Income Tax Appellate Tribunal – Jaipur
M/S. K.K. Construction Co., … vs Assistant Commissioner Of Income … on 5 December, 2019 vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”B” JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k
BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 990/JP/2017 fu/kZkj.k o”kZ@Assessment Year : 2012-13 M/s K.K. Construction Co., cuke The ACIT,
Village Kanwarpura, Vs. Circle,
Post- Bakhtawarpura, Jhunjhune.
Dist- Jhunjhune.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAJFK 9114 E
vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj l@ s Assessee by : Shri Vedant Agarwal (C.A.)& Shri Satish Gupta (C.A.) jktLo dh vksj ls@ Revenue by : Smt. Runi Pal (DCIT) lquokbZ dh rkjh[k@ Date of Hearing : 04/11/2019 mn?kks”k.kk dh rkjh[k@Date of Pronouncement : 05/12/2019 vkns’k@ ORDER PER: VIKRAM SINGH YADAV, A.M.

This is an appeal filed by the assessee against the order of ld.
CIT(A)-3, Jaipur dated 10.11.2017 for Assessment Year 2012-13
wherein the assessee has taken following grounds of appeal:-
“1. On the facts and circumstances of the case and in law also Ld Lower authorities grossly erred in making the addition of Rs. 2,38,67,250/- by making disallowances u/s 40A(3) of the income tax act 1961.
2 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT 2. On the facts and circumstances of the case Ld Lower authorities grossly erred in making the addition of Rs. 18,00,000/- u/s 68 of the Income Tax Act.

2. Regarding ground no. 1, briefly the facts of the case are that the
assessee is engaged in the business of civil construction. During the
course of assessment proceedings, the Assessing Officer observed that
the assessee has made payment of Rs. 2,38,67,250/- in cash exceeding
prescribed threshold in contravention of Section 40A(3) of the Act
towards purchase of grit and other items for construction to various
persons as detailed at pages 5-7 of the assessment order. A show
cause notice was issued to the assessee as to why the cash payment
made in contravention of Section 40A(3) of the IT Act may not be
added to the total income of the assessee. In response, the assessee
submitted that the contract work was executed in rural area and the
payments were made in cash for purchase of raw material due to non-
availability of banking facility in the village area. It was further
submitted that the stone crushers are located in the remote hilly areas
where there is no banking facility and the suppliers do not accept the
cheque payments and the assessee has to make payment in cash due
to compelling circumstances. It was further submitted that there was
complete ban on the mining in the State of Haryana since 2010 and the
assessee had to purchase the grit, stone & dust from the State of
Rajasthan and the business of assessee’s firm is mainly in the state of
Haryana and the suppliers do not accept payment through cheque
hence the assessee firm was under business compulsion to complete
the work in a time bound manner and therefore, had to make the
purchases in cash. The submissions so filed by the assessee were
3 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT considered however, not found acceptable to the Assessing Officer.
Firstly, the Assessing Officer observed that on various dates, the
assessee has made payment through RTGS therefore, the payment so
made by the assessee in cash could have been made through RTGS.
Further, the Assessing Officer observed that on perusal of the
photocopies of the cheques issued by the assessee firm, it reveals that
the cheques so issued were self cheque without any mention of name
of the party and the account number of the party and therefore, these
are self cheques and not account payee cheque drawn by the assessee
firm. Further, Assessing Officer observed that the assessee has made
payment to renowned parties and they were operating widely in their
areas and therefore, the assessee’s contention that the parties to whom
such payment were made in cash were operating in the rural and
remote areas was wrong and baseless. It was accordingly held by the
Assessing officer that the assessee’s case is not covered under clause
(a) to (I) of Rule 6DD of the IT Rules hence, the amount of Rs.
2,38,67,250/- was disallowed as per provisions of Section 40A(3) of the
IT Act.
3. Being aggrieved, the assessee carried the matter in appeal
before the ld. CIT(A) and during the course of appellate proceedings,
the assessee filed additional evidence in the form of certificates from ‘Sarpanch’ of the Gram Panchayats stating therein that no bank
branches are available in the area of business of the assessee where
the assessee has purchase grits for the requirement of the civil
construction. The said additional evidences were forwarded to the
Assessing Officer for examination and seeking the remand report.
