1982 (5) TMI 79 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 35,000 paid to M/s Lathi Warehouse under Section 40A(3) of the IT Act 1961.
2. Disallowance of Rs. 23,600 pertaining to earlier years' warehouse charges.

Detailed Analysis:

1. Addition of Rs. 35,000 Paid to M/s Lathi Warehouse under Section 40A(3):

The primary issue in this case is the addition of Rs. 35,000 paid by the assessee to M/s Lathi Warehouse, which was disallowed by the Income Tax Officer (ITO) under Section 40A(3) of the Income Tax Act, 1961. The assessee explained that the payment was made in cash due to the immediate demand by M/s Lathi Warehouse, who threatened to auction the goods if payment was not made. The ITO rejected this explanation, stating that no exceptional circumstances were demonstrated to justify cash payment, and thus, invoked Section 40A(3) and Rule 6DD(j).

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the addition, but the assessee contested this decision before the Appellate Tribunal. The assessee's counsel argued that the payment was necessitated by the confiscation of goods by customs authorities and the subsequent demand for immediate cash payment by M/s Lathi Warehouse. The counsel highlighted that the payee did not have a bank account and insisted on cash payment, supported by letters and a certificate from M/s Lathi Warehouse.

The Tribunal, after reviewing the submissions and evidence, found that the circumstances justified the cash payment. The Tribunal noted that the goods were confiscated and released by customs, and M/s Lathi Warehouse had persistently demanded payment, threatening auction. The Tribunal observed that no prudent businessman would have accepted anything other than cash under such circumstances. The Tribunal also emphasized that the revenue should have examined the payee to verify the compelling circumstances, as per the precedent set by the Allahabad High Court in Radhey Shyam Jagdish Prasad.

2. Disallowance of Rs. 23,600 Pertaining to Earlier Years' Warehouse Charges:

The second issue pertains to the disallowance of Rs. 23,600, which the ITO claimed related to earlier years and thus should not be allowed in the current assessment year. The assessee, adopting the mercantile method of accounting, argued that the liability for warehouse charges arose only after the goods were released by customs in April 1976, making it relevant to the current assessment year.

The Tribunal referred to the Punjab and Haryana High Court's decision in Pretty Cycle Industries, which held that in the mercantile system of accounting, a loss is deductible when it accrues, provided it is an ascertained liability. The Tribunal also cited the Calcutta High Court's decision in Soorajmull Nagarmull, which stated that a liability under dispute is deductible in the year of settlement or adjudication.

In this case, the Tribunal found that the warehouse charges became an ascertained liability only after the release of the goods in April 1976 and the subsequent demands for payment by M/s Lathi Warehouse. The Tribunal concluded that the liability for warehouse charges pertained to the current assessment year, not earlier years, and thus, the disallowance of Rs. 23,600 was unjustified.

Conclusion:

Based on the above analysis, the Tribunal held that the addition of Rs. 35,000 made by the ITO and confirmed by the CIT(A) was unsustainable and deserved to be deleted. Consequently, the appeal was allowed in favor of the assessee.