justice,the delay in filing may be condoned and the appeal may be admitted for adjudication on merits. In support, reliance was placed on the Coordinate Bench decision in case of Shri Ram Bharose Sharma vs ITO (ITA no.
1066/JP/2016 dated 14.06.2018) wherein delay of 636 days was condoned.
Further, reliance was placed on the Hon’ble Supreme Court decision in case
of Senior Bhosale Estate (HUF) vs ACIT (Civil appeal no. 6671-6676 of 2010
dated 7.11.2019) wherein delay in filing appeal by 1754 was condoned.

3. Per contra, the ld. CIT/DR submitted that there is a substantial delay
of 703 days as computed by the assessee company, it is therefore important
that the assessee should come forward and explain each and every day of
delay which has happened in filing the present appeal. It was further
submitted that the affidavits so filed by the former director, the employee
and accountant of the erstwhile management as well as affidavit of the
current director are self-serving document and cannot thus provide any
assistance to the assessee company in explaining the delay in filing the
present appeal. He accordingly opposed condoning the delay in filing the
present appeal.

4. We have heard the rival contentions and purused the material
available on record. There is no dispute that there has been a delay in filing the present appeal and the period of delay as computed by the Registry comes to 654 days. There is also no dispute that under section 253(5) of the Act, the Tribunal may admit an appeal filed beyond the period of limitation where it is satisfied that there was sufficient cause on the part of the assessee for not presenting the appeal within the prescribed time. The explanation of the assessee therefore becomes relevant to determine whether the same reflects sufficient cause on its part in not presenting the present appeal within the prescribed time. In the instant case, it has been stated in the affidavits so submitted that there has been a change in the management of the company and the present tax matter pertaining to the period prior to change of management, it was decided that the same would be handled by the erstwhile management, however, due to change of management and lack of diligence on part of ershwhile employees, the appeal could not be filed. It has been further stated that the matter came to light of the present management on 11.07.2018 when an enquiry was made by the Assessing officer for payment of outstanding demand and thereafter,the appeal papers were prepared and appeal was submitted before the Registry on 20.08.2018 though with a delay of 654 days. We therefore find that there is no culpable negligence or malafide on the part of the assessee company in delayed filing of the present appeal and as soon as it came to know of the old tax matter pertaining to the period prior to change of the management, it took steps and filed the present appeal. Therefore, in the factual matrix of the present case, we find that there exists sufficient and reasonable cause for condoning the delay in filing the present appeal and as held by the Hon’ble Supreme Court, where substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserved to be preferred. Therefore, in exercise of powers under section 253(5) of the Act, we hereby condone the delay in filing the present appeal as we are satisfied that there was sufficient cause for not presenting the appeal within the prescribed time and the appeal is hereby admitted for adjudication on merits.

5. The assessee company has submitted an application praying for
raising the following additional ground of appeal which reads as under:-

“That on the facts and in the circumstances of the case the Ld.
Assessing Officer has grossly wrong and erred in law in making
addition of Rs. 42,50,000/- under section 40A(3) of the I. T. Act, 1961
in assessment made under section 153A r.w.s. 143(3) of the I.T. Act,
1961 in as much as no incriminating material was found during the
course of search which could suggest any undisclosed income so as to
initiate proceedings u/s 153A of the Act.”

6. It was submitted by the ld AR that the additional ground is purely a
legal ground which was inadvertently not taken at the time of filing the
original appeal. However, no new facts are required to be examined or
brought on record and being a legal ground, the same may kindly be
admitted for adjudication. In support, the reliance was placed on the Hon’ble Supreme Court decision in case of NTPC Ltd. vs. CIT 229 ITR 38 and Jute Corporation of India Ltd. vs CIT 187 ITR 688.

7. Per contra, the ld. CIT/DR opposed the prayer of the assessee
company for admitting the additional ground of appeal. It was submitted that
the assessee had ample opportunity to raise the ground of appeal before the
ld. CIT(A). However, having failed to take said ground of appeal before the
ld. CIT(A) or advancing any contentions in this behalf before the lower
authorities, the assessee cannot be allowed to raise this ground of appeal for the first time before the Tribunal.

8. We have heard the rival contentions and purused the material
available on record. We find that search and seizure operations u/s 132(1)
were carried on 25.04.2012 at various premises of Dangayach Group and
assessee company was also covered in the said search operations.
Subsequently, notice u/s 153A was issued on 27.12.2012 and in response,
the assessee company furnished its return of income on 15.01.2013
declaring total income at Nil and reiterating the income as per the return of income originally filed u/s 139 on 08.02.2008. Thereafter, the notice u/s
143(2) was issued on 08.08.2013 and assessment was completed u/s 143(3)
read with section 153A dated 25.03.2015. During the course of assessment
proceedings, the Assessing Officer observed that the assessee company has
purchased certain pieces of land vide six separate registered sale deeds and
the sale consideration has been discharged partly in cash. Thereafter, a show cause was issued u/s 40A(3) and after considering the submission of the
assessee, 25% of total expenditure incurred in cash amounting to Rs.
42,50,000/- was disallowed invoking the provisions of section 40A(3) of the
Act. We therefore find that the impugned assessment order has been passed
without any reference to any incriminating material found during the course
of search in case of the assessee and thus, no fresh facts are required to be examined nor any findings on facts are required to be recorded in the instant case. Given the existing facts as emanating from the assessment order, the additional ground of appeal where the assessee has challenged the
impugned assessment order for want of any incriminating material is
therefore purely a legal ground of appeal and even though the same has not
been taken before the ld CIT(A), it can be taken up before the Tribunal for
the first time as held by the Courts from time to time and is hereby admitted for adjudication.

9. We now refer to the contentions advanced by the ld AR on merits of the
additional ground of appeal. During the course of hearing, the ld. AR
submitted that the assessee company got incorporated on 13-07-2006 and is
engaged in the business of real estate. It did not have any
sale/receipts/income during the year. The company purchased few parcels of
agricultural land during the year which is shown as stock-in-trade and all
expenses incurred during the year has been added in stock in trade. The
assessee company filed its original return of income u/s 139 on 08-02-2008
declaring total income at NIL. A search action thereafter had taken place at
various premises of Dangayach group on 25-04-2012 and assessee company
was also covered therein. It was submitted that no document/loose paper
was found /seized during the course of search at the business premises of
the assessee company indicating any on-money receipt/investment/advances
made and any unexplained/overstated expenditure etc. in its books of
account pertaining to the year under appeal thus the mode and manner of
the additions made in the orders passed u/s 153A deserves to be held bad in
law. It was submitted that the reading of provisions of section 153A would
reveal that the time limit for issuance of notice u/s 143 (2) stood expired for the year under appeal and therefore, no assessment was pending at the time when search was conducted in this case and therefore additions, if any, to be made via assessment u/s 153A would be restricted to incriminating
documents found during the course of search. In other words, no routine
additions would be permitted to be made having no nexus with any
incriminating documents found during the search. In support, the
reliance was placed on the following decisions:- 
• All Cargo Global Logistic Ltd. Vs. DCIT 137 ITD 287 (Mum)(SB) 
• CIT vs Kabul Chawla (2016) 380 ITR 573 (Delhi) 
• Jai Steel (India) vs ACIT 259 CTR (Raj) 281 
It was further submitted that the Hon’ble Supreme Court has also dismissed
the SLP filed by the Revenue in case of Meeta Gutgutia vs. Pr. CIT (96
Taxmann.com 468).

10. Per contra, the ld. CIT/DR submitted that in case of Meeta Gutgutia,
though SLP of the Department has been dismissed by the Hon’ble Supreme
Court, however, merely dismissal of the SLP cannot be read as affirmation of
the view taken of the Hon’ble Delhi High Court. It was further submitted that there are two subsequent SLPs which have been admitted by the Hon’ble
Supreme Court on similar matters and therefore, the Department is not
accepting the position taken in case of Meeta Gutgutia and other decisions
cited by the ld. AR.

