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TMI Blog2003 (5) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... 500 amounting to Rs. 4,83,000 made to Hanuman Sugar and Industries Ltd., made in respect of delivery of cotton yam are hit by the provisions of sub-section (3) of section 40A of the Income-tax Act, and that, therefore, such payments should be added to the total income in terms of the aforesaid section? 2. Whether, on the facts and in the circumstances of the case and on a proper interpretation of rule 6DD of the Income-tax Rules, 1962, read with Circular No. 220 dated 31 May, 1997, issued by the Central Board of Direct Taxes, the Tribunal was justified in upholding the disallowance of Rs. 4,83,000, in terms of sub-section (3) of section 40A of the Income-tax Act, 1961?" The brief facts of this case are as follows: The assessee is the purchaser of cotton from one Hanuman Sugar and Industries Ltd. for the value of above Rs. 2 crores. All the payments made for such purchases were made by account payee cheque/bank draft except for the payment of Rs. 4,83,000. The payments of Rs. 4,83,000, however, were made in cash. Needless to mention that the said sum of Rs. 4,83,000 is the aggregate of amounts paid in cash on several occasions, to be precise, on seven occasions. It was pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of the said sum of Rs. 4,83,000, under section 40A(3) of the 1961 Act. Under section 40A(3), as the said section stood at the material time, it was provided that the expenditure in respect of which payments were made in a sum exceeding Rs. 2,500, otherwise than by a crossed cheque or by a crossed bank draft, was not allowed as a deduction. The second proviso to the said sub-section, however, contemplated that no disallowance was to be made in such cases and under such circumstances as might be prescribed having regard to the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors. This literal interpretation of the said section 40A(3), however, was given by the learned advocate, Mr. Khaitan, on behalf of the assessee. Mr. Khaitan, however, submitted that the prescription in terms of the second proviso to section 40A(3), was made by the rule 6DD. In terms of rule 6DD(j), Mr. Khaitan submitted, no disallowance was to be made where the assessee satisfied the Assessing Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft due to certain circumstances which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring: to be decided herein is as to whether on a proper interpretation of the said section 40A(3), rule 6DD(j) and having regard to the facts as found by the Tribunal, the case of the assessee fell within the exceptions provided in rule 6DD(j) and as such the cash payments made by the assessee could not, therefore, be disallowed under the said section 40A(3). On behalf of the Revenue, however, it was contended that the questions raised on behalf of the assessee were questions of fact only. The assessee, it was pointed out, had not raised any question of perversity against the Assessing Officer, or, for that matter, against the learned Tribunal. It was contended that since the questions were merely questions of fact this court should not answer the said questions. A few decisions were also relied upon on behalf of the Revenue in support of the above contention. It was, however, submitted on behalf of the assessee that the questions raised by the assessee and directed to be referred by this court were questions of law involving the interpretation of the provisions of section 40A(3), and its second proviso and the provisions of rule 6DD(j) of the Income-tax Rules and Circular No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the facts proved constituted exceptional circumstances as provided by rule 6DD(j), was a question of law. In the case of Sarda Plywood Industries Ltd. [1999] 238 ITR 354 (Cal), one of the questions for consideration was as to whether the amounts spent for presentation of silver boxes to dealers amounted to advertisements within the meaning of section 37(2B) and rule 6B. The Revenue contended that the question, as framed by the learned Tribunal, was a pure question of fact, this court, however, rejected the above contention of the Revenue. It was held that when on admitted facts the inference drawn by the Tribunal is an erroneous one, a mixed question of fact and law would arise and as such a reference under section 256(2) was maintainable. Thus, citing the above two decisions it was contended that the question whether on the facts found by the Tribunal, the case of the assessee fell within the exceptions laid down in rule 6DD(j), was a pure question of law. It was also submitted that, in any event, on admitted facts, the inference drawn b y the Tribunal that the assessee's case did not fall within the exceptions provided in rule 6DD(j), was a mixed question of fact and law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the facts and the circumstances of a particular case satisfy the requirements of section 40A(3) and rule 6DD, are matters of fact indeed, but what degree of proof of facts and circumstances of a particular case would satisfy the requirements of the provisions of the said rule is, in my opinion, a question of law to be decided on the basis of the facts and the circumstances of each case. The questions raised herein, therefore, in my opinion, are to be answered by us as questions of law. Regarding the case of CIT v. Ram Agya Shyam Narain [1991] 189 ITR 470 (All), it was pointed out by Mr. Khaitan on behalf of the assessee, that the facts of that case were almost similar to the present reference. In that case, it was submitted, the amount paid in cash was quite small compared to the total amount involved in the transaction between the assessee and the supplier. The supplier, in fact, insisted upon payment in cash and the assessee had to oblige the supplier by making cash payment only to maintain good business relations. The Allahabad High Court, however, did not interfere with the order of the learned Tribunal as it was found that the case of the assessee was covered by the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding Rs. 2,500 were made in a given case by crossed cheque drawn on a bank or by a crossed bank draft it would be easier to ascertain whether the payments were genuine and made out of the income from the disclosed sources. The object of rule 6DD(j) was to relax the rigour of section 40A(3), in genuine and bona fide cases in order to avoid hardship and harassment. It