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Issues involved: Interpretation of u/s 40A(3) of the Income-tax Act, 1961 regarding cash payments for stock-in-trade and applicability of Circular No. 220 dated May 31, 1977.
Interpretation of Section 40A(3): The Income-tax Officer disallowed a cash expenditure for stock-in-trade under u/s 40A(3) of the Act. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld this decision. Contention of the Assessee: The assessee argued that payments for stock-in-trade are not covered by u/s 40A(3) and that the cash payments were made due to unavoidable circumstances. They claimed exemption based on rule 6DD(j) and Circular No. 220 dated May 31, 1977. Rule 6DD and Circular No. 220: Rule 6DD of the Income-tax Rules, along with Circular No. 220, exempts cash payments u/s 40A(3) in exceptional or unavoidable circumstances with evidence of genuineness and payee identity. Assessee's Explanation: Initially, the assessee stated cash payments were due to threats by dealers. Later, they claimed payments were made due to lack of bank accounts in certain places. The Income-tax Officer accepted payment genuineness but questioned the necessity of cash payments. Judicial Findings: The first appellate authority found no need for cash payments as parties accepted drafts. Inconsistencies in account entries led to doubts about the genuineness of certain payments. The Income-tax Appellate Tribunal questioned the necessity of cash payments in absence of bank accounts. Conclusion: The court held that the assessee is entitled to exemption u/r 6(DD) due to lack of bank accounts and established payee identities. The court declined to answer the first question and ruled in favor of the assessee on the second question. The reference was answered accordingly with no costs incurred.
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