11. We have heard the rival contentions and purused the material available
on record. A search and seizure action was carried out in case of the
assessee’s group on 25.04.2012. The original return of income was filed u/s
139 on 08.02.2008 and the last day of issuing notice section 143(2) had thus
expired on 30.09.2008 before the date of search and the assessment
proceedings therefore were not pending as on 25.04.2012 i.e. the date of
search. As per section 153A of the Act, once a search and seizure action is
carried out, the AO has to assess or reassess the total income of the
assessee in respect of 6 years immediately preceding the assessment year
relevant to the previous year in which a search is conducted or requisition is made. In case the assessment is pending on the date of search, the same
shall be abated as per proviso to section 153A(1) of the Act and the AO is
free to assess the income of the assessee as regular assessment. However,
in case of completed assessment and not abated due to initiation of search
u/s 132 or making of requisition u/s 132A, the AO has to reassess the total
income of the assessee and therefore, the assessment already completed
can be tinkered with or distrusted where any incriminating material is found
and seized during the course of search or requisition as case may be
indicating undisclosed income of the assessee. Therefore, the scope and
jurisdiction of the AO to reassess the total income of the assessee u/s 153A
is limited only to the extent of the income disclosed by the incriminating
material found and seized during the search and seizure action. As we have
noted above, the Assessing Officer has reassessed the income of the
assessee by making the disallowance u/s 40(A)(3) without making any
reference to any incriminating material found during the course of search.
There is no finding of the Assessing officer or any other material brought on record that the six registered sale deeds were found and seized during the course of search or the transactions so represented by such sale deeds were not recorded in the books of accounts as on the date of search. Once these transactions are duly recorded in the books of accounts and basis the same,the return of income has been furnished before the date of search, the said transactions were duly disclosed to the department and thus, doesn’t
represent any undisclosed transactions so as to constitute incriminating
material found during the course of search in case of the assessee.
Therefore, the disallowance/addition made by the AO and reassessment
completed u/s 153A is undisputedly not based on any incriminating material
found or seized during the course of search and seizure action u/s 132 of the Act. Once, the Assessing Officer has completed the reassessment u/s 153A
without any reference to the incriminating material found, then no addition
can be made to the returned income of the assessee.

12. The Hon’ble Delhi High Court in case of CIT v. Kabul Chawla
(supra) while considering an identical issue has held as under:-

“37. On a conspectus of Section 153A(1) of the Act, read with the provisos
thereto, and in the light of the law explained in the aforementioned
decisions, the legal position that emerges is as under: 
i. Once a search takes place under Section 132 of the Act, notice under
Section 153 A(1) will have to be mandatorily issued to the person
searched requiring him to file returns for six AYs immediately preceding
the previous year relevant to the AY in which the search takes place. 
ii. Assessments and reassessments pending on the date of the search shall
abate. The total income for such AYs will have to be computed by the
AOs as a fresh exercise. 
iii. The AO will exercise normal assessment powers in respect of the six
years previous to the relevant AY in which the search takes place. The
AO has the power to assess and reassess the 'total income' of the
aforementioned six years in separate assessment orders for each of the
six years. In other words there will be only one assessment order in
respect of each of the six AYs "in which both the disclosed and the
undisclosed income would be brought to tax". 
iv. Although Section 153 A does not say that additions should be strictly
made on the basis of evidence found in the course of the search, or
other post-search material or information available with the AO which
can be related to the evidence found, it does not mean that the
assessment "can be arbitrary or made without any relevance or nexus
with the seized material. Obviously an assessment has to be madeunder this Section only on the basis of seized material." 
v. In absence of any incriminating material, the completed assessment can
be reiterated and the abated assessment or reassessment can be made. 
The word 'assess' in Section 153 A is relatable to abated proceedings
(i.e. those pending on the date of search) and the word 'reassess' to
completed assessment proceedings. 
vi. Insofar as pending assessments are concerned, the jurisdiction to make
the original assessment and the assessment under Section 153A merges
into one. Only one assessment shall be made separately for each AY on
the basis of the findings of the search and any other material existing or
brought on the record of the AO. 
vii. Completed assessments can be interfered with by the AO while making
the assessment under Section 153 A only on the basis of some
incriminating material unearthed during the course of search or
requisition of documents or undisclosed income or property discovered
in the course of search which were not produced or not already
disclosed or made known in the course of original assessment. 
39. The question framed by the Court is answered in favour of the Assessee
and against the Revenue.”

13. A similar view has been taken by the Hon’ble Jurisdictional High
Court in case of Jai Steel India v ACIT (supra) as held in para 22 to 30 as
under:-

“22. In the firm opinion of this Court from a plain reading of the provision
along with the purpose and purport of the said provision, which is intricately linked with search and requisition under Sections 132 and 132A of the Act, it is apparent that: 
(a) the assessments or reassessments, which stand abated in terms of II
proviso to Section 153A of the Act, the AO acts under his original
jurisdiction, for which, assessments have to be made; 
(b) regarding other cases, the addition to the income that has already been
assessed, the assessment will be made on the basis of incriminating
material and

(c) in absence of any incriminating material, the completed assessment can
be reiterated and the abated assessment or reassessment can be made.
Though such a claim by the assessee for the first time under Section
153A of the Act is not completed, the case in hand, has to be considered
at best similar to a case where in spite of a search and/or requisition,
nothing incriminating is found. In such a case though Section 153A of
the Act would be triggered and assessment or reassessment to ascertain
the total income of the person is required to be done, however, the same
would in that case not result in any addition and the assessments passed
earlier may have to be reiterated. 
23. The reliance placed by the counsel for the appellant on the case of Anil
Kumar Bhatia (supra) also does not help the case of the assessee. The
relevant extract of the said judgment reads as under:— 
"19. Under the provisions of Section 153A, as we have already noticed,
the Assessing Officer is bound to issue notice to the assessee to furnish
returns for each assessment year falling within the six assessment years
immediately preceding the assessment year relevant to the previous year
in which the search or requisition was made. Another significant feature
of this Section is that the Assessing Officer is empowered to assess or
reassess the "total income" of the aforesaid years. This is a significant
departure from the earlier block assessment scheme in which the block
assessment roped in only the undisclosed income and the regular
assessment proceedings were preserved, resulting in multiple
assessments. Under Section 153A, however, the Assessing Officer has
been given the power to assess or reassess the 'total income' of the six
assessment years in question in separate assessment orders. This means
that there can be only one assessment order in respect of each of the six
assessment years, in which both the disclosed and the undisclosed
income would be brought to tax.

20. A question may arise as to how this is sought to be achieved where
an assessment order had already been passed in respect of all or any of
those six assessment years, either under Section 143(1)(a) or Section
143(3) of the Act. If such an order is already in existence, having
obviously been passed prior to the initiation of the search/requisition, the
Assessing Officer is empowered to reopen those proceedings and
reassess the total income, taking note to the undisclosed income, if any,
unearthed during the search. For this purpose, the fetters imposed upon
the Assessing Officer by the strict procedure to assume jurisdiction to
reopen the assessment under Sections 147 and 148, have been removed
by the non obstante clause with which sub-section (1) of Section 153A
opens. The time-limit within which the notice under Section 148 can be
issued, as provided in Section 149 has also been made inapplicable by
the non obstante clause. Section 151 which requires sanction to be
obtained by the Assessing Officer by issue of notice to reopen the
assessment under Section 148 has also been excluded in a case covered
by Section 153A. The time-limit prescribed for completion of an
assessment or reassessment by Section 153 has also been done away
with in a case covered by Section 153A. With all the stops having been
pulled out, the Assessing Officer under Section 153A has been entrusted
with the duty of bringing to tax the total income of an assessee whose
case is covered by Section 153A, by even making reassessments without
any fetters, if need be.