4 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT 4. In the remand report dated 15.09.2017, the Assessing Officer has
stated in para 3 as under:-
“However, clause (g) of Rule 6DD of Income Tax Rules, 1962 states that–‘where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town’. The provisions of the Income Tax Act were available to the assessee ab-initio. The assessee was given sufficient time to submit such evidences during the course of assessment proceedings and it was not prevented by any cause or reason. In this regard, vide show cause notice dated 27/02/2015 & 11/03/2015, the assessee firm was asked as to why the cash payment made in the areas falling under the Gram Panchyats as submitted by the assessee during the appellate proceedings may not be added u/s 40A(3) of the Act. In response to that showcause, the assessee filed written submission stating therein that the contract work has been executed in Rural Area and the payment have to be made in cash for purchase of raw material due to non banking facility nearby but the assessee did not submit the certificates despite adequate opportunity was accorded to it.

Without prejudice to the above, additional evidences in the form of certificates from the Sarpanch of Gram Panchayats have been verified by the Inspector of this office. The Inspector of this office has submitted his report stating that the Gram Panchyats under consideration does not have any bank branch within the geographical territory of the Panchayats. Therefore, the additional evidences submitted by the assessee during the appellate proceedings may be entertained on merits.”

Further, the Assessing officer has issued another remand report on
28.09.2017 and in the said remand report has stated in para 3 as
under:-
5 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT “3. However, clause (g) of Rule 6DD of Income Tax Rules, 1962
states that –‘where the payment is made in a village or town,
which on the date of such payment is not served by any bank,
to any person who ordinarily resides, or is carrying on any
business, profession or vocation, in any such village or town’.
The provisions of the Income Tax Act were available to the
assessee ab-initio. The assessee was given sufficient time to
submit such evidences during the course of assessment
proceedings and it was not prevented by any cause or reason.
In this regard, vide show cause notice dated 27/02/2015 &
11/03/2015, the assessee firm was asked as to why the cash
payment made in the areas hilling under the Gram Panchyats as
submitted by the assessee during the appellate proceedings may
not be added u/s 40A(3) of the Act. In response to that
showcause, the assessee filed written submission stating therein
that the contract work has been executed in Rural Area and the
payment have to be made in cash for purchase of raw material
due to non banking facility nearby but the assessee did not
submit the certificates despite adequate opportunity was
accorded to it.

Without prejudice to the above, additional evidences in the form
of certificates from the Sarpanch of Gram Panchayats have been
verified by the Inspector of this office. The Inspector of this office
has submitted his report stating that the Gram Panchyats under
consideration does not have any bank branch within the
geographical territory of the Panchayats. However, it is further
submitted that the Gram Panchayats under consideration have
banking facility in nearby area as described below:
6 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT S.No. Name of Gram Name of Nearby Gram Approx Distance from the Panchayat Under Panchayat/town having Gram Panchayat under consideration banking facility consideration 1. Gadrata, Tehsil 1. Papurna (Baroda Papurna-two Kilometer Khetri Rajasthan Kshatriya Gramin Bank) Babai-Four Kilometer. 2. Babai (Baroda Rajasthan Kshatriya Gramin Bank & SBI) 2. Sanjay Nagar, 1. Papurna (Baroda Papurna-three Kilometer Tehsil-Khetri Rajasthan Kshatriya Gramin Bank) Babai-Five Kilometer. 2. Babai (Baroda Rajasthan Kshatriya Gramin Bank & SBI) 3. Zerpur, Tehsil- 1. Mahendra Garh (SBI, Mahendra Garh- Seven Mahindragarh PNB, Canara Bank, CBI, Kilometer. Indian Bank, HDFC, ICICI, Kotak Mahindra Pali-Eight Kilometer. etc.) 2. Pali ( Haryan Gramin Bank) Therefore, the additional evidences submitted by the assessee during the appellate proceedings may be entertained on merits.”
5. The ld. CIT(A), after considering the submissions of the assessee
and the remand reports of the Assessing Officer, has given a finding
that the banking facility was not available in the Gram Panchayat area
wherein the payment made shown by the assessee but the Assessing
officer has categorically mentioned in the remand report that banking
7 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT facility is available nearby 2-3 KMs from the gram panchayat and in the
modern, 2-3 Kms distances doesn’t mean anything. Further, he held
that since certain payments have been made through RTGS, the
argument of banking facility not available doesn’t arise because the
recipient have got the bank account for receiving the payment.
Accordingly, he upheld the finding of the Assessing Officer. Against the
said findings of the ld. CIT(A), the assessee is now in appeal before us.
6. During the course of hearing, the ld. AR referring to the
provisions of Section 40A(3) of the Act submitted that the intent of
bringing the said provisions was to curb the black money but
genuineness of transaction, business expediency and genuine hardship
has also been kept as relevant consideration by way of above provision.
