1994 (3) TMI 125 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance under section 40A(3) of the Income-tax Act, 1961.
2. Applicability of CBDT Circular No. 220 dated 31-5-1977 and rule 6DD(j).
3. Assessment of exceptional or unavoidable circumstances for cash payments.

Detailed Analysis:

1. Deletion of Disallowance under Section 40A(3):

The primary issue in this appeal concerns the deletion by the CIT (Appeals) of the disallowance of Rs. 50,07,304 made by the Assessing Officer (AO) under section 40A(3) of the Income-tax Act, 1961. The AO had disallowed cash payments exceeding Rs. 2,500 made by the assessee-company to three parties: M/s Patidar Ginning & Pressing Co. (Rs. 30,89,000), M/s Deepak Trading Co. (Rs. 16,00,000), and Haldharu Purva Vibhag Cotton Sahakari Mandli Ltd. (Rs. 3,18,304). The AO concluded that these payments violated section 40A(3) and were not covered by any exceptions in rule 6DD(j) or the CBDT Circular.

The CIT (Appeals) examined the entire evidence and concluded that payments to Deepak Trading Co. and Haldharu Sahakari Mandli were essentially sale proceeds collected on behalf of these parties, not purchases, and thus not subject to section 40A(3). For payments to Patidar Ginning & Pressing Co., the CIT (Appeals) found that these were made under urgent business necessity and were covered by the CBDT Circular and rule 6DD(j).

2. Applicability of CBDT Circular No. 220 and Rule 6DD(j):

The AO and the CIT (Appeals) examined whether the cash payments could be treated as covered by CBDT Circular No. 220 dated 31-5-1977 and rule 6DD(j). The AO concluded that the provisions of section 40A(3) were applicable and that the payments were not covered by any exceptions. However, the CIT (Appeals) found that the payments to Deepak Trading Co. and Haldharu Sahakari Mandli were merely the passing of sale proceeds and not purchases, thus not attracting section 40A(3). For Patidar Ginning & Pressing Co., the CIT (Appeals) determined that the payments were made due to urgent business necessity, satisfying the conditions of the CBDT Circular and rule 6DD(j).

3. Assessment of Exceptional or Unavoidable Circumstances for Cash Payments:

The CIT (Appeals) scrutinized the evidence and found that the payments to Deepak Trading Co. and Haldharu Sahakari Mandli were sale proceeds and not purchases. For Patidar Ginning & Pressing Co., the CIT (Appeals) examined the books of account and confirmed the urgent necessity for cash payments. The CIT (Appeals) found that the firm required immediate cash to make payments to farmers and to ensure cheques issued by the firm were honored. The CIT (Appeals) concluded that the payments were made under exceptional and unavoidable circumstances, thus covered by rule 6DD(j) and the CBDT Circular.

Conclusion:

The Tribunal upheld the CIT (Appeals) decision, finding that the payments to Deepak Trading Co. and Haldharu Sahakari Mandli were not subject to section 40A(3) as they were sale proceeds. The payments to Patidar Ginning & Pressing Co. were made under urgent business necessity, satisfying the conditions of rule 6DD(j) and the CBDT Circular. The appeal was dismissed, and the deletion of the disallowance under section 40A(3) was confirmed.