21. Now there can be cases where at the time when the search is
initiated or requisition is made, the assessment or reassessment
proceedings relating to any assessment year falling within the period of
the six assessment years mentioned above, may be pending. In such a
case, the second proviso to sub-section (1) of Section 153A says that
such proceedings "shall abate". The reason is not far to seek. Under
Section 153A, there is no room for multiple assessment orders in respect
of any of the six assessment years under consideration. That is because
the Assessing Officer has to determine not merely the undisclosed
income of the assessee, but also the 'total income' of the assessee in
whose case a search or requisition has been initiated. Obviously there
cannot be several orders for the same assessment year determining the
total income of the assessee. In order to ensure this state of affairs
namely, that in respect of the six assessment years preceding the
assessment year relevant to the year in which the search took place
there is only one determination of the total income, it has been provided
in the second proviso of sub-Section (1) of Section 153A that any
proceedings for assessment or reassessment of the assessee which are
pending on the date of initiation of the search or making requisition
"shall abate". Once those proceedings abate, the decks are cleared, for
the Assessing Officer to pass assessment orders for each of those six
years determining the total income of the assessee which would include
both the income declared in the returns, if any, furnished by the
assessee as well as the undisclosed income, if any, unearthed during the
search or requisition. The position thus emerging is that the search is
initiated or requisition is made, they will abate making way for the
Assessing Officer to determine the total income of the assessee in which
the undisclosed income would also be included, but in case where the
assessment or reassessment proceedings have already been completed
and assessment orders have been passed determining the assessee's
total income and such orders subsisting at the time when the search or
the requisition is made, there is no question of any abatement since no
proceedings are pending. In this latter situation, the Assessing Officer
will reopen the assessments or reassessments already made (without
having the need to follow the strict provisions or complying with the
strict conditions of Sections 147, 148 and 151) and determine the total
income of the assessee. Such determination in the orders passed under
Section 153A would be similar to the orders passed in any reassessment,
where the total income determined in the original assessment order and
the income that escaped assessment are clubbed together and assessed
as the total income. In such a case, to reiterate, there is no question of
any abatement of the earlier proceedings for the simple reason that no
proceedings for assessment or reassessment were pending since they
had already culminated in assessment or reassessment orders when the
search was initiated or the requisition was made." (Emphasis supplied) 
24. The said judgment also in no uncertain terms holds that the
reassessment of the total income of the completed assessments have to be
made taking note of the undisclosed income, if any, unearthed during the
search and the income that escaped assessments are required to be clubbed
together with the total income determined in the original assessment and
assessed as the total income. The observations made in the judgment
contrasting the provisions of determination of undisclosed income under
Chapter XIVB with determination of total income under Sections 153A to
153C of the Act have to be read in the context of second proviso only, which
deals with the pending assessment/reassessment proceedings. The further
observations made in the context of de novo assessment proceedings also
have to be read in context that irrespective of the fact whether any
incriminating material is found during the course of search, the notice and
consequential assessment under Section 153A have to be undertaken.

25. The argument of the learned counsel that the AO is also free to disturb
income, expenditure or deduction de hors the incriminating material, while
making assessment under Section 153A of the Act is also not borne out from
the scheme of the said provision which as noticed above is essentially in
context of search and/or requisition. The provisions of Sections 153A to 153C cannot be interpreted to be a further innings for the AO and/or assessee beyond provisions of Sections 139 (return of income), 139(5) (revised return of income), 147 (income escaping assessment) and 263 (revision of orders) of the Act. 
26. The plea raised on behalf of the assessee that as the first proviso
provides for assessment or reassessment of the total income in respect of
each assessment year falling within the six assessment years, is merely
reading the said provision in isolation and not in the context of the entire
section. The words 'assess' or 'reassess' have been used at more than one
place in the Section and a harmonious construction of the entire provision
would lead to an irresistible conclusion that the word 'assess' has been used in the context of an abated proceedings and reassess has been used for
completed assessment proceedings, which would not abate as they are not
pending on the date of initiation of the search or making of requisition and
which would also necessarily support the interpretation that for the
completed assessments, the same can be tinkered only based on the
incriminating material found during the course of search or requisition of
documents. 
27. The Allahabad High Court in Smt. Shaila Agarwal's (supra) has held as
under:— 
"19. The second proviso to Section 153A of the Act, refers to abatement
of the pending assessment or re-assessment proceedings. The word
'pending' does not operate any such interpretation, that wherever the
appeal against such assessment or reassessment is pending, the same
along with assessment or reassessment proceedings is liable to be
abated. The principles of interpretation of taxing statutes do not permit
the Court to interpret the Second Proviso to Section 153A in a manner
that where the assessment or reassessment proceedings are complete,
and the matter is pending in appeal in the Tribunal, the entire
proceedings will abate. 
20. There is another aspect to the matter, namely that the abatement of
any proceedings has serious causes and effect in as much as the
abatement of the proceedings, takes away all the consequences that
arise thereafter. In the present case after deducting bogus gifts in the
regular assessment proceedings, the proceedings for penalty were drawn
under Section 271(1)(c) of the Act. The material found in the search may
be a ground for notice and assessment under Section 153A of the Act
but that would not efface or terminate all the consequence, which has
arisen out of the regular assessment or reassessment resulting into the
demand or proceedings of penalty." (Emphasis supplied) 
The said judgment which essentially deals with second proviso to Section
153A of the Act also supports the conclusion, which we have reached
hereinbefore. 
28. It has been observed by the Hon'ble Supreme Court in K.P.
Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 that "it is well recognized
rule of construction that a statutory provision must be so construed, if
possible that absurdity and mischief may be avoided." 
29. The argument of the counsel for the appellant if taken to its logical end would mean that even in cases where the appeal arising out of the
completed assessment has been decided by the CIT(A), ITAT and the High
Court, on a notice issued under Section 153A of the Act, the AO would have
power to undo what has been concluded up to the High Court. Any
interpretation which leads to such conclusion has to be repelled and/or
avoided as held by the Hon'ble Supreme Court in the case of K.P.
Varghese (supra). 
30. Consequently, it is held that it is not open for the assessee to seek
deduction or claim expenditure which has not been claimed in the original
assessment, which assessment already stands completed, only because a
assessment under Section 153A of the Act in pursuance of search or
requisition is required to be made.”

14. In light of above discussions and in the entirety of facts and
circumstances of the case where the reassessment completed u/s 153A
without any reference to the incriminating material, following the binding
precedents as cited above including that of the Jurisdictional High Court, the addition made by the AO u/s 40(A)(3) is not sustainable and the same is
hereby deleted. In the result, the additional ground of appeal is allowed.

15. Now coming to the original ground of appeal taken by the assessee
company which reads as under:

“That on the facts and in the circumstances of the case the Ld. CIT(A)
is wrong, unjust and has erred in law in confirming invoking of
provisions of section 40A(3) of the I.T. Act, 1961 by the assessing
officer in respect to payment of Rs. 2,12,50,000/- made by the
appellant in cash for purchase of agricultural land hold as stock-in-
trade resulting in disallowance and consequent of addition of Rs.
42,50,000/- being 20% of said amount of Rs. 2,12,50,000/- to the
income of the appellant.”

16. In this regard, the ld. AR submitted that the assessee company during
the year purchased vide six separate registered sale deeds, following parcels of land:

Date Area Amount 
13-09-2006 2.63 Hectare 3,00,00,000/- 
27-09-2006 0.69 Hectare 1,08,00,000/- 
11-10-2006 0.78 Hectare 87,90,000/- 
11-10-2006 1.04 Hectare 1,15,10,000/- 
30-10-2006 0.79 Hectare 89,00,000/- 
01-02-2007 0.63 Hectare 71,00,000/-

17. It was submitted that the assessee company out of above total six
purchases of land made cash payments in part in following five purchases of
land: 
Date Total amount paid

To whom paid Amount paid in cash 
13-09-2006 3,00,00,000/- Jangal Ram, Badri Narayan,
Banna Lal and Tija 1,00,00,000/-

27-09-2006 1,08,00,000/- Birdhi Chand 38,00,000/- 
11-10-2006 87,90,000/- M/s N.R. Buildcom Pvt. Ltd. 27,90,000/- 
11-10-2006 1,15,10,000/- M/s N.R. Buildcom Pvt. Ltd. 25,10,000/- 
30-10-2006 89,00,000/- Sitaram NIL 
01-02-2007 71,00,000/- Govindi Bai 21,50,000/-
2,12,50,000/-

18. It was submitted that the A.O. issued a show cause notice asking the
assessee company to explain why the cash payments should not be
disallowed for violation of provisions of section 40A (3) of I.T. Act, 1961. The assessee company furnished its explanation which is reproduced in para 5.4 of assessment order. The A.O. however held the explanation as unacceptable for the following reasons:

(i) The legislature has laid down out a few conditions, in Rule 6DD of
Income-tax Rules, under which no disallowance can be made u/s 40A(3), but
the assessee has not put forward any of such condition in its submission. 
(ii) The assessee has submitted that land has been purchased from
farmers who demand payment in cash, but no any such evidence has been
furnished by the assessee in support of its submission. 
(iii) Out of total cash payments, Rs. 53 lacs have been paid in cash to one
company M/s. N.R. Buildcom Pvt. Ltd. while the assessee is submitting that
cash payments have been made to farmers on their demand. 
(iv) In the case of Shri Birdhi Chand, part payment has been made by
cheque and part payment has been made in cash. Likewise, in the case of
Smt. Govindi Bai also, part payment has been made by cheque and part
payment has been made in cash. Hence, the submission regarding cash
demands of the farmers cannot be accepted.

