2007 (2) TMI 197 - HC - Income Tax

Addition made u/s 40A(3) towards purchase of raw materials - Genuineness of the payments made to shandy persons in cash - benefit of rule 6DD - valuation of the closing stock - HELD THAT - We do not find any justification to accept the said plea of the Revenue. As a matter of fact, the Tribunal noted that a large quantity of sale of wet blue was stated to be out of previous year's closing stock and current year's purchases. Further, verification of the regular accounts could not be considered as additional evidence to be called as violation under rule 46A(3). Considering the finding of fact by the Tribunal, we do not find any question of law for interference. On the question of addition made in respect of payment at shandies to be held as violative of section 40A(3) read with rule 6DD, the assessee has produced necessary grounds for making cash payment, considering the nature of trade carried on by the assessee, the Tribunal noted that these payments were made to small time vendors, who come from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power. The Tribunal also noted from the order of the Commissioner, that considering the fact that the purchases were made from the unorganized sector, cash payments were indispensable. In the above circumstances, the Tribunal rightly came to the conclusion, giving the relief to the assessee. This court, in the decision in CIT v. Chrome Leather Company P. Ltd. 1997 (3) TMI 36 - MADRAS HIGH COURT , held that rule 6DD provides that an assessee can be exempted from the payment by a crossed cheque or crossed bank draft in the circumstances specified in the rule. The CBDT has issued certain guidelines giving certain circumstances, and those circumstances are illustrative and not exhaustive and the underlying idea of the circular is that if the identity of the payee is known, it would be possible for the Income-tax Officer to cross-check, whether the transaction had in fact taken place. Taking note of the fact that under similar circumstances this court had accepted the plea of the assessee, having regard to the nature of trade, we do not find any justification to take it a reason to interfere. Thus, these appeals are dismissed, in limine.

Summary

Issues:
1. Valuation of closing stock under section 260A of the Income-tax Act, 1961.
2. Genuineness of payments made to shandy persons without letters of confirmation.
3. Assessment year 2001-02.

Analysis:
1. The assessment for the year 2001-02 involved issues of undervaluation of closing stock and unexplained payments to shandy persons. The first appellate authority rejected the enhancement of closing stock value but confirmed a disallowance of Rs. 28,36,000 for payments to shandy persons. The Commissioner applied section 40A(3) and rule 6DD to justify the cash payments, citing the nature of the business. The Tribunal upheld the Commissioner's findings on the closing stock valuation, ruling out any violation of rule 46A. It remitted the issue of unexplained payments for further substantiation by the Assessing Officer.

2. The Tribunal also addressed the Revenue's concerns regarding the purchase of raw materials, emphasizing that lack of confirmation by creditors does not imply unaccounted money usage. The Tribunal directed a reevaluation of the Rs. 28,36,600 addition, seeking clarification from the assessee. Regarding section 40A(3) disallowance, the Tribunal upheld the necessity of cash payments at shandies due to the unorganized nature of the sector. The Tribunal dismissed the Revenue's appeal on this matter.

3. The Revenue challenged the Tribunal's decisions, arguing lack of justification for deletion of undervaluation and questioning the additional evidence considered. The High Court upheld the Tribunal's findings, noting the legitimate reasons for cash payments at shandies based on the nature of the trade. Citing previous judgments and circulars, the High Court affirmed the relief granted to the assessee. Ultimately, the appeals were dismissed, and costs were not awarded.