1997 (6) TMI 72 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of addition of Rs.10,000 in the labour payment account.
2. Confirmation of an amount of Rs.1,22,077 added under section 40A(3) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Rs.10,000 in Labour Payment Account:

The Assessing Officer (AO) added Rs.10,000 to the labour payment account because most of the payments out of the total Rs.2,04,078 were not verifiable with supporting vouchers. The assessee was unsuccessful before the Commissioner of Income Tax (Appeals) [CIT(A)], who confirmed the addition. Upon review, the Tribunal found that the entire labour payment was not fully vouched and hence unverifiable to the fullest extent. The Tribunal deemed it fit and proper to restrict the addition to Rs.7,500 in the labour payment account as against Rs.10,000 made by the AO and confirmed by the CIT(A), considering the peculiar circumstances of the case and to meet the ends of justice.

2. Confirmation of Amount of Rs.1,22,077 Added Under Section 40A(3):

The second grievance involved the confirmation of Rs.1,22,077 added under section 40A(3) of the Income Tax Act, which pertains to cash payments made to M/s. STP Ltd., Dhanbad. The assessee argued that M/s. STP Ltd. did not have a bank account at Dhanbad, necessitating cash payments for immediate business purposes. The AO added the amount because payments exceeding Rs.10,000 were made in cash, which contravened section 40A(3). The CIT(A) confirmed this addition.

The Tribunal considered the written submissions and various case laws cited by the assessee. It was noted that the AO did not doubt the genuineness of the payments made to M/s. STP Ltd., which was assessed to income tax. The Tribunal referred to several High Court decisions, including Hasanand Pinjomal v. CIT, Girdharilal Goenka v. CIT, and Avtar Singh & Sons v. CIT, which emphasized that section 40A(3) aims to check tax evasion and not to disallow legitimate expenditure where the transaction is genuine.

The Tribunal also considered Rule 6DD(i) and the CBDT Circular No. 220 dated 31st May 1977, which provide exceptions to section 40A(3) under unavoidable and exceptional circumstances. The Tribunal concluded that the assessee's case fell within these exceptions and directed the deletion of the addition of Rs.1,22,077.

Separate Judgment Delivered by Judges:

The Judicial Member and the Accountant Member had differing opinions on the disallowance of Rs.1,22,077 under section 40A(3). The Judicial Member favored the assessee, emphasizing the genuineness of the transactions and the applicability of Rule 6DD(i) and CBDT Circular No. 220. The Accountant Member, however, upheld the disallowance, stating that the certificate from M/s. STP Ltd. was additional evidence not admissible before the Tribunal and that the payments could have been made by crossed demand drafts.

The matter was referred to a Third Member due to the difference of opinion. The Third Member agreed with the Judicial Member, emphasizing that the circumstances justified cash payments and that the certificate from M/s. STP Ltd. should be admitted as evidence. The Third Member concluded that the addition of Rs.1,22,077 should be deleted.

Conclusion:

The appeal was partly allowed. The addition of Rs.10,000 in the labour payment account was restricted to Rs.7,500, and the addition of Rs.1,22,077 under section 40A(3) was deleted.