(v) The assessee has made expenditure in cash which has become the
part of its stock-in-trade which will ultimately be used by the assessee to
earn income. 
(vi) The facts of the case laws narrated by the assessee are different from
the facts of this case.

The A.O. accordingly held that assessee has contravened provisions of
section 40A(3) and there is no escape through rule 6DD therefore he
disallowed 20% part of total expenditure (Rs. 2,12,50,000) incurred in cash
amounting to Rs. 42,50,000/- and added the same to total income in the
hands of the assessee company. The addition so made has been confirmed
by the ld CIT(A) and against the said findings, the assessee company is in
appeal.

19. In the above background, it was submitted by the ld AR that the profits
and gains of any business or profession which was carried on by the assessee
at any time during the previous year is chargeable to income tax u/s 28 of
Act and same is to be computed in accordance with provisions contained in
section 30 to 43D as per provisions of section 29. Thus for computation of
income under the head “business”, the foremost requirement is that there
should be business which was carried on by assessee at any time during the
previous year and there should be income (which includes loss) therefrom. 
The income is result of receipts of business and other receipts as per section 28, deducted therefrom the outgoings permissible expenditures/deductions in accordance with provisions of section 30 to 43D. In case there is no receipt chargeable u/s 28 of I.T. Act, 1961 nothing can be assessed under the head profits and gains of business or profession and provisions of section 30 to 43D cannot be invoked. It is clear from the facts appearing from copy of Audited accounts submitted herewith that assessee in this previous year neither has any receipt of business assessable u/s 28 of the Act, and so has not claimed any ‘expenditure’ the purchase cost of agricultural land (treated as stock-in-trade at close of year) in the year under consideration but the entire ‘expenditure’ of said stock-in-trade was carried forward to next accounting year as opening stock. This position of facts has been accepted by Ld. A.O. in assessment order as no such receipts of business has been assessed in assessment order. In order to invoke provisions of section 40A(3), the amount of ‘expenditure’ incurred in cash must be claimed as expenditure either while working gross profit or while working net profit. It is where a claim for allowance of expenditure is made in computing business income of the year then there could be any disallowance out of the expenditure. There cannot be disallowance of expenditure only without any claim of allowance of expenditure having been made. The legal view is fully supported with the judgement in case of Saral Motors &amp; General Finance Ltd.Vs. ACIT Cir-2, Meerut (2009) 121 ITD 50 (Delhi) and decision of ITAT, Jaipur Bench, Jaipur in case of Salasar Overseas P. Ltd. vs. ACIT. It is thus submitted that Ld. A.O. has wrongly invoked provisions of Section 40A (3) in case of assessee company. 
20. It was further submitted that the object of the provisions of section
40A(3) is to check evasion of taxes so that the payment is made from the
disclosed sources. Both the payer and the payee would be showing in the
respective account the payments made and received. It presupposes that the
transactions must be genuine transactions [Girdharilal Goenka v. CIT (1989)
179 ITR 122, 127 [(Cal)]. In other words, the object of enacting section 40A
(3) is to ensure that payments in respect of which deductions are claimed by
the taxpayers are genuinely made and accommodation payments are not
claimed as deductions [Late Smt. Jyothi Chellaram v. CIT, (1988) 173 ITR
358, 363 (A.P.)]. In the case of assessee who is a colonizer, it has to
purchase land from farmers who are group of persons being relatives or
family members wherein some people have Bank Account and others do not
have bank account. The group of persons sign sale deeds simultaneously and
therefore all person demands payments in cash and colonizer/developer has
no choice but to accept their demand if land holdings are to be acquired. The farmers are illiterate and do not sign sale deeds of land sold and present them for registration unless receive payment in cash due to fear that they will be deprived from their land holding soon after signing sale deed and later on account payee cheque or draft may not be got encashed and, therefore, they do not agree to sale their land holdings without receiving payment in cash. 
The colonizer/developer once starts acquiring land holdings in a particular
area, he has to acquire all adjacent lands necessarily as without that a
township colony project cannot be brought into existence and in such
constrained circumstances, he is not in a position to enforce the term of
payment by crossed account payee cheque or drafts. The payments in cash
made by assessee company have been accepted as genuine by Ld. A.O. and
said payments for purchase of agricultural land from farmers have been
made from explained sources of funds which are shown in Balance Sheet of
company duly audited by Auditors under Companies Act, 1956. Thus
genuineness of payments were established and intention of provisions of
section 40A (3) have not been defeated and, therefore provisions of section
40A(3) cannot be invoked in the case of assessee. The reliance is placed on
the judgement of jurisdictional High Court in case of Kantilal Purshottam &amp;
Co. Vs. CIT (1985) 155 ITR 519 (Raj.). In CIT Vs. Chaudhary &amp; Co. (1996)
217 ITR 431, 433 (All), it was held that where the seller has insisted on cash payment and the payment was genuine disclosing the identity of seller, the provisions of section 40A (3) cannot be invoked. The similar views have been held by various High Courts and various Benches of the Tribunal including the Jaipur Bench which supports the case of assessee. In view of the above legal position, the provisions of section 40A(3) cannot be invoked.

21. It was further submitted that on exactly same issue having same facts
the Jaipur Bench in case of Ace India Abodes Ltd. Vs. ACIT, CC-2, Jaipur (ITA No. 79/JP/2011 order dated 4-8-11), decided the issue in favour of assessee on both of above counts and held as under :- 
“In view of the above facts and circumstances, we hold that since
assessee has not claimed any expenditure, therefore, no disallowance
can be made during the year under consideration.” 
“In this case also it has been held that where payment has been made
in villages, the provisions of section 40A(3) cannot be applied.” 
As the facts of the case and position of law are same in the case of assessee company, the issue raised in ground of appeal is fully covered in its favour from said decision in case of Ace India Abodes Ltd. and so ground deserves to be decided in favour of assessee company. It is, therefore, prayed that addition of Rs. 42,50,000/- made u/s 40A(3) in the hands of assessee company may kindly be deleted.

22. It was further submitted that section 40A(3) does not in blanket
manner mandate disallowance in respect of all situations where cash
payment has been made. It is submitted that the cash payments were made
on the specific condition put up by the seller. It is further submitted that the lands were purchased through registered sale deeds, identity of the sellers and genuineness of the transactions is fully established and the AO has not raised any doubt over the genuineness of the payments and it was
accordingly submitted that where the genuineness of the payments which are
as per the registered sale deeds are not doubted by the AO, no disallowance
could be made. In support, reliance is placed on the decision of Hon’ble
Punjab and Haryana High Court in case of Gurdas Garg vs. CIT [2015] 63
taxmann.com 289. It was submitted that the provisions of section 40A(3)
have been enacted as one of the measures for countering evasion of tax. The
provisions were enacted to enable the assessing authority to ascertain
whether the payment was genuine or whether it was out of the income from
undisclosed sources. Genuine and bona fide transactions are taken out of the
sweep of Section 40A(3).

23. It was submitted that in the present case, the assessee company has
not made use of black money for purchase of land in cash. It was just on the
insistence of the sellers, cash was withdrawn from bank and the payment
was made in cash keeping in mind the business exigencies. This fact is clear
from perusal of assessment order and from Bank Statements of the assessee
firm. The assessee company has withdrawn cash from Bank on very same
day or previous day before the date of payment made in cash. For ready
reference, the details of cash withdrawn from bank and payments made to
sellers are as follow:- 
Date of Amt. paid

Amount Name of seller Date of withdrawal made from bank

Amount withdrawn

13-09-2006 1,00,00,000/- Jangal Ram, Badri
Narayan, Banna Lal and Mr. Tija

11.09.2006 1,00,00,000/-

27-09-2006 38,00,000/- Birdhi Chand 26-09-2006 38,00,000/- 
11-10-2006 27,90,000/- N.R. Buildcom P.Ltd.

11-10-2006 55,00,000/- 
11-10-2006 25,10,000/- M/s N.R. Buildcom P. Ltd.

