2004 (5) TMI 31 - HC - Income Tax

Cash transactions - addition to the income of the assessee on account of violation of the provisions of section 40A(3) - transactions of cash payments in the present case are protected by the exceptions provided under rule 6DD(j) read with circular dated May 31,1977. Even otherwise there is no dispute about the genuineness of the transactions - It was held by the Commissioner of Income-tax (Appeals) that the assessee s case fell under the exceptions provided in rule 6DD(j) of the Income-tax Rules as the cash payments had been made on the insistence of the seller and this claim of the assessee was supported by the confirmatory letter issued by the seller. These findings have been confirmed by the Tribunal - No substantial question of law arises out of the order of the Tribunal.

Summary

Issues:
Violation of provisions of section 40A(3) of the Income-tax Act, 1961 - Exception under rule 6DD(j) of the Income-tax Rules - Interpretation of exceptional and unavoidable circumstances - Application of Circular No. 220, dated May 31, 1977 - Genuineness of transactions.

Violation of provisions of section 40A(3) of the Income-tax Act, 1961:
The case involved the Revenue appealing against the dismissal of its appeal by the Income-tax Appellate Tribunal. The Assessing Officer had added a certain amount to the income of the assessee for making purchases against cash payments from a specific supplier, alleging a violation of section 40A(3) of the Act. The assessee explained that cash payments were made at the insistence of the seller due to past payment delays and at lower rates than credit purchases. The Commissioner of Income-tax (Appeals) allowed the appeal, citing an exception under rule 6DD(j) of the Income-tax Rules, which was upheld by the Tribunal.

Exception under rule 6DD(j) of the Income-tax Rules:
The Tribunal and the Commissioner of Income-tax (Appeals) found that the assessee's case fell under the exceptions provided in rule 6DD(j) as the cash payments were made on the insistence of the seller, supported by a confirmatory letter. The court analyzed the various explanations provided by the assessee and concluded that the situation fell within the exceptions of rule 6DD(j) and Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes. The court referred to precedents and highlighted the need to consider exceptional circumstances from a businessman's perspective regarding business exigencies.

Interpretation of exceptional and unavoidable circumstances:
The court emphasized that exceptional circumstances under rule 6DD(j) should be viewed in light of business exigencies. It referenced Circular No. 220, dated May 31, 1977, to illustrate circumstances where exceptions apply, such as the seller refusing non-cash payments. The court noted that section 40A(3) aims to curb black money flow and transactions that lack cross-verification. The genuineness of the transactions was not disputed, and the court cited a previous decision to support the assessee's case.

Application of Circular No. 220, dated May 31, 1977:
The court found that the transactions of cash payments were protected by the exceptions provided under rule 6DD(j) in conjunction with the circular dated May 31, 1977. It highlighted the importance of proper identification and verification in transactions falling under the exceptions. The court also referenced a decision supporting the assessee's case, emphasizing the genuineness of the transactions.

In conclusion, the court dismissed the appeal, stating that no substantial question of law arose from the Tribunal's order, thereby upholding the decision in favor of the assessee based on the exceptions under rule 6DD(j) and Circular No. 220, dated May 31, 1977, along with the genuineness of the transactions.