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TMI Blog2006 (10) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; return of income for the asst. yr. 1993-94 on 29th Oct., 1993. The return was processed under s. 143(1)(a) of the IT Act, 1961 (hereinafter referred to as 'the Act') and an intimation dt. 2nd March, 1994 was sent to the assessee. 2.2. Then, notice under s. 143(2) of the Act was issued and a detailed questionnaire dt. 30th June, 1995 eliciting explanation on various points was also served on the assessee. The assessee appeared for the hearing, and after considering the statement of the assessee relating to cash payments exceeding Rs. 10,000 which frustrated s. 40A(3) of the Act, as then existed, the AO held as under : "Assessee paid Rs. 34,97,760 as machining charges to ARJ Textiles (P) Ltd. under s. 40A(3), expenses paid in excess of Rs. 10,000 in cash is not allowable as explained earlier. The total machining charges amounting to Rs. 27,61,100 have been paid in cash. The explanation given by the assessee is in the case of M/s ARJ Textiles. The day-to-day expenses like salary payments, etc. are to be met out of machining charges payable by the assessee and hence, the amounts are paid in cash by the assessee. The argument of the assessee is not acceptable. Under s. 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld attract s. 40A(3) of the Act and therefore the said payments are deductible, we propose to deal with both the questions together. 4.1. Before proceeding further, it is apt to refer to s. 40A(3), as it then existed, which reads as under : "40A. Expenses or payments not deductible in certain circumstances. '(1) xxxx (2) xxxxx (3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction." 4.2. By virtue of Finance (No. 2) Act, 1996 which came into effect from 1st April, 1997, the quantum of Rs. 10,000 was increased to Rs. 20,000. 5. It is also relevant to refer r. 6DD(j) of IT Rules, 1962 (hereinafter referred to as 'the Rules'), framed in exercise of the powers conferred by s. 295 of the Act, which reads thus : "6DD. Cases and circumstances in which payment in a sum exceeding ten thousand rupees ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s satisfaction before allowing the benefit of r. 6DD(j). 6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of r. 6DD(j)." 7. The question relating to the interpretation of the r. 6DD(j) and s. 40A(3) came up for consideration before various High Courts and the ratio laid down by the said Courts on the point in issue is as under : (i)(a) The object of the provision of s. 40A(3) is to check evasion of taxes so that the payment is made from the disclosed sources. Both the payer and the payee would be showing in the respective account the payments made and received. It presupposes that the transactions must be genuine transactions. (b) The object of the rule is to relax the rigour of sub-s. (3) of s. 40A in genuine and bona fide cases to avoid hardship and harassment. Practicability for the purpose of r. 6DD(j)(2) must be judged from the point of view of the businessman and not of the Revenue. For the purposes of carrying on his business, a businessman may have to make payment otherwise than by crossed cheque or draft in ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof and also furnishes evidence to the satisfaction of the AO as to the genuineness of the payment and the identity of the payee, the assessing authority has got discretion to allow the expenditure [vide CIT vs. Eastern Condiments (P) Ltd. (2003) 181 CTR (Ker) 483 : (2003) 261 ITR 76 (Ker)]. (v) When the genuineness of the transactions was not doubted or called in question, the amounts could not be disallowed [vide Ramaditya Investments vs. CIT (2003) 262 ITR 491 (Del)]. (vi)(a) The intention of the legislature in enacting s. 40A(3) particularly was to ensure that payments exceeding the sum specified are made by a crossed cheque drawn on a bank or by a crossed bank draft so that it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was made out of income from disclosed sources. While interpreting the provisions of this section, the above mischief which was sought to be remedied will have to be borne in mind. (b) The word 'practicable' used in r. 6DD(j)(2) must be held to signify that which is feasible, that is to say, capable of being put into practice, done, or accomplished with the available means and resources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of amount on the ground that the disallowance of 20 per cent is bad, because the payments made to associate concerns were reimbursement expenses and hence, s. 40A(3) does not attract, which has been affirmed by the Tribunal. 9. In our considered opinion, even though s. 40A(3) of the Act is not absolute, payments made in cash cannot automatically be allowed merely for the reason that the payments were made to associate concerns and such reason that weighed the CIT(A) is not only illogical, but also outside the scope of s. 40A(3) of the Act. If such reason is accepted, the transactions which frustrate s. 40A(3) would pave way for evading tax which is contrary to the object of s. 40A(3). The cumulative effect of Circular of CBDT dt. 31st May, 1977, r. 6DD(j) and s. 40A(3) is that the assessee should satisfy that there were exceptional and unavoidable circumstances of transactions in which payments were made in cash and that payment by way of crossed cheque or crossed bank draft was not practicable or the same would have caused genuine difficulty to the payee having regard to the nature of the transaction or there was necessity for expeditious settlement. In addition to that, the ass ..... 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