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TMI Blog2000 (4) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the minor, hit by the provisions contained in section 40A(3) of the Income-tax Act ? (3) Whether, on the facts and in the circumstances of the case : (a) the payment of interest in cash was justified under rule 6DD(j) of the Income-tax Rules ? (b) the circular relied on by the Tribunal has application to the facts of the case ?" It is to be noted that the prayer in respect of some other issues was not acceptable. The factual position, as delineated in the statement of the case, runs as follows : The assessee is a partnership firm carrying on business as money lenders. It has been crediting interest at the rate of 18 per cent. per annum in the interest account on the loans advanced. In view of the provisions of the Kerala Money Lending Act (in short, "the Money Lending Act"), excess interest collected was credited into the partners' account and the same was included as income of the assessee in the return filed by it. In the course of the assessment proceedings for the assessment year 1990-41, the Assessing Officer made enquiries with five parties, who had taken loans from the assessee. He found that they had paid interest at the rate of Rs, 2.50 per Rs. 100 per month, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent of Rs. 10,60,000. It was held that there was no genuine payment of interest to be allowed as a deduction in computing the assessee's income with the accounts maintained on cash basis. The Assessing Officer also held that the payment was hit by section 40A(3) of the Act as the claim was regarding payment in cash in excess of Rs. 10,000. The Commissioner of Income-tax (Appeals) affirmed the conclusions. In second appeal, the Tribunal observed as follows : "Merely because the entries were passed representing the payment of interest and redeposit of such interest, it cannot be said that the assessee was claiming the interest payment on mercantile basis unless it is shown that the impugned amounts have become legally due to the payees. This has not been established. Therefore, we hold that the entries passed by the assessee in its books do not partake of the nature of mercantile system of accounting, in the light of the pronouncements of the apex court. 15. This takes us to examine whether there has been cash payment of interest to the assessee. It is in this context that the submissions of Shri Srinivasan, the learned chartered accountant, acquire significance. The person to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a tax avoidance scheme because the interest received by the minor daughter has been admitted in her return of income, and the interest payment was for the use of the funds deposited with the assessee. Therefore, we hold in the facts of the case, that the entries evidencing the payment of interest and deposit of interest in the loan account of the partner cannot be dismissed as mere journal entry or book entries. 17. The next objection of the Revenue that the payment of interest in excess of Rs. 10,000 has been made in cash to Miss Thomas, the minor daughter of the partner and, therefore, the provisions of section, 40A(3) stood attracted. This line of stand of the Revenue conflicts with its earlier stand that there has been no genuine payment of interest. Perhaps the provisions of section 40A(3) were invoked as an additional ground to support the disallowance made earlier. It is not in dispute that the minor daughter to whom the interest was paid did not have any bank account. Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes, states that if the payments are made on a bank holiday, it would be an exceptional or unavoidable circumstance within the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, are immediately debited even before the amounts in question are actually disbursed. Under the latter system, the profits and gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the same at the material time. It is to be noted that the Tribunal observed at one place that merely because the depositing of interest either preceded its payment or succeeded its payment, it cannot be said that there had been no movement of cash. The Tribunal held that merely because the entries were passed representing the payment of interest and redeposit of such interest, it cannot be said that the assessee was claiming the interest payment on mercantile basis, unless it is shown that the impugned amounts have become legally due to the payee, and the same has not been established. It is not the case of the assessee that something was being paid which was not due. The onus was on the assessee to show it. It is not clear from the order of the Tribunal as to who, according to it, was to establish the same. As payment has been made and claimed as expenditure, the assessee was required to show how it was not due. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the explanation given at the time of assessment, which, inter alia, leads as follows : "It is not correct to state that interest has been provided in the case of Anna Thomas. Merely because her account is credited with interest would not lead to the conclusion that interest has been provided. In fact, whatever interest has been paid to Anna Thomas, has been returned by Anna Thomas to the firm since it was not immediately required by her, so that such interest would also earn further interest in the ensuing years." A claim of payment of interest, as the factual position would go to show, is deviced in a novel way of redeposit of payment. Further, if the Revenue's stand is accepted, there was no payment by cash and there were mere book entries. Alternatively, section 40A(3) is pressed into service. One thing is crystal clear that if cash payment is not there, section 40A(3) will have no application. Then the question of urgent need to attract exclusions enumerated in rule 6DD has to be considered. If there is no urgent need, desirability of making payment by the prescribed modes has to be adjudicated. We are of the considered opinion that the factual aspects have not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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