01-02-2007 21,50,000/- Govind Bai 31-01-2007 22,00,000 
Total 2,12,50,000 2,15,00,000/-

24. It was further submitted that after introduction of section 40A(3),
certain exceptions were allowed to be provided by way of delegated
legislations. Accordingly, Rule 6DD was notified in the year 1969 setting out the exceptions. The Hon’ble Jurisdictional Rajasthan High Court in the case of Harshila Chordia vs. ITO 298 ITR 349 has held that list of exceptions provided under rule 6DD is not exhaustive. Meaning thereby that more could be read into it, if the same does not violate the reason for which section 40A(3) was introduced. Thus, the contention of AO and ld. CIT(A) that the appellant was unable to specify under which clause of Rule 6DD its case fall is not correct.

25. Lastly, reliance was placed on the Hon’ble Supreme Court decision in
case of Attar Singh Gurmukh Singh vs ITO reported in 59 taxmann.com 11
and the decision of the Coordinate Bench in case of M/s Daga Royal Arts,
Jaipur vs. ITO Ward-2(2), Jaipur (ITA no. 1065/JP/2016 dated 15.05.2018).

26. Per contra, the ld. CIT/DR submitted that the assessee company has
purchased land from farmers and it has been contended the farmers have
demand payment in cash. However, in support of the said claim, no
evidences have been furnished by the assessee at the assessment stage or
even during the appellate proceedings. It was accordingly submitted that
these are merely contentions which are not supported by any evidence and
the contention which remain unsubstantiated cannot be accepted. Further,
referring to the individual transactions, it was submitted that two transactions have been executed with M/s N. R. Buildcom Pvt. Ltd and thereafter, the contention regarding demand of payment in cash by the farmers cannot be applied in these two transactions. It was further submitted that the payments have been made on days which were working days and there were no banking holidays or strike on those days, therefore, assessee’s case is also not falling under Rule 6DD. Further, referring to the bank statement furnished by the assessee company, it was submitted that there are two transactions on 11th Oct, 2006 and 31st Jan, 2007 wherein the payments have been shown to be made to Mr. Santosh. It was submitted that it is not clear whose Mr. Santosh is and what linkage, he has with assessee company or with the transactions under consideration. Further, reliance was placed on the decision of AO as well as ld. CIT(A) and submitted that there is no infirmity in the said orders where the disallowance has been made on
account of cash payment invoking provisions of section 40A(3) and the same
may accordingly be confirmed.

27. We have heard the rival submissions and perused the material
available on record. The first contention which has been advanced by the ld
AR is that the provisions of section 40A(3) cannot be invoked in absence of
any claim of the expenditure in the profit/loss account as the expenditure
incurred on purchase of land has been carried forward as stock-in-trade to
the subsequent year. We find that the said issue is no more res integra and
is covered against the assessee by the decision of the Hon’ble Supreme
Court in case of Attar Singh Gurmukh Singh (supra) confirming the
decision of the Rajasthan High Court in case of Kanti Lal Purshottam &amp;
Co. v. CIT [1985] 155 ITR 519 (Raj) and Fakri Automobiles v. CIT [1986] 160
ITR 504 (Raj) and the relevant findings read as under:

“8. As to the second question, it may be stated that the word
'expenditure' has not been defined in the Act. It is a word of wide
import. Section 40A(3) refers to the expenditure incurred by the
assessee in respect of which payment is made. It means all outgoings
are brought under the word 'expenditure' for the purpose of the
section. The expenditure for purchasing the stock-in-trade is one of
such outgoings. The value of the stock-in-trade has to be taken into
account while determining the gross profits under section 28 of the Act
on principles of commercial accounting. The payments made for
purchases would also be covered by the word 'expenditure' and such
payments can be disallowed if they are made in cash in the sums
exceeding the amount specified under section 40A(3). We have earlier
observed that rule 6DD has to be read along with section 40A(3). The
rule also contemplates payments made for stock-in-trade and raw
materials. This rule is in accordance with the terms of section 40A(3). 
The rule provides that an assessee can be exempted from the
requirements of payment by crossed cheque or a crossed bank draft
where the purchases are made of certain agricultural or horticultural
commodities or from a village where there is no banking facility.
Section 40A(3) is, therefore, attracted to payments made for acquiring
stock-in-trade and other materials. This is also the view taken by
several High Courts. - Sajowanlal Jaiswal v. CIT [1976] 103 ITR 706
(Ori.), U.P. Hardware Store v. CIT [1976] 104 ITR 664 (All.), Raton
Udyog v. 1TO [1977] 109 ITR 1 (AIl), PH. Textiles v. CIT [1980] 121
ITR 237 (Ker.), CIT v. Kishan Chand Maheshwari Dass [1980] 121 ITR
232 (Punj. &amp; Har.), Kanti Lal Purshottam &amp; Co. v. CIT [1985] 155 ITR
519 (Raj.), CIT v. New Light Tin Mfg. Co. [1980] 121 ITR 229 (Punj. &amp;
Har.), Fakri Automobiles v. CIT [1986] 160 ITR 504 (Raj.), Venkata
Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253 (AP),
and Akash Films v. CIT [1991] 190 ITR 32 (Kar.). The decisions of the
High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka,
Punjab &amp; Haryana, Rajasthan and Patna are to the effect that the
payments made for purchasing stock-in-trade or raw materials should
also be regarded as expenditure for the purpose of section 40A(3). The
only discordant note struck on this aspect is by the Gauhati High Court
in CIT v. Hardware Exchange [1991] 190 ITR 61. The Gauhati High
Court has observed that section 40A(3) applies only to payments made
on account of 'expenditure incurred' and the payment made for
purchase of stock-in-trade cannot be termed as 'expenditure incurred'
since money does not go irretrievably in such cases. We are unable to
agree with the view taken by the Gauhati High Court.” 
28. Now, coming to other contentions of the ld AR which are centred
around the intention of the legislature behind introduction of section 40A(3),genuine and bonafide transactions not covered within the sweep of section 40A(3) and exceptions provided in Rule 6DD are not exhaustive and various authorities quoted in support thereof, this Bench had an occasion to examine the same at length in case of M/s A Royal Daga Arts vs ITO Ward-2(2),Jaipur (supra) in light of decision of the Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh vs. ITO and the decisions of various High Courts including the decisions of the jurisdictional High Court and the relevant findings reads as under: 
“18. We have heard the rival contentions and perused the material
available on record. It would be relevant to refer to the provisions of section 40A(3) of the Act which reads as under: 
“(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.

(3A) Where an allowance has been made in the assessment for any year in
respect of any liability incurred by the assessee for any expenditure and
subsequently during any previous year (hereinafter referred to as
subsequent year) the assessee makes payment in respect thereof, otherwise
than by an account payee cheque drawn on a bank or account payee bank
draft, the payment so made shall be deemed to be the profits and gains of
business or profession and accordingly chargeable to income-tax as income
of the subsequent year if the payment or aggregate of payments made to a
person in a day, exceeds twenty thousand rupees: 
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 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, 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 :
Provided further that in the case of payment made for plying, hiring or
leasing goods carriages, the provisions of sub-sections (3) and (3A) shall
have effect as if for the words "twenty thousand rupees", the words "thirty-
five thousand rupees" had been substituted.

(4) Notwithstanding anything contained in any other law for the time being
in force or in any contract, where any payment in respect of any expenditure
has to be made by an account payee cheque drawn on a bank or account
payee bank draft in order that such expenditure may not be disallowed as a
deduction under sub-section (3), then the payment may be made by such
cheque or draft; and where the payment is so made or tendered, no person
shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other
manner.”

19. The aforesaid provisions have to be considered and interpreted in light
of various authorities which have been quoted at the Bar and relied upon by
the ld AR and ld DR in support of their respective contentions.

20. In case of Attar Singh Gurmukh Singh v. ITO (supra), the matter
which came up for consideration before the Hon’ble Supreme Court, the facts
of the case were that assessee had made payment in cash exceeding a sum
of Rs. 2,500/- for purchase of certain stock-in-trade. Payments were not
allowed as deductions in the computation of income under the head “profits
and gains of business or professions” as the same were held to be in
contravention of section 40A(3) read with that 6DD of the Income rules. In
that factual background, the question regarding validity of section 40A(3)
and applicability of the said provisions to payment made for acquiring stock- in-trade came up for consideration before the Hon’ble Supreme Court.