It was submitted that the intention of the legislature behind
introduction of Section 40A(3) of the Act was 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 or not. He was relied on the decision of the Hon’ble
Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO 4 SCC
385 wherein it was held that Section 40A(3) of the Act must not be read
in isolation or to the exclusion of Rule 6DD and where this section must
be read along with the Rule 6DD and if read together, it is clear that the
provisions of Section 40A(3) are not intended to restrict the business
activities. It was submitted that in the instant case the cash payments
were made either at the construction site of the assessee or where the
supplier’s stone crushing unit is situated. It was submitted that the
assessee is in the business of construction of roads and was mostly
8 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT working in remote areas and there is no banking facility available near
its working sites and moreover, given the nature of work, the assessee
has to move its placement in every 10-15 days of the work progress. It
was further submitted that even the stone crushing units are situated in
remote and hilly areas near the mines, where also there is no banking
facility available. The location of some crushers as mentioned in the
assessment order is submitted herewith:-
S.No. Name Location
1. BKN Stone Crushing Company Village Jerpur
2. Ganesh Stone crusher Village Modi
3. Quality Earth Miners Pvv. Ltd. Village Ramkumarpura
4. Bajrang Stone Village Papda
5. Bhagwati Stone Crusher Village Sultanpur
6. Shree Shyam Associates Dhani suiwali 7. It was further submitted that even the Assessing officer has
accepted the position that banking facility is not available at place of
work accordingly submitted that the case of the assessee is squarely
covered U/s 6DD(g) of the Income Tax Rules. Regarding the second
remand report by the AO as well the findings of the ld. CIT(A), it was
submitted that the Rules are very clear in its language and cannot be
given any other interpretation as there is no ambiguity and therefore,
does not matter if there is a banking facility situated 2-3 Kms outside
the village as there is no banking facility in the village where the
payment is made, the condition so specified in Rule 6DD are fulfilled
9 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT and both the lower authorities therefore, erred in wrongly interpreting
the said provision.
8. It was further submitted that neither the AO nor ld. CIT(A) has
doubted the genuineness of payment made to suppliers in respect of
goods purchased by the assessee or the identity of the suppliers as the
Assessing Officer as himself stated in the assessment order that the
payment are made to the renowned suppliers.
9. It was further submitted that as the mining activities had been
banned in the State of Haryana, assessee had no other option but to
buy construction material from State of Rajasthan as the transport of
grit is very expensive and to buy raw material from any other state
would have increased the cost substantially. Increase in cost is a major
factor because in this competitive world, a lot of tenders are filed and
the one with the best possible tender with least cost of construction is
selected. It was submitted that the stone crushing units situated in the
State of Rajasthan insisted on the payment to be made in the form of
cash and not cheque. It was submitted that the assessee was left with
no choice but to buy the construction material in cash, as the
assessee company was working on a strict timeline. It was further
submitted that if the payments were not made, the suppliers would
have stopped the further supply which would have caused unnecessary
delay in finishing the work contracts. It was submitted that if the
assessee company did not finish the contract in time, they would be
held liable to substantial fines for delay in completing the work.
Moreover, a delay would also hamper the reputation of the company.
10 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT Reliance was placed on the Hon’ble Punjab and Haryana High Court
decision in the case of Gurdas Garg v. CIT 63 taxmann.com 289 as well
as Hon’ble Madras High Court in the case of CIT vs. Chrome Leather
235 ITR 708 regarding the business expediency of making the cash
payment.
10. It was further submitted that it can be established from the bank
statements of the assessee that every single cash payment made to the
supplier has been from the sale proceeds received by the assessee in its
bank account either by withdrawing the said amount from bank or by
issuing bearer cheques. It was further submitted that the source of cash
payment is clearly identifiable in form of withdrawals from the
assessee’s bank and details have been submitted before the lower
authorities and they have not been disputed by them. Reliance was
placed on the Coordinate Bench decision in the case of M/s A Daga
Royal Arts v. ITO (in ITA No. 1065/JP/2016 dated 15.05.2018).
11. It was further submitted that the few payments made by RTGS to
the payess does not disentitle the assessee from claiming relying in
terms of Rule 6DD(g). Reliance was placed on the Coordinate Bench
decision in case of Shree Govind Kripa Buildmart v. ACIT (in ITA No.
472/JP/2011 dated 26.08.2011) which has subsequently been affirmed
by the Hon’ble Rajasthan High Court (in DB ITA No. 47/2012 dated
20.09.2017.
