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TMI Blog2006 (9) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of Rs. 7,78,735. (2) On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition on account of payments of Rs. 38,93,684 by the assessee to its supplier exceeding Rs. 20,000 otherwise than by a cross Cheque or Demand Draft. (3) On the facts and in the circumstances of the case, the CIT(A) has erred in treating the payments made as covered by clause (l) of rule 6DD. (4) It is an undisputed fact that the payment of Rs. 38,93,684 was made in violation of the provisions of section 40A(3) because the employee of the assessee carried the said cash from Aurangabad which he deposited in the bank accounts of the payees in respect of some purchases made from them. The question is whether such payments are covered by the exception provided under rule 6DD(l) of the Income-tax Rules which reads as under: 'where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.' According to the Learned CIT(A), the said employee of the assessee can be treated as his 'agent' and hence the payment in question is not adversely hit by section 40A(3). An 'agent' is understoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of the assessee is also supported in Appendix Two attached to the Income-tax Act. It is provided under Appendix Two that no disallowance under section 40A(3) will be made where payment is made in the following cases/circumstances: 1. Where the payment is made to banking and other credit institution like RBI/Schedule Banks/Commercial Banks in public and private sector. In view of above 20 per cent disallowance out of payment of Rs. 38,93,684 may not be made and oblige." The Assessing Officer did not accept the above contentions of the assessee because of the following reasons:- "(i) It is well-settled law that cash purchases for goods come under the purview of section 40A(3) of the Income-tax Act, 1961. These are treated as expenses by the Supreme Court as well as various High Courts. (ii) It is stated that cash was deposited on the various dates in the bank account of vendors (from which goods were purchased) and some pay-in-slips and the bank account of the vendor was furnished. But when the assessee was requested as to which employee had filled up these deposits forms and pay-in-slips, the assessee stated that it is not ascertainable as to who had filled these s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the supplier himself, and the suppliers were regular suppliers who are also assessed to income-tax and hence their identity is not in dispute. Also, at the same time, it was stated that it was more tedious task to get a bank draft and to send the same to the supplier because of the time involved, and due to this reason, the assessee was making an entry in its books of account, recording the fact that cash was being carried by one of his employees by mentioning his name and immediately thereafter, on the day on which the actual payment was being made, i.e., within two-three days of dispatch of money, an appropriate entry was being passed to the effect that the amount had been deposited in the account of the concerned party. Before Ld. CIT(A), it was also argued that the money was actually being deposited by the assessee or his representative directly in the bank account of the supplier. 4.1 During the appellate proceedings, the attention of Ld. CIT(A) was drawn to Appendix 2 of the Taxman's Income-tax Act in which rule 6DD which provides for exceptions to section 40A(3) has been analysed, wherein it is being pointed out that as per this analysis, payments through the banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e neither through a crossed cheque or through a crossed bank draft. The proviso to section 40A(3) however provides for certain exceptions which are covered under rule 6DD of the Income-tax Rules. Rule 6DD(J) as it stood prior to 1-4-1996 provided for a general exception in cases where the assessee satisfied the assessing authority that payment could not be made through cross cheque/draft (i) due to exceptional or unavoidable circumstances or (ii) due to impracticability or (iii) due to genuine hardship. This clause (j) in rule 6DD has since been omitted with effect from 25-7-1995 and new clauses (j) to (l) were inserted with effect from 1-12-1995. The appellant has drawn my attention to the interpretation of this newly substituted clause (j) to (l) and is trying to argue that his payment is through the banking system and hence is covered under rule 6DD. I further note that clause (l) of rule 6DD reads as under:- 'where the payment made by any person to this agent who is required to make payment in cash for goods or services on behalf of such person.' 3.5 In my opinion the case of the appellant is squarely covered by the above clause as the appellant had made payment to its agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the said party, has duly been mentioned. The names and addresses of all the suppliers were also stated to be verifiable. Coming to the legal issue, the Ld. A.R. has mentioned that though section 40A(3) prescribes that where the assessee incurs any expenditure in cash exceeding Rs. 20,000, then 20 per cent of the said expenditure is to be disallowed but exceptions are given in rule 6DD. Referring this rule, Ld. A.R. has stated that as per rule 6DD(l), where the payment is made by any person to his agent is required to make the payment in cash for the goods on behalf of such person shall not come within the purview of section 40A(3) of Income-tax Act. Further, stressing upon the scope of rule 6DD(l), Ld. A.R. has vehemently argued that the employee is an agent being specifically engaged to execute a work on his behalf. In this context, he has referred section 182 of Indian Contract Act wherein the definition of agent is provided. So, Ld. A.R. has argued that an agent is a person employed to do any act for another or to represent another in dealings with a third person. The person for whom such act is done or offered, who is so represented is so called 'Principal'. Elaborating this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling with third person. The person for whom such act is done or who is so represented is called the 'principal'. Ld. A.R. has not only cited this definition but also referred the Law Lexicon for the purpose of definition of 'agent'. At both the places, the definition/meaning is almost identical. There is no doubt that an act of an agent binds the master but it is necessary to examine a very pertinent question of relationship between the two. To our understanding, this relationship is of two types i.e., one is an employer and employee relationship and second, relationship of agent and master. In the former case, the relationship is purely a master and servant relationship, however, in the latter one, on the basis of an existence of an agency, the relationship is of an agent and a principal. An agency comes into existence by creation of a contract either orally or through a document. An agent can also manage the affairs of his principle like a manager and his act is binding upon the principal. However, their relationship is more like a trustee. In our considered opinion, there is a distinction between the two i.e., 'employee' and an 'agent'. An agent can be distinguished from a serva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rol and supervision of his master. In the present case, it is not in dispute that the employee was under the direct control and supervision of the assessee firm. Though he was acting for and on behalf of his employer, but he was entirely dependent upon the order of his employer and not entitled to take his independent decision. Contrary to this, an agent, though acts as per the lawful instruction but is under the direct control or supervision of his principal. He does not act in the capacity of a servant. Also, a subtle difference is that in case of employee, the existence of salary is a pre-condition which is fixed on monthly basis; on the other hand, generally in the case of a principal-agent, the commission is fixed on the basis of work done by an agent. The terms of payment as we have just mentioned are general in practice though sometimes with certain variations. However, the basic principle is that an employee works on monthly payment terms, however, an agent is engaged to execute some specific contract on commission basis. In view of these reasons and relying upon the commentary reproduced herein-above, we are of the considered view that clause (l) of rule 6DD has a limited ..... X X X X Extracts X X X X X X X X Extracts X X X X
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