1984 (8) TMI 74 - HC - Income Tax

Summary

Issues:
1. Validity of an agreement for cash payments under Income-tax Rules.
2. Exceptional circumstances for not making payments by crossed cheques or bank drafts.
3. Applicability of rule 6DD and disallowance under section 40A(3) of the Income-tax Act.

Analysis:

Issue 1: The dispute revolves around the validity of an agreement between the assessee, a tobacco manufacturing company, and a contractor for cash payments made after the enactment of section 40A(3) of the Income-tax Act in 1969. The Income-tax Appellate Tribunal had to determine whether the agreement constituted a legal and valid contract requiring cash payments, as per rule 6DD(c) of the Income-tax Rules, 1962. The Tribunal found that the payments were made in exceptional circumstances, as the contractor had to pay numerous workers in cash. The Tribunal considered the agreement from 1957 and a subsequent letter as evidence of the intention for cash payments, leading to the conclusion that the payments were bona fide and covered by rule 6DD(c) and (j).

Issue 2: The Tribunal had to assess whether there were exceptional and unavoidable circumstances justifying the non-use of crossed cheques or bank drafts for payments, as required by rule 6DD(j) of the Income-tax Rules, 1962. The Tribunal accepted the argument that the nature of the contractor's work, involving payments to multiple laborers, constituted such exceptional circumstances, thereby justifying the cash payments made by the assessee.

Issue 3: The Tribunal also had to determine the applicability of rule 6DD and the correctness of the disallowance of Rs. 31,938 under section 40A(3) of the Income-tax Act. The Tribunal held that the claim of the assessee was covered by sub-clause (c) of rule 6DD, given the existence of the agreement and the bona fides of the payments. Consequently, the Tribunal ruled in favor of the assessee, holding that the disallowance was not justified under section 40A(3) of the Income-tax Act.

In conclusion, the High Court answered the first question in favor of the assessee, rendering the subsequent questions academic. The Court emphasized the importance of the agreement, the exceptional circumstances, and the applicability of rule 6DD in justifying the cash payments, ultimately ruling in favor of the assessee against the Department.