12. Further, reliance was placed on the Coordinate Benche decision in
the case of M/s Lord Chloro Alkali v. ACIT where it was held that no
11 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT disallowance should be made where the industries are situated in
backward areas and is not having banking facility. It was submitted that
the said decision has subsequently been affirmed by the Hon’ble
Rajasthan High Court (in DB ITA No. 38/2017 dated 20.11.2017) and
the SLP filed by the Department has been dismissed by the Hon’ble
Supreme Court.
13. Further, reliance was placed on the Hon’ble Rajasthan High Court
decision in case of Harshila Chordia vs. ITO 208 CTR 208 wherein it was
held that exceptions contained in Rule 6DD are not exhaustive and that
the said Rule must be interpreted liberally. It was accordingly submitted
that genuineness of the transaction and identity of the payee has not
been doubted and the business expediency has been established, the
addition so made by the Assessing officer should be deleted.
14. It was also submitted that the AO has wrongly considered
following three payments which have been made through cheques
amounting to Rs. 21 lakhs and account transfer which is clearly not a
subject matter of disallowance U/s 40A(3) of the Act:-
S.No Date of Party Name Amount Cheque payment No.
1. 8.07.2011 Birla Corporation Ltd. 300000 232791
2. 10.02.2012 DS Filling Station 600000 454718
3. 1.12.2011 Ramesh Kr Contractor 1200000 454701
12 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 15. Per contra, the ld. DR submitted that the provisions of Section
40A(3) of the Act are clearly attracted in the instant case as the
payment have been made either in cash exceeding the prescribed
threshold or through cash withdrawal by issue of self cheque from the
bank. It was submitted that unless and until the cheque is issued in the
name of the party and is an account payee cheque, the payment so
made does not satisfy the requirement of Section 40A(3) of the Act.
Further, he has relied on the finding of the lower authorities.
16. We have heard the rival contentions and perused the material
available on record. Firstly, we find that the three cheque payments
amounting to Rs 21 lacs out of total disallowance of Rs 2.38 crores are
clearly outside the scope of section 40A(3) as the same have been
transferred to respective payee’s account as reflected in the bank
statements and the addition so made is directed to be deleted.
17. In respect of other payments, the case of the assessee is that
given its nature of road construction work, banking facility is not
available near its working sites and even the stone crushing units are
situated in remote and hilly areas near the mines, where there is no
banking facility available and its case thus falls in exception as
contained in Rule 6DD(g) which reads as under:
“where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town.”
13 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT In support of its contention, the assessee has submitted certificates
from ‘Sarpanch’ of the Gram Panchayats where the assessee has
purchase grits for the requirement of the civil construction work. We
find that the Assessing officer in her remand report dated 15.09.2017
has accepted the said factual position wherein she states that:
“… additional evidences in the form of certificates from the Sarpanch of
Gram Panchayats have been verified by the Inspector of this office. The
Inspector of this office has submitted his report stating that the Gram
Panchyats under consideration does not have any bank branch within
the geographical territory of the Panchayats.”
18. The ld CIT(A) has also returned a similar finding stating that the
banking facility was not available in Gram Panchayat area. Therefore,
where there is a clear finding of both the lower authorities, the
Assessing officer as well as ld CIT(A), we donot see any justifiable basis
to deny the claim of the assessee that the payments so made falls
under exception so carved out in Rule 6DD(g) as the language of Rule
6DD(g) is clear and unambiguous to the effect that “the payment is
made in a village or town, which on the date of such payment is not
served by any bank” which, in the instant case, is clearly demonstrated
and verified by the lower authorities through physical inspection that
there is no banking facility in the Gram Panchyat areas where the
payments have been made by the assessee to the payees and thus, on
this ground itself, no disallowance should be made invoking provisions
of section 40A(3) of the Act.
14 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT 19. Further, regarding the contention of the ld AR as to the intention
of the legislature behind introduction of section 40A(3) and various
authorities quoted in support thereof, this Bench had an occasion to
examine the same in case of M/s A Royal Daga Arts vs ITO (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 decision 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.
15 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT (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 (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
16 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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]
24 Taxman 578/160 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
17 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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
18 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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 (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.”
19 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT 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 v. Swastik Roadways [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 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
20 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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.
21 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT (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 v. 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 Ajmer Food Products (P.) Ltd. v. JCIT [IT Appeal No. 625 (jp) of 2014,
dated 28-9-2016] 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 (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
22 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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 (supra) and the decision of Hon’ble Supreme Court in case of Attar
Singh Gurmukh Singh (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 Dhuri Wine v. Dy. CIT [2017] 83 taxmann.com
20 (Chd. – Trib.) 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 v. Asstt. CIT [IT Appeal No. 102
(Asr.) of 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.
