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2005 (2) TMI 99 - HC - Income TaxUnaccounted transactions in cash - Business expediency - genuineness of the payment and the identity of the payee - Whether the Appellate Tribunal is right in deleting the disallowance made u/s 40A(3) holding that the exceptions to that section in rule 6DD(j) can be applied for payments which were made in the course of a business outside the books? - HELD THAT - In the present fact situation the entire order of the Tribunal nowhere reflects as to how and in what manner the assessee has established the business expediency and thereafter exceptional and unavoidable circumstances; nor is there any evidence to show that the payment by crossed cheque or draft was not practicable having regard to the nature of the transaction and the necessity for expeditious settlement; nor is there any evidence to show that the payment by crossed cheque or draft would have caused genuine difficulty to the payee having regard to the nature of the transaction and the necessity for expeditious settlement. The reasoning of the Tribunal that once the business was not reflected in the regular books payment by crossed cheque or draft would not have been practicable considering the nature of the transaction loses sight of the fact that the assessee is further required to show the impracticability of the mode of payment having regard to the nature of the transaction and the necessity for expeditious settlement thereof. In the present case no such evidence is placed on record. Similarly the onus which is on an assessee to establish genuineness of the payment and the identity of the payee also remains undischarged. In these circumstances it is not possible to accept the reasoning which is adopted by the Tribunal. The Tribunal has committed an error in reading the provision of rule 6DD(j) of the Rules when it states that the necessity of the assessee proving genuineness of the payment and the identity of the payee is not connected with sub-clause (1) of rule 6DD(j) of the Rules and the said requirement is only while invoking sub-clause (2) of rule 6DD(j) of the Rules. The aforesaid reasoning adopted by the Tribunal is fallacious when one considers the object with which the provision has been brought on the statute book. It is necessary to bear in mind that even if an exceptional or unavoidable circumstance is pleaded the Revenue must have data with it to verify the genuineness of the transaction and identify the recipient of the cash payment. If what the Tribunal states is correct the entire provision is rendered otiose and that interpretation can never be placed on a provision. The need to prove genuineness of the payment and the identity of the payee can be appreciated from a slightly different angle. The Revenue must be permitted to inquire and ascertain that the payment made in cash by an assessee is reflected in the accounts of the recipient payee. In other words the cash paid by an assessee should remain in regular and legal business and banking channel. In the absence of the identity of the payee it will not be possible for the Department to ascertain the destination of the payment. This is of course subject to the genuineness of the transaction and payment being established. Therefore rule 6DD(j) can be applied only in cases where the genuineness of the payment is established the payee is identified and only then the question as to whether the payment in cash was made in exceptional or unavoidable circumstances can be examined. Thus it is not possible to accept the findings of the Tribunal. The Tribunal has committed an error in law in holding that the case of the assessee would be covered by the exceptions provided in rule 6DD(j) of the Rules. The Tribunal has apparently lost sight of the distinction between an entire business which is illegal and a business which is otherwise lawful wherein the assessee resorts to unlawful means to augment his profits. The question referred to the court is therefore answered in the negative i.e. in favour of the Revenue and against the assessee. The reference stands disposed of accordingly.
Issues Involved
1. Applicability of Section 40A(3) of the Income-tax Act, 1961 to unaccounted business transactions. 2. Interpretation and application of Rule 6DD(j) of the Income-tax Rules, 1962. 3. Requirement to establish genuineness of payment and identity of payee under Rule 6DD(j). 4. Distinction between illegal business and lawful business using unlawful means. Detailed Analysis 1. Applicability of Section 40A(3) of the Income-tax Act, 1961 to Unaccounted Business Transactions The court analyzed whether the provisions of Section 40A(3) apply to unaccounted business transactions. The Assessing Officer had disallowed a sum of Rs. 43,35,715 paid in cash for purchases related to unaccounted business detected during a search. The assessee argued that unaccounted transactions are always made in cash, and thus, Section 40A(3) should not apply. However, the court noted that Section 40A(3) aims to check tax evasion by ensuring payments exceeding a specified limit are made by crossed cheque or bank draft. The court emphasized that the provisions of Section 40A(3) are mandatory, even for unaccounted or illegal businesses, as held by the Andhra Pradesh High Court in S. Venkata Subba Rao v. CIT. 2. Interpretation and Application of Rule 6DD(j) of the Income-tax Rules, 1962 The Tribunal had concluded that the assessee's case was covered by the exceptions in Rule 6DD(j), which allows for cash payments under exceptional or unavoidable circumstances. However, the court found that the Tribunal failed to establish how the assessee met the criteria for exceptional or unavoidable circumstances. The court emphasized that Rule 6DD(j) requires proof of business expediency and the impracticability of payment by crossed cheque or draft. The Tribunal's reasoning that unaccounted business transactions inherently justify cash payments was deemed insufficient. 3. Requirement to Establish Genuineness of Payment and Identity of Payee under Rule 6DD(j) The court highlighted that Rule 6DD(j) necessitates the assessee to furnish evidence of the genuineness of the payment and the identity of the payee. The Tribunal's interpretation that these requirements were not connected to sub-clause (1) of Rule 6DD(j) was rejected. The court stated that without establishing the genuineness of the payment and the identity of the payee, the exceptions under Rule 6DD(j) cannot be invoked. The court stressed that the Revenue must verify the destination of cash payments to ensure they remain within legal business and banking channels. 4. Distinction between Illegal Business and Lawful Business Using Unlawful Means The court noted the distinction between an entirely illegal business and a lawful business that resorts to unlawful means to augment profits. The court cited the Supreme Court's observations in Maddi Venkataraman and Co. P. Ltd. v. CIT, which held that if the entire business is illegal, expenses incurred in illegal activities must be allowed as deductions. However, if a lawful business uses unlawful means, such expenses cannot be deducted. This distinction was crucial in determining the applicability of Section 40A(3) and Rule 6DD(j). Conclusion The court concluded that the Tribunal erred in law by holding that the assessee's case was covered by the exceptions in Rule 6DD(j). The Tribunal's reasoning was found to be flawed, and the assessee failed to establish the genuineness of the payment and the identity of the payee. The question referred to the court was answered in the negative, in favor of the Revenue and against the assessee. The reference was disposed of with no order as to costs.
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