was submitted by Mr. Mallick, on behalf of the Revenue, that on the facts and the circumstances of the case and the materials in support thereof, the assessee failed to satisfy the Assessing Officer that the payments could not be made by crossed cheque drawn on a bank, or by a crossed bank draft, as required by the said rule 6DD, due to exceptional or unavoidable circumstances, because the payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee. Basing the case of the Revenue, on these contentions, it was submitted, that the findings of the learned Tribunal were purely findings of facts and, therefore, no question of law arose in the facts and the circumstances of the case. It was pointed out that the assessee did not contend that the decision of the Tribunal or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reply, it was pointed out on behalf of the assessee, that the facts of that case revealed that the assessee had consciously split up the several payments so that each payment did not exceed the monetary limit provided in section 40A(3), only to circumvent the provision of law. The following observations were made by the High Court: "The finding recorded is that the assessee had consciously split up the payments in several payments so that each payment does not exceed Rs. 10,000 only to circumvent the provisions of law. Under the circumstances, the addition has been confirmed." It was submitted on behalf of the assessee that it was in those circum stances, the Madhya Pradesh High Court held that the questions involved in that case were questions of fact based on appreciation of evidence and the findings of the Tribunal were not perverse. In the instant case, however, it was submitted, that there was no lack of evidence nor any dispute on fact. Citing Srinath Bullion Refinery v. CIT [2001] 251 ITR 540 (MP), it was contended on behalf of the Revenue that the Madhya Pradesh High Court, on a similar question, was pleased to dismiss the assessee's appeal because the question involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the learned Tribunal held that in rule 6DD(j), the said requirements were only subsidiary requirements in addition to the main requirement of proving the exceptional circumstances and genuine difficulties which had not been fulfilled by the assessee in the instant case. Thus, in the facts and the circumstances of the case and having regard to the decisions referred to above, it was submitted on behalf of the Revenue that the answer to both the questions should be in the affirmative and in favour of the Revenue. It appears from the order of the Assessing Officer that the return was accompanied with tax audit report which showed that the assessee had made considerable cash payments in excess of Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or crossed demand draft. The assessee contended on the basis of a letter dated March 26, 1990, that most of the payments were made on account of delivery charges and freight expenditure which needed immediate payment for smooth running of business. The genuineness of payments and the identity of the payee were also established. The Assessing Officer, however, found that the stand of the assessee was not totally acceptable 'as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax (Appeals), had allowed the appeal on the ground that the identity of the payee and the genuineness of the transaction were not in doubt. According to the learned Tribunal, however, these are only subsidiary requirements in rule 6DD(j), in addition to the main requirement of proving the exceptional circumstances and genuine difficulties, which in the opinion of the Tribunal, had not been fulfilled by the assessee. In my opinion, however, the assessee has to establish only one of the requirements as provided in rule 6DD(j)(1) and (2), namely, that payment was made in exceptional or unavoidable circumstances or payment by cheque or bank draft was not practicable or payment by cheque or draft would have caused genuine difficulty. If the assessee can satisfy the existence of one of the requirements as provided in rule 6DD(j), then, he is entitled to the protection provided in rule 6DD(j). One interesting feature of this case is that the genuineness of the transaction was not doubted by the Assessing Officer and by the learned Tribunal as well. The identity of the payee was also not questioned by the Assessing Officer and the learned Tribunal either. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The factual proof of each case has to be taken into account for the purpose of finding out whether the requirements under the said rule are or are not satisfied. As aforesaid if the assessee satisfies one of such requirements as provided in rule 6DD(j), he is entitled to seek protection under the said rule. In the case of Giridharilal Goenka v. CIT [1989] 179 ITR 122 (Cal), the identity of the payee who was an income-tax assessee was established and the genuineness of the transactions was not doubted or disputed. It was held that the circular of the Board was not exhaustive but only illustrative. It was further held that the Income-tax Officer had to take a pragmatic view of the matter: "The Income-tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pointed out on behalf of the assessee that the amount paid in cash was Rs. 4,83,000, which was quite small compared to the total amount involved in the entire transaction which was over Rs. 2 crores. It was submitted on behalf of the assessee that the supplier on each of the seven occasions had insisted, in writing, on the cash payments for its own business requirement and also issued a certificate to that effect. The assessee made payments in cash in order to maintain, as I have said above, harmonious relationship as otherwise its business could have been adversely affected. There was no dispute about the genuineness of the transaction or the identity of the payee. Having considered the provisions under section 40A(3), rule 6DD(j) and the said circular and having considered the facts and the circumstances of the case and the admitted documents of the present reference I am of the opinion that the assessee made the said payments other than by crossed cheque drawn on a bank or by a crossed bank draft due to unavoidable circumstances which in the words of the learned Commissioner "with a view to keep the harmonious relationship with the payee". Thus, the case of the assessee cam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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