21. The Hon’ble Supreme Court referring to the provisions of section
40A(3) and Rule 6DD and in particular, Rule 6DD(j), as existed at relevant
point in time, has held as under:-

“6. 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
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 tax on an assumed income would be a restriction on the right to carry on the business, besides being arbitrary.

7. 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 disclosed
sources. The terms of section 40A(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 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. – Mudiam Oil Co. v. ITO [1973] 92 ITR 519 (AP). If the payment is made by a crossed cheque 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.”

22. Further, the Hon’ble Supreme Court upheld the applicability of section
40A(3) to payment made for acquiring stock-in-trade and raw materials and
also affirmed the decision of Hon’ble Rajasthan High Court in case of Fakri
Automobiles v. CIT [1986] 160 ITR 504 (Raj) to the effect that the payments
made for purchasing stock-in-trade or raw material should also be regarded
as expenditure for the purposes of section 40A(3) of the Act.

23. The Hon’ble Supreme Court has therefore upheld the constitutional
validity of section 40A(3) of the Act and has held that the provisions are not intended to restrict the business activities and restraint so provided are only intended to curb the chances and opportunities to use or create black money and the same should not be regarded as curtailing the freedom of trade or business. The Hon’ble Supreme Court has thus laid great emphasis on the intention behind introduction of these provisions and it would therefore be relevant to examine whether in the present case, there is any violation of such intention and if ultimately, it is determined that such intention has been violated, then certainly, the assessee deserves the disallowance of the expenditure so claimed.

24. The Hon’ble Supreme Court referring to the provisions of section
40A(3) as existed at relevant point in time which talks about considerations
of business expediency and other relevant factors and Rule 6DD(j) which
provides for the exceptional or unavoidable circumstances and the fact that
the payment in the manner aforesaid was not practical or would have caused
genuine difficulty to the payee and furnishing the necessary evidence to the
satisfaction of the Assessing Officer as to the genuineness of the payments
and the identity of the payee has held that:

“The terms of section 40A(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 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.”

25. Here, it is relevant to note that there has been no change in the
provisions of section 40A(3) in so far as considerations of business
expediency and other relevant factors are concerned, as existed at relevant
point in time and as considered by the Hon’ble Supreme Court and the
provisions of section 40A(3) as exist now and relevant for the impunged
assessment year i.e. AY 2013-14. However, Rule 6DD(j) has been amended
and by notification dated 10.10.2008, it now provides for an exception only
in a scenario where the payment was required to be made on a day on
which banks were closed either on account of holiday or strike. A question
which arises for consideration is whether the legal proposition so laid down
by the Hon’ble Supreme Court regarding consideration of business
expediency and other relevant factors has been diluted by way of delegated
legislation in form of Income Tax Rules when the parent legislation in form of section 40A(3) to which such delegated legislation is subservient has been retained in its entirety. Alternatively, can it be said that what has been prescribed as exceptional circumstances in Rule 6DD as amended are
exhaustive enough and which visualizes all kinds and nature of business
expediency in all possible situations.

26. If we look at the legislative history of section 40A(3) and Rule 6DD, we
find that initially, section 40A(3) provides for disallowance of 100% of the
expenditure unless the matter falls under exception as provided in Rule
6DD(j) Later on, section 40A(3) has been amended to provide for
disallowance of 20% of the expenditure incurred in cash and Rule 6DD(j)
was omitted. Thereafter, by virtue of another amendment, disallowance
under section 40A(3) was increased from 20% to 100%, however, Rule
6DD(j) was not reintroduced in original form to provide for exceptional and
unavoidable circumstances rather it was restricted to payment by way of
salary to employees and thereafter, by virtue of lastest amendment in year
2008 to payments made on a day on which the banks were closed on
account of holiday or strike.

27. We do not believe that by virtue of these amendments, the legal
proposition so laid down by the Hon’ble Supreme court regarding
consideration of business expediency and other relevant factors has been
diluted in any way. At the same time, we also believe that Rule 6DD as
amended are not exhaustive enough and which visualizes all kinds and
nature of business expediency in all possible situations and it is for the
appropriate authority to examine and provide for a mechanism as originally
envisaged which provides for exceptional or unavoidable circumstances to
the satisfaction of the Assessing officer whereby genuine business
expenditure should not suffer disallowance.

28. Further, the Courts have held from time to time that the Rules must be
interpreted in a manner so as to advance and not to frustrate the object of
the legislature. The intention of the legislature is manifestly clear and which is to curb the chances and opportunities to use or create black money and to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. And Section 40A(3) continues to provide that no disallowance shall be made in such cases and under such circumstances as may be prescribed having regard to the nature and extent of the banking facilities available, consideration of business expediency and other relevant factors. In our view, given that there has been no change in the provisions of section 40A(3) in so far as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated under section 40A(3) of the Act so long as the intention of the legislature is not violated. We find that our said view find resonance in decisions of various authorities, which we have discussed below and thus seems fortified by the said decisions.

29. We refer to the decision of the Hon’ble Rajasthan High Court in case of
Smt. Harshila Chordia vs. ITO (supra), where the facts of case were that the
assessee had made certain cash payments towards purchase of
scooter/mopeds which exceeded Rs. 10,000/- in each case to the principal
agent instead of making payment through the cross cheques or bank draft.
The Assessing Officer invoked the provisions of section 40A(3) and held that
they were no exceptional circumstances falling under rule 6DD which could
avoid consequences of the provisions of section 40A(3) of the Act. The ld.
CIT(A) held that such exceptional circumstances did exist. However, the
findings of the ld. CIT(A) were reversed by the Tribunal and the matter came
up for consideration before the Hon’ble High Court.

30. The Hon’ble High Court observed that the principal reason which
weighed with the Tribunal in discarding the explanation furnished by the
assessee was that the case of the assessee did not fall in any of the clauses enumerated in the circular issued by the CBDT about the explanatory note appended to clause (j) was to operate as it was existing at the relevant time and enumerated circumstances in the circular was exhaustive of exceptional circumstances. The Hon’ble High Court observed that the Tribunal has erroneously assumed that enumeration of instances in the circular in which the provisions of clause (j) under rule 6DD would operate to be exhaustive of such circumstances and had not been properly understood its implication. It was further observed by the Hon’ble High Court that primary object of enacting section 40A(3) in its original incarnation was two-fold, firstly,putting a check on trading transactions with a mind to evade the liability to tax on income earned out such transaction and, secondly, to inculcate the banking habits amongst the business community. The consequence which was provided was to disallow of deduction of such payments/expenses which were not through bank either by crossed cheques or by demand draft or by pay order. It was further held by the Hon’ble High Court that:

31. It was accordingly held by the Hon’ble High Court that it is the relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in light of Rule 6DD as clarified by circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a
consequence. This is particularly so, because the consequence provided u/s
40A(3) for failure to make payments through bank is not absolute in terms
nor automatic but exceptions have been provided and leverage has been left
for little flexing by making a general provision in the form of clause (j) in rule 6DD. Thereafter, the Hon’ble High Court refers to the clause 6DD(j) and the circular dated 31st May, 1977 issued by the Board in the context of what shall constitute exceptional and unavoidable circumstances within the meaning of section Clause (j). The Hon’ble High Court observed that the circular in paragraph 5 gives a clear indication that rule 6DD(j) has to be liberally construed and ordinarily where the genuineness of the transaction and the payment and the identity of the receiver is established, the requirement of rule 6DD(j) must be deemed to have been satisfied. The Hon’ble High Court observed that 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 and this clarification, in our opinion, is in conformity with the principle enunciated by the Supreme Court in CTO vs. Swastik Roadways reported in [2004] 2 RC 539; [2004] 3 SCC 640.

32. The legal proposition that arises from the above decision of the Hon’ble
Rajasthan High Court is that the consequences, which were to befall on
account of non-observation of sub-section (3) of section 40A must have
nexus to the failure of such object. Therefore the genuineness of the
transactions and it being free from vice of any device of evasion of tax is
relevant consideration and which should be examined before invoking the
rigours of section 40A(3) of the Act.

