1985 (5) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance under section 40A(3) of the Income-tax Act, 1961.
2. Disallowance of a part of the wastage of gunny bags.
3. Disallowance of interest amounting to Rs. 2,100.

Detailed Analysis:

1. Disallowance under section 40A(3) of the Income-tax Act, 1961:
The primary issue was the disallowance of cash payments made by the assessee to Standard Refrigeration Co. and Deccan Brush Co. under section 40A(3) of the Income-tax Act, 1961. The Income-tax Officer (ITO) disallowed these payments, stating that the assessee did not prove the existence of exceptional or unavoidable circumstances as required by rule 6DD(j) of the Income-tax Rules, 1962. The Commissioner (Appeals) upheld this disallowance, finding no sufficient evidence that the purchases had to be made on the spot in cash. The assessee argued that the payments were necessary due to urgent repairs and the refusal of shopkeepers to accept cheques, which should be considered under rule 6DD. The Tribunal noted that rule 6DD(j) allows for exceptions if payment by cheque was not practicable or would have caused genuine difficulty to the payee, and the assessee proved the genuineness of the payment and the identity of the payee. The Tribunal found that the nature of the transactions and the necessity for expeditious settlement justified the cash payments, thus allowing the deduction under rule 6DD(j).

2. Disallowance of a part of the wastage of gunny bags:
The assessee objected to the disallowance of a part of the wastage of gunny bags. The ITO found that the stock of gunny bags was less by 14,100, which was more than 12% of the total purchase, whereas in prior years, the shortage was around 8%. The ITO restricted the shortage to 8% and disallowed the excess, amounting to Rs. 13,481. The Commissioner (Appeals) reduced the addition to Rs. 10,000. The assessee argued that the excess shortage was due to the poor quality of gunny bags received from the Food Corporation of India (FCI). However, the Tribunal found that the assessee had not provided satisfactory reasons for the increased wastage and upheld the addition.

3. Disallowance of interest amounting to Rs. 2,100:
The ITO disallowed interest amounting to Rs. 2,100, finding that the assessee had advanced Rs. 30,000 interest-free to a sister concern, Surya Roller Flour Mills, from borrowed funds. The Commissioner (Appeals) agreed with this finding. The assessee contended that the advance could have come from its capital and reserves, but the Tribunal noted that these were already locked in various assets, and the liquid funds were primarily bank overdrafts. The Tribunal concluded that the advance likely came from borrowed funds and upheld the disallowance of interest.

Conclusion:
The Tribunal partly allowed the appeal, granting the deduction under section 40A(3) for cash payments but upholding the disallowances related to the wastage of gunny bags and the interest on borrowed funds.