1983 (5) TMI 13 - HC - Income Tax

Summary

Issues:
1. Interpretation of s. 40A(3) of the I.T. Act regarding cash payments exceeding Rs. 2,500.
2. Application of r. 6DD of the I.T. Rules, 1962 to determine exceptional circumstances for cash payments.

Analysis:
The case involved the Commissioner of Income-tax seeking a mandamus to direct the Tribunal to refer two questions of law to the court. The first issue was whether the Tribunal's assumption that cash payments made by the assessee to identified payees, in contravention of s. 40A(3) of the I.T. Act, was supported by relevant evidence. The second issue was whether the Tribunal was justified in holding that exceptional circumstances existed under r. 6DD(j) to exempt the assessee from the prohibition in s. 40A(3). The assessee, engaged in speculative business and gambling, made cash payments exceeding Rs. 2,500 to 34 persons, leading to an addition in income by the ITO. The Tribunal upheld the deletion of the amount, citing the need to make cash payments to avoid criminal prosecution due to the unlawful nature of the activity. The Tribunal's decision was challenged by the Revenue, arguing that the exceptional circumstances claimed were not valid as they arose from an unlawful activity. The court held that the question of whether the proven facts constituted exceptional circumstances under r. 6DD(j) was a legal issue, directing the Tribunal to refer question No. 2 to the court for consideration.

The Tribunal correctly determined that the first question did not arise from its order as the payments were made to identified payees, which was not disputed. However, the Tribunal erred in categorizing the existence of exceptional circumstances under r. 6DD(j) as a finding of fact. The Revenue contended that the unlawful nature of the activity did not qualify as exceptional circumstances and that such circumstances must arise from a lawful activity. The court acknowledged that the determination of exceptional circumstances was a legal question, emphasizing that the nature of the activity itself did not automatically justify cash payments. Therefore, the court partially allowed the petition, directing the Tribunal to refer question No. 2 for legal consideration.