33. In case of Anupam Tele Services v. Income Tax Officer, the matter
which came up for consideration before the Hon’ble Gujarat High Court, the
facts of the case were that the assessee who is involved in the business of
distribution mobile and recharge vouchers of Tata Tele Services Ltd had
made payment of Rs. 33,10,194/- to Tata Tele Services Ltd., by cash on
different dates. The assessee had made such payment through account
payee cheques till 22nd Aug, 2005, when a circular was issued by Tata Tele
Services Ltd., requiring the appellant to deposit cash at the company’s office at Surat. In that factual background , the Hon’ble High Court held as under:- 
“17. Rule 6DD of the IT Rules, 1962 provides for situations under which
disallowance under s. 40A(3) shall not be made and no payment shall be
deemed to be the profits and gains of business or profession under the said
section. Amongst the various clauses, cl. (j) which is relevant, read as under: 
(j) where the payment was required to be made on a day on which the
banks were closed either on account of holiday or strike; 
18. It could be appreciated that s. 40A and in particular sub-cl. (3)
thereof aims at curbing the possibility of on-money transactions by insisting that all payments where expenditure in excess of a certain sum (in the present case twenty thousand rupees) must be made by way of account
payee cheque drawn on a bank or account payee bank draft. 
19. As held by the Apex Court in case of Attar Singh Gurmukh Singh
(supra). "..In our opinion, there is little merit in this contention. Sec.
40A(3) must not be read in isolation or to the exclusion of r. 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. Sec. 40A(3) only empowers the A.O. 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 s. 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 A.O. the circumstances under which the payment in the manner prescribed in s. 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 s. 40A(3) and r. 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:” 
20. It was because of these considerations that this Court in case of
Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the
payment and the identify of the payee are the first and foremost
requirements to invoke the exceptions carved out in r. 6DD(j) of the IT
Rules,1962.

21. In the present case, neither the genuineness of the payment nor the
identity of the payee were in any case doubted. These were the conclusions
on facts drawn by the CIT(A). The Tribunal also did not disturb such facts
but relied solely on r. 6dd(j) of the rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of r. 6DD, consequences envisaged in s. 40A(3) of the Act must follow.

22. In our opinion, the Tribunal committed an error in coming to such a
conclusion. We would base our conclusions on the following reasons: 
(a) The paramount consideration of section 40A(3) is to curb and
reduce the possibilities of black money transactions. As held by the
Supreme Court in Attar Singh Gurmukh Singh (supra), section 40A(3) of
the Act does not eliminate considerations of business expediencies. 
(b) In the present case, the appellant assessee was compelled to make
cash payments on account of peculiar situation. Such situation was as
follow- 
(i) the principal company, to which the assessee was a distributor,
insisted that cheque payment from a co-operative bank would not do, since
the realization takes a longer time;

(ii) the assessee was, therefore, required to make cash payments only; 
(iii) Tata Tele Services Ltd. assured the assessee that such amount
shall be deposited in their bank account on behalf of the assessee; 
(iv) It is not disputed that the Tata Tele Services Ltd. did not act on such
promise; 
(v) if the assessee had not made cash payment and relied on cheque
payments alone, it would have received the recharge vouchers delayed by
4/5 days and thereby severely affecting its business operations.
We would find that the payments between the assessee and the Tata Tele
Services Ltd. were genuine. The Tata Tele Services Ltd. had insisted that
such payments be made in cash, which Tata Tele Services Ltd. in turn
assured and deposited the amount in a bank account. In the facts of the
present case, rigors of s. 40A(3) of the Act must be lifted. 
23. We notice that the Division Bench of the Rajasthan High Court in
case of Smt. Harshila Chordia vs. ITO (2007) 208 CTR (Raj) had observed
that the exceptions contained in r. 6DD are not exhaustive and that the
said rule must be interpreted liberally.”

34. In case of M/s Ajmer Food Products Pvt. Ltd., Ajmer vs. JCIT (supra),
a similar issue has come up before the Co-ordinate Bench and speaking
through one of us, it was held as under:

“4.5 The genuineness of the transaction as well as the identity of the payee
are not disputed. Further, the appellant has explained the business
expediency of making the cash payments to both the parties which has not
been controverted by the Revenue. Following the decision of Gujarat High
Court in case of Anupam Tele Services (supra) and Rajasthan High Court in
case of Harshila Chordia (supra), the addition of Rs. 45,738/- under section
40A(3) is deleted.”

35. In case of Gurdas Garg vs. CIT(A), Bathinda (supra), the matter which
came up for consideration before the Hon’ble Punjab &amp; Haryana High Court,
the facts of the case are pari materia to the instant case and the ratio of the said decision clearly applies in the instant case. In that case, the facts of the case were that the assessee was engaged in trading in properties and during the course of assessment proceedings, the AO observed that there are transactions where the payments have been made in excess of Rs. 20,000/- in cash which were disallowed u/s 40A(3) of the Act. The Hon’ble High Court held that rule 6DD(j) is not exhaustive of the circumstances in which the proviso to section 40A(3) is applicable and it only illustrative. The Hon’ble High Court refers to the decision of the Hon’ble Rajasthan High Court in case of Smt. Harshila Chordia v. ITO (Supra) and the decision of Hon’ble Supreme Court in case of Attar Singh Gurmukh Singh v. ITO (Supra). The High Court further observed that the ld. CIT(A) has given a finding that the identity of the payee i.e. vendors in respect of land purchase by the appellant was established, the sale deeds were produced, the genuineness thereof was accepted and the amount paid in respect of each of these agreement was satisfied before the Stamp Registration Authority and the transactions were held to be genuine and the bar against the grant of deductions u/s 40A(3) of the Act was not attracted. The Hon’ble High Court further observed that the Tribunal did not upset these findings including as to the genuineness and the
correctness of the transactions and 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 and therefore 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 Hon’ble High Court accordingly observed that “the
Tribunal has not disbelieved the transactions or the genuineness thereof nor
has it disbelieved the fact that payments having been made. More
importantly, 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.”

36. The Co-ordinate Bench in case of M/s Dhuri Wine vs DCIT (ITA No.
1155/chd/2013 &amp; others dated 09.10.2015) has held that the proposition so
laid down by the Hon’ble High Court in case of Gurdas Garg (supra) is quite
unambiguous to the effect that even if the case of the assessee does not fall in any of the clauses of Rule 6DD of the Income Tax Rules, invoking the
provisions of section 40A(3) of the Act can be dispensed with if the assessee is able to prove the business expediency because of which it has to make the cash payments, the genuineness of the transactions have also to be verified.

37. The Co-ordinate Bench in case of Rakesh Kumar vs. ACIT (ITA No.
102(Asr)/2014 dated 09.03.2016) relying on the decision of Hon’ble Punjab
and Haryana High Court in case of Gurdas Garg (supra) has held that the
genuineness of the payment has not been doubted as the Assessing Officer
himself has held that sale deeds of properties were registered with the
Revenue department of the Government. Therefore, following the decision of
Hon’ble Punjab and Haryana High Court, the payment for purchase of land
was allowed.

38. We further note that in case of M/s ACE India Abodes limited (DB
Appeal No. 45/2012 dated 11.09.2017), a similar issue has come up before
the Hon’ble Rajasthan High Court regarding payment for purchase of land
from various agriculturist for which the assessee has paid consideration in
cash and shown the land as its stock-in-trade. The Hon’ble Rajasthan High
Court referring to the intent behind introduction of section 40A(3) and catena of decisions right from Attar Singh Gurmukh Singh, Smt. Harshila Chordia,Gurdas Garg, Anupam Tele Services referred supra has decided the issue in favour of the assessee and against the department.

