Cash deposit made by the Assessee for the Purchase of Stock-in-Trade cannot be disallowed u/s 40A(3) of the Income Tax Act: ITAT Kolkata [Read Order]

The Kolkata division of Income Tax Appellate Tribunal, has recently ruled that the cash deposit made by the assessee for the purchase of stock-in-trade cannot be disallowed u/s 40a(3) of the Income Tax Act, 1961 since these payment falls within the ambit of Rule 6DD(b) and Rule 6DD(k) and therefore, are entitled to exemption.

The Assessee is a retail vendor of Country Liquor and Pachai. As per the revised procedure prescribed by the Excise Department, for lifting Country Spirit, the assessee, who is a retail vendor, was required to make the entire payment consisting of cost of the stock-in-trade, Excise duty and bottling charges etc. only to the wholesale Licensee appointed by the State Government. Following the above procedure, the assessee, during the relevant previous year, made both cash payments and also used demand draft for purchase of its stock-in-trade. The assessee claimed deduction in respect of such payments under section 40A(3) of the Act. However, the Assessing Officer disallowed the cash payments(in excess of Rs.20,000 on each occasion) and allowed deduction in respect of cash payments.

Before the CIT(A), the assessee contended that that since the Assessee deposited cash in the State Bank of India, no disallowance u/s. 40A(3) of the Act is called for in view of the exemption allowed under Rule 6DD(a)(ii) of the I. T. Rules. It was further submitted that the cash payments made to the purchase should be treated as payments made to the Government and hence no disallowance is called for in view of provisions of Rule 6DD(b) of the I. T since as per  the Notification dated 29.08.2005, the wholesale Licensees were appointed by the State Government for collecting the cost price, Excise duty, bottling charges etc. the CIT(A) rejected bot h the arguments and decided the matter in favor of the Department.

The Tribunal noticed the decision of the Bangalore Co-Ordinate Bench, in Sri Renukeswara Rice Mills vs ITO reported in 93 ITD 263 (Bang Trib., in which it was held that the cash payment in the bank account of the payee is sufficient to get exemption in terms of Rule 6DD in as much it is ensured that the payee and payee alone receives the payment and the origin and conclusion of the transaction is traceable thereby fulfilling the criterion for ensuring the object of introduction of section 40A(3) of the Act.

The Tribunal found that the transactions made by the assessee are genuine, the identity of the receiver (wholesale licensee) is established beyond doubt and the payment is made in the bank account of the seller (wholesale licensee).According to the Tribunal, since the genuinty of the seller is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case.

It was further added that “It is observed that the assessee had taken enough precautions from its side to ensure that the payee also don’t escape from the ambit of taxation on these receipts by directly depositing the cash in the bank account of the payee. Moreover, the regulations of the West Bengal Government pursuant to notification from its Excise Department dated 29.8.2005 also mandates the payment to be made by way of direct deposit into the bank account of the wholesale licensee. This fact is also not disputed by the revenue.”

While allowing the claim that assessee’s case falls under the exceptions provided in Rule 6DD(b) and Rule 6DD(k) of the Rules, the Tribunal further observed that “We are not inclined to ignore the intention of the provisions of section 40A(3) of the Act by giving a plain reading of the same as argued by the ld DR. We find that the disallowance of the entire cash purchases results in abnormal trading profit for the assessee which it could never earn. We find a purposive construction should be resorted to while applying the provisions of the Act. Hence it would be more relevant to get into the intention of the legislature. In our opinion, the primary object of enacting section 40A(3) was twofold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non-observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration. In the instant case, the cash has been deposited directly in the bank account of the supplier i.e M/s Asansol Bottling &Packaging Co. Pvt Ltd by the assessee.”

Read the full text of the order below.