1986 (9) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the Income-tax Act, 1961.
2. Interpretation of the term "expenditure" in Section 40A(3).
3. Applicability of Rule 6DD(j) and related circulars.
4. Mandatory nature of Section 40A(3).

Summary:

1. Applicability of Section 40A(3) of the Income-tax Act, 1961:
The Tribunal held that payments exceeding Rs. 2,500 made for the purchase of commodities are hit by the provisions of sub-section (3) of section 40A of the Income-tax Act, 1961. The Income-tax Officer added Rs. 46,203 to the total income of the assessee as the payments were not made by crossed cheques, contravening the mandatory provisions of sub-section (3) of section 40A.

2. Interpretation of the term "expenditure" in Section 40A(3):
The assessee contended that the term "expenditure" does not include "purchases," and thus, payments made for purchases should not fall within the inhibition of section 40A(3). However, the Tribunal and the court rejected this argument, stating that the word "expenditure" includes expenditure incurred on purchases. Rule 6DD(f) clarifies that purchases are covered by the term "expenditure."

3. Applicability of Rule 6DD(j) and related circulars:
The assessee argued that its case is covered by rule 6DD(j) and the circulars issued by the Central Board of Direct Taxes (CBDT). However, the court found that no exceptional or unavoidable circumstances were demonstrated by the assessee to justify cash payments exceeding Rs. 2,500. The payments were made after a time lag of six to seven days, and the traders to whom payments were made maintained bank accounts. The court concluded that the assessee failed to establish that payments by cheque or bank draft were not possible or would have caused genuine difficulty.

4. Mandatory nature of Section 40A(3):
The assessee argued that the provisions of section 40A(3) are not mandatory. The court, however, upheld the mandatory nature of section 40A(3), emphasizing that the assessee must prove exceptional or unavoidable circumstances to claim the benefit of rule 6DD(j). The court referred to the guidelines issued by the CBDT, which outline specific circumstances under which cash payments exceeding Rs. 2,500 may be justified.

Conclusion:
The Tribunal was justified in holding that the payments exceeding Rs. 2,500 made for purchases were hit by the provisions of sub-section (3) of section 40A of the Income-tax Act, 1961. The court answered the reference in the positive, in favor of the Revenue and against the assessee.