39. The issue which is being disputed before us has to be considered and
decided in light of facts on record and the legal position which emerges from the above referred decisions. The facts of the case are that during the year under consideration, the assessee firm has purchased 26 pieces of plot of land in the month of April and May, 2012 from various persons for a total
consideration of Rs. 2,46,28,425/-, out of which payment amounting to Rs.
1,71,67,000/- were made in cash to various persons, payment amounting to
Rs. 59,48,920/- were made in cheque to various persons, and Rs.
8,15,700/- and Rs. 6,84,296/- were paid in cash towards stamp duty and
court fee respectively. During the course of assessment proceedings, the
assessee submitted copies of the sale deed, the particulars of which find
mention on page 7 and 8 of the assessment order. On perusal of the said
details, it is observed that the said details contains the name of the seller, date of sale deed, plot no., purchase value, stamp duty, Court fee and mode of payment – cash/cheque. Therefore, as far as the identity of the persons from whom the purchases have been made and genuineness of the
transactions of purchase of various plots of land and payment in cash is
concerned, the same is evidenced by the registered sale deeds and there is
no dispute which has been raised by the Revenue either during the
assessment proceedings or before us. The identity of the sellers and
genuineness of the transactions is therefore fully established in the instant case. 
40. From perusal of the assessment order, it is further noted that the AO,
on perusal of the details of the properties purchased, as per copies of the
sale deed furnished, held that the assessee had made cash payments
regularly and no specific circumstances have been brought to his knowledge
that the cash payments were made due to some unavoidable circumstances. 
It was held by the AO that maximum cash payments were made to persons
residing in Jaipur city and in single family, repeated cash payments were
made which itself shows that there were no unavoidable circumstances to
make cash payments to the sellers. What is therefore relevant to note that
the AO has appreciated the necessity of determining the unavoidable
circumstances which could have led the assessee to make cash payments.
During the course of assessement proceedings, it was submitted by the
assessee that the payment for purchase of land has been made in cash
because the sellers were new to the assessee and refused to accept the
cash. It was submitted that the delay in making the cash payment, it could
have lost the land deals. In this regard, the ld AR submitted before us that
the assessee had purchased the lands both through cash and cheques.
Based on the requirement of the seller, assessee had selected the mode of
payment. For the sellers, who had insisted the payments in cash, assessee
had withdrawn the cash from bank on the same date of registry and made
the payments to seller accordingly. The withdrawals from bank and
payments to seller have been tabulated below as per dates below:-

Date Bank Grand Total Cumulative balance

Utilization Net Balance
ICICI Bank Yes Bank Date Amount 18,00,000 
5-Apr-12 14,50,000 3,50,00 18,00,000 18,00,000 5,07,00 
9-Apr-12 - 9,00,000 9,00,000 27,00,000 9-Apr-12 21,93,000 3,34,000 
11-Apr-12 - 2,00,000 2,00,000 29,00,000 11-Apr-12 3,73,000 3,34,000 
12-Apr-12 - - - 29,00,000 - - 3,34,000 
13-Apr-12 - - - 29,00,000 - - 11,97,100 
19-Apr-12 - 30,00,000 30,00,000 59,00,000 23-Apr-12 21,36,900 11,57,000 
24-Apr-12 30,00,000 25,00,000 55,00,000 1,14,00,000 24-Apr-12 55,40,100 11,57,000 
25-Apr-12 - - - 1,14,00,000 - - 11,57,000 
30-Apr-12 - - - 1,14,00,000 - - 11,57,000 
4-May-12 - - - 1,14,00,000 - - 11,57,000 
7-May-12 - - - 1,14,00,000 - - 11,57,000 
8-May-12 19,00,000 23,00,000 42,00,000 1,56,00,000 8-May-12 38,55,000 15,02,000 
12-May-12 - - - 1,56,00,000 - - 15,02,000 
14-May-12 - - - 1,56,00,000 - - 15,02,000 
15-May-12 - - - 1,56,00,000 - - 15,02,000 
16-May-12 - 15,00,000 15,00,000 1,71,00,000 - - 30,02,000 
17-May-12 - 15,00,000 15,00,000 1,86,00,000 17-May-12 30,69,000 14,33,000 
Total 63,50,000 1,42,50,000 1,86,00,000 1,71,67,000

41. It was submitted by the ld AR that in order to secure the deal,
assessee had no other option but to make the payment in cash. Cash
payments were made from the disclosed sources being the amount
withdrawn from bank. It was for sheer insistence of the seller that the
payments were made in cash. Had the assessee denied the cash payment
looking to the provisions of sections 40A(3), the deal could not have been
finalized. In such circumstances, in the business interest and to complete the deal, the assessee had chosen to make the payments in cash fortified
through registered sale deed. The payment has been made out of the
explained sources, through the registered document and as a disclosed
transaction. 
42. We find force in the contentions so raised by the ld AR. The
transactions have been executed by the assessee within a span of one and
half month and there are transactions where the payment has been made
through cheque and there are transactions where the payment has been
made through cash. The said contentions are supported by the fact that on
the same day, there are cash and cheque payments as evidenced from the
details of the transactions appearing at page 7 and 8 of the assessment
order. It is therefore clear that the assessee was having sufficient bank
balance and only at the insistence of the specific sellers, the assessee has
withdrawn cash and made payment to them and wherever, the seller has
insisted on cheque payments, the payment has been made by cheque. This
makes out a case that the assessee has business expediency under which it
has to make payment in cash and in absence of which, the transactions
could not be completed. The second proviso to section 40A(3) refers to “the
nature and extent of banking facility, consideration of business expediency
and other relevant factors” which means that the object of the legislature is not to make disallowance of cash payments which have to be compulsory
made by the assessee on account of business expediency. Further, the
source of cash payments is clearly identifiable in form of the withdrawals
from the assessee’s bank accounts and the said details were submitted
before the lower authorities and have not been disputed by them. It is not
the case of the Revenue either that unaccounted or undisclosed income of
the assessee has been utilised in making the cash payments. 
43. In the entirety of facts and circumstances of the case and respectfully
following the legal proposition laid down by the various Courts and
Coordinate Benches referred supra, we are of the view that the identity of
the persons from whom the various plots of land have been purchased and
source of cash payments as withdrawals from the assessee’s bank account
has been established. The genuineness of the transaction has been
established as evidenced by the registered sale deeds and lastly, the test of business expediency has been met in the instant case. Further, as held by
the Hon’ble Rajasthan High Court in case of Harshila Chordia (supra), the
consequences, which were to befall on account of non-observation of sub-
section (3) of section 40A must have nexus to the failure of such object.
 
Therefore the genuineness of the transactions and it being free from vice of
any device of evasion of tax is relevant consideration. The intent and the
purpose for which section 40A(3) has been brought on the statute books has
been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of section 40A(3) of the Act.” 
29. In the instant case, we find that the identity of the persons from whom
the purchase of various land parcels have been made by the assessee has
been established and the source of cash payments is clearly identifiable in
form of the withdrawals from the assessee's bank accounts and the said
details were submitted before the lower authorities and have not been
disputed by them. It is not the case of the Revenue either that unaccounted
or undisclosed income of the assessee has been utilised in making the cash
payments. The genuineness of the transaction has been established as
evidenced by registered sale deeds wherein the payments through cheque as
well as cash has been duly mentioned and lastly, the test of business
expediency has been met as the initial payments as insisted by the sellers
most of whom are farmers have been made in cash to secure the transaction.
Further, as held by the Hon'ble Rajasthan High Court in case of Smt. Harshila Chordia (supra), the consequences, which were to befall on account of non-observation of sub-section (3) of section 40A must have nexus to the failure of such object. Therefore the genuineness of the transactions and it being free from vice of any device of evasion of tax is relevant consideration for which section 40A(3) has been brought on the statute books and which has been satisfied in the instant case. Similar view has been taken by the Hon'ble Rajasthan High Court in case of CIT vs Solutions reported in 80 Taxmann.com 246 wherein it was held as under:

“11. The Appellate Authorities have relied upon the judgment rendered
in the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR
667/59 Taxman 11 (SC), where the hon'ble apex court has observed as
under (page 673) : 
"The terms of section 40A(3) are not absolute. Consideration 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." 
12. The aforesaid observation does apply in the instant case. The
Assessing Officer on the facts noticed has been unable to make out a
case of involvement of unaccounted money.

13.It is also a finding of fact recorded by the Commissioner of Income-
tax (Appeals) that copies of the ledger accounts were produced before
the Assessing Officer who has not found any discrepancy in such books
of account and no unaccounted transaction has been reported/noticed
by the Assessing Officer.”

30. In the entirety of facts and circumstances of the case and respectfully
following the legal proposition laid down by the various Courts including that of the Jurisdictional High Court and the Coordinate Benches referred supra,no disallowance is called for under section 40A(3) of the Act and the same is directed to be deleted. In the result, the ground of the assessee’s appeal is allowed. 
In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 27/10/2020. 
Sd/- Sd/-

(Vijay Pal Rao) (Vikram Singh Yadav)
Judicial Member Accountant Member Jaipur
Dated:- 27/10/2020