23 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT 38. We further note that in case of 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
24 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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 Cumulative Utilization Net Total balance Balance ICICI Yes Bank Date Amount 18,00,000 Bank 5- 14,50,000 3,50,00 18,00,000 18,00,000 5,07,00
Apr-
12 9- – 9,00,000 9,00,000 27,00,000 9- 21,93,000 3,34,000
Apr- Apr-
12 12 11- – 2,00,000 2,00,000 29,00,000 11- 3,73,000 3,34,000
Apr- Apr-
12 12 12- – – – 29,00,000 – – 3,34,000
Apr-
12 13- – – – 29,00,000 – – 11,97,100
Apr-
12 19- – 30,00,000 30,00,000 59,00,000 23- 21,36,900 11,57,000
Apr- Apr-
12 12 24- 30,00,000 25,00,000 55,00,000 1,14,00,000 24- 55,40,100 11,57,000
Apr- Apr-
12 12 25- – – – 1,14,00,000 – – 11,57,000
Apr-
25 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 12 30- – – – 1,14,00,000 – – 11,57,000
Apr-
12 4- – – – 1,14,00,000 – – 11,57,000
May-
12 7- – – – 1,14,00,000 – – 11,57,000
May-
12 8- 19,00,000 23,00,000 42,00,000 1,56,00,000 8- 38,55,000 15,02,000
May- May-
12 12 12- – – – 1,56,00,000 – – 15,02,000
May-
12 14- – – – 1,56,00,000 – – 15,02,000
May-
12 15- – – – 1,56,00,000 – – 15,02,000
May-
12 16- – 15,00,000 15,00,000 1,71,00,000 – – 30,02,000
May-
12 17- – 15,00,000 15,00,000 1,86,00,000 17- 30,69,000 14,33,000
May- May-
12 12 Total 63,50,000 1,42,50,000 1,86,00,000 1,71,67,000
26 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT 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 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. 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.
27 ITA No. 990 /JP/2017
M/s K.K. Construction Co. vs. ACIT In the result, the appeal of the assessee is allowed.”
20. In the instant case, we find that the identity of the persons from
whom the purchases have been made 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
purchase of construction material for road construction and lastly, the
test of business expediency has been met as it is the admitted position
that the mining activities had been banned in the State of Haryana and
the assessee had no other option but to buy construction material from
State of Rajasthan where the suppliers and stone crushing units had
insisted on cash payments at the time of delivery of material. 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.
21. 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, no disallowance is called
28 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT under section 40A(3) of the Act and the same is directed to be deleted.
In the result, the ground no. 1 of the assessee’s appeal is allowed.
22. In ground no. 2, the assessee has challenged the sustenance of
addition of Rs 18 lacs under section 68 of the Act. We find that the ld
CIT(A) has sustained the addition for the reason that the
creditworthiness of creditors have not been established and hence, he
has confirmed the additions so made by the Assessing officer. The ld DR
has relied on the findings of the lower authorities. In its submissions,
the assessee has submitted that these three persons have appeared
before the Assessing officer and have confirmed having provided loan to
the assessee firm through cheque payments. It was further submitted
that the creditworthiness of these persons are also established and in
support, paper of ownership of agricultural land and copy of bank
account statements of these persons were filed reflecting regular
transactions of deposits and withdrawals.
23. We have heard the rival contentions and pursued the material
available on record. We find that these three persons have appeared
before the Assessing officer and have confirmed the transaction of
advancing the money to the assessee and during the appellate
proceedings, their confirmations along with PAN details have also been
filed. The transactions have happened through the banking channel and
in support of creditworthiness, agricultural land ownerships records and
the bank accounts reflect regular transactions of deposits and
withdrawals have been submitted, the assessee has thus discharged the
initial onus cast on it and in absence of any contrary findings and any
material on record by the Revenue, no addition is called for by invoking
29 ITA No. 990 /JP/2017 M/s K.K. Construction Co. vs. ACIT provisions of section 68 of the Act. In the result, the addition so made
is directed to be deleted and ground of appeal is allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on05/12/2019.
Sd/- Sd/- ¼fot; iky jko½ ¼foØe flag ;kno½ (Vijay Pal Rao) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur
fnukad@Dated:- 05/12/2019.
*Santosh
vkns’k dh izfrfyfi vxzfs ‘kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s K.K. Construction Co., Jhunjhune.
2. izR;FkhZ@ The Respondent- ACIT, Crile, Jhunjhune.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur.
6. xkMZ QkbZy@ Guard File { ITA No. 990/JP/2017} vkns’kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar

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