1985 (8) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 13,45,000 under section 40A(3) of the Income-tax Act, 1961.
2. Applicability of rule 6DD(h) and (j) of the Income-tax Rules, 1962.
3. Genuineness of payments and identity of payees.
4. Commercial expediency and hardship in making payments by crossed cheques or drafts.
5. Consistency in accepting similar transactions in different locations (Surat vs. Village Astan).

Detailed Analysis:

1. Disallowance of Rs. 13,45,000 under section 40A(3) of the Income-tax Act, 1961:
The primary issue in this appeal pertains to the disallowance of Rs. 13,45,000 under section 40A(3) of the Income-tax Act, 1961. The assessee, a company, made cash payments exceeding Rs. 2,500 for purchases from two firms, Patel Bros., Astan and Patel Bros. Co., Astan, where the directors of the assessee-company were either partners or otherwise interested. The Income-tax Officer (ITO) scrutinized the books of account and found that the assessee made payments totaling Rs. 51,89,234 in cash, which were disallowed under section 40A(3). However, the Inspecting Assistant Commissioner (IAC) later accepted the assessee's contention for payments aggregating to Rs. 38,30,419 but upheld the disallowance of Rs. 13,45,000.

2. Applicability of rule 6DD(h) and (j) of the Income-tax Rules, 1962:
The assessee argued that the provisions of rule 6DD(h) and (j) were applicable as village Astan, where the payments were made, was not served by any bank. The ITO and the Commissioner (Appeals) did not accept this argument, stating that sufficient cash balances were available in the bank account at Bardoli, and payments could have been made by crossed cheques or drafts without causing undue hardship to the payees. The Tribunal, however, found that the facts and circumstances in village Astan were almost identical to those in Surat, where similar payments were accepted by the income-tax authorities. Therefore, the Tribunal concluded that the provisions of rule 6DD(h) and (j) should have been considered favorably for the assessee.

3. Genuineness of payments and identity of payees:
The assessee contended that the payees were identifiable, and the genuineness of the payments could be easily verified. The assessee provided evidence, including photocopies of receipts and details of transactions, to support the genuineness of the payments. The Tribunal noted that the income-tax authorities did not act on the assessee's request to call and examine the payees to verify their identification and the genuineness of the payments. The Tribunal emphasized that the provisions of section 40A(3) are intended to safeguard against bogus payments and not to generate revenue. Given the material on record and the acceptance of similar payments in Surat, the Tribunal found no reason to doubt the genuineness of the payments made in village Astan.

4. Commercial expediency and hardship in making payments by crossed cheques or drafts:
The assessee argued that payments were made in cash due to commercial expediency and genuine difficulty in making payments by crossed cheques or drafts. The assessee highlighted that the firms acted as purchasing agents at a fixed margin and were under financial pressure, making it commercially expedient to settle transactions in cash. The Tribunal found merit in the assessee's argument, noting that the income-tax authorities should have appreciated the commercial realities and the difficulties faced by the assessee in making payments by crossed cheques or drafts.

5. Consistency in accepting similar transactions in different locations (Surat vs. Village Astan):
The Tribunal observed that the income-tax authorities had accepted similar payments totaling Rs. 38,30,419 in Surat but disallowed Rs. 13,45,000 for transactions in village Astan. The Tribunal found that the facts and circumstances in both locations were almost identical and that the income-tax authorities should have maintained consistency in their approach. The Tribunal concluded that the disallowance of Rs. 13,45,000 was not justified and deleted the amount from the total income of the assessee.

Conclusion:
The Tribunal allowed the appeal partly, deleting the disallowance of Rs. 13,45,000 under section 40A(3) of the Income-tax Act, 1961, and rejecting the ground regarding the disallowance of Rs. 8,278.