1986 (9) TMI 138 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of cash payments exceeding Rs. 2,500 under Section 40A(3) of the Income Tax Act.
2. Applicability of Rule 6DD(j) exceptions.
3. Violation of principles of natural justice.
4. Admissibility of additional evidence under Rule 46 of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Disallowance of Cash Payments Exceeding Rs. 2,500 under Section 40A(3):

The primary issue in the appeal was the disallowance of cash payments exceeding Rs. 2,500, which were made instead of issuing crossed cheques or demand drafts, thus violating Section 40A(3) of the Income Tax Act. The Income Tax Officer (ITO) made an addition to the assessee's income by disallowing such payments, resulting in a significant increase in the assessed income. The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the disallowance, confirming it for payments made to five parties totaling Rs. 2,74,239.

2. Applicability of Rule 6DD(j) Exceptions:

The assessee argued that the cash payments fell within the exceptions provided under Rule 6DD(j). Specifically, the assessee contended that payments to M/s. Sri Krishna & Co. were made in cash due to business compulsion, as the supplier's clerks often demanded payment outside banking hours to maintain a good business relationship. The Tribunal accepted this argument, noting that both the assessee and the supplier were regular income-tax assessees and their accounts tallied without discrepancies. The Tribunal held that the payments were made under exceptional circumstances, thus falling within the exceptions of Rule 6DD(j).

For payments to M/s. B.S. Company, the Tribunal found that the seller insisted on cash payments and did not have a bank account in Vijayawada, satisfying the conditions of Rule 6DD(j). Similarly, payments to M/s. Sri Lakshmi Ganapathi Paper & General Stores were justified as the seller generally insisted on cash payments.

For M/s. Swastik Coaters and M/s. Kesava Agencies, the Tribunal noted that these were new parties to the assessee, and the transactions were one-time occurrences. The Tribunal referred to the Central Board of Direct Taxes (CBDT) Circular No. 220, which listed circumstances under which Rule 6DD(j) could apply, including transactions with new sellers. The Tribunal held that these payments were also covered by Rule 6DD(j).

3. Violation of Principles of Natural Justice:

The assessee argued that the CIT(A) relied on a letter dated 30th October 1985 from M/s. Sri Krishna & Co., which was obtained behind the assessee's back and used against him without providing an opportunity to explain. The Tribunal agreed with the assessee, citing Supreme Court decisions that adverse material must be brought to the assessee's notice. The Tribunal held that using the letter without giving the assessee a chance to respond violated the principles of natural justice, thus vitiating the lower authorities' findings regarding the applicability of Section 40A(3).

4. Admissibility of Additional Evidence under Rule 46 of the Income Tax Rules:

The Departmental representative argued against the admissibility of certain documents filed before the CIT(A) as additional evidence. The Tribunal rejected this argument, stating that the CIT(A) is entitled to secure crucial documents essential for a just decision. The Tribunal held that the CIT(A) had the authority to admit additional evidence, and the Department was presumed to have been granted an opportunity to present its case.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal, setting aside the disallowances made by the lower authorities. The Tribunal held that the cash payments were made under exceptional circumstances, falling within the exceptions provided under Rule 6DD(j). The Tribunal also found that the lower authorities violated the principles of natural justice by using adverse material without providing the assessee an opportunity to explain. The appeal was fully allowed, and the orders of the lower authorities were set aside.