1978 (10) TMI 5 - HC - Income Tax

Summary

Issues:
1. Interpretation of rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962.
2. Applicability of section 40A(3) in disallowing cash payments exceeding Rs. 2,500.
3. Consideration of Circular No. 220, dated May 31, 1977, by the Central Board of Direct Taxes.
4. Application of the formula adopted by the Supreme Court in CIT v. Indian Molasses Co. P Ltd. [1970] 78 ITR 474.

Analysis:
1. The judgment dealt with two references arising from the same Tribunal order regarding the interpretation of rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962. The first reference questioned the non-coverage of payments made to a specific party, while the second reference questioned the coverage of payments made to another party under the said rules.

2. The facts revealed that the assessee had made cash payments exceeding Rs. 2,500 to two different parties during the assessment year 1970-71. The Income-tax Officer disallowed these payments under section 40A(3) due to non-compliance with the requirement of crossed cheques or bank drafts. The Tribunal analyzed the circumstances of each payment and concluded that one party's payments were not justifiable, while the other party's payments fell within the exceptions of rule 6DD(j)(i) and (ii).

3. Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes, clarified various circumstances where rule 6DD(j) would be applicable. The circular provided illustrative instances and requirements for satisfying the conditions of the rule, emphasizing the need for proper documentation and evidence to support the genuineness of transactions falling under the specified categories.

4. In light of the unavailability of the Circular during the assessment proceedings, the Court decided not to answer the questions raised in the references. Instead, they referred to the formula adopted by the Supreme Court in CIT v. Indian Molasses Co. P Ltd. [1970] 78 ITR 474, highlighting the importance of allowing both parties to present evidence regarding the applicability of rule 6DD(j) as per the Circular of the Board dated May 31, 1977.

In conclusion, the judgment emphasized the significance of considering all relevant circumstances and evidence, as outlined in the Circular, before making determinations regarding the applicability of rule 6DD(j)(i) and (ii) in cases of cash payments exceeding Rs. 2,500 under section 40A(3) of the Income-tax Act, 1961.