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TMI Blog1987 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... o section 40A(3) and is covered by rule 6DD(j) of the Income-tax Rules, 1962, and is, therefore, deductible in computing the total income for the assessment year 1974-75 ? " On October 26, 1973, the central excise and customs authorities searched the assessee's business premises and found certain contraband commodities, like foreign cloth, cigarettes of foreign make and cloves. On December 12, 1974, the assessee filed returns of his income for the assessment years 1969-70 to 1974-75. In this case, we are concerned with the assessment year 1974-75. For this year, the assessee disclosed an income of Rs. 255 only. The assessee was carrying on business in soaps, etc. The Income-tax Officer made certain additions to the income returned. One ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n error in holding that section 40A(3) has no application to such illegal business. The Tribunal also held that rule 6DD cannot come to the rescue of the assessee herein. Accordingly, it reversed the order of the Appellate Assistant Commissioner and upheld the Income-tax Officer's order disallowing the said claim for deduction. Thereupon, the assessee asked for and obtained this reference. Section 40A(3), in so far as it is relevant, reads as follows: " 40A. (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 two thousand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee." A reading of sub-section (3) of section 40A of the Act and rule 6DD shows that the Income-tax Officer is not entitled to allow as deduction any expenditure said to have been incurred by the assessee, in respect of which payment is made in a sum exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank, or by a crossed bank draft, except in the cases mentioned in rule 6DD. Clause (j) of rule 6DD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of the transaction, the very nature of business ; and (iii) that the contraband goods have actually been confiscated by the customs authorities. The result is that the assessee has lost the goods altogether and now the said sum of Rs. 39,246 is being added back to his income. It amounts to a double penalty upon the assessee. There is no doubt about the proposition that profits and gains derived from an illegal business can also be taxed. The reasons for doing so are discussed and set out in some detail in the decision of this court in CIT v. Maddi Venkataratnam and Co. Pvt. Ltd. [1983] 144 ITR 373, to which one of us (Jeevan Reddy J.) was a party. Indeed, it is not disputed by the assessee herein that the profits and gains der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, if an assessee says that he is entitled to take advantage of a particular clause in rule 6DD, he must satisfy the requirements of that clause, which means that, in this case, the assessee who is seeking to claim the benefit of clause (j) in rule 6DD, has not only to satisfy that having regard to the nature of the business there was a genuine difficulty in complying with the requirements of section 40A(3), but he must also establish the genuineness of the payment and the identity of the payee. Unless he does that, he cannot take advantage of clause (j). It is not open to the assessee to say that he will only partly satisfy the requirements of clause (j) and would still be entitled to the benefit of the said clause. We may make it clear th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : The sum of Rs. 39,246 consists of three items, viz., Rs. 4,498 said to be the cost of 50 kgs. of cloves purchased from Kamala Traders, Madurai; Rs. 16,068 said to be the cost of purchasing 200 kgs. of cloves from South Travancore Plantation Ltd., Nagarcoil, and Rs. 18,680 being the price of 467 cartons of cigarettes purchased from M/s. Gulam Abbabhai, Bombay. The record placed before us shows that only 467 cartons of cigarettes have been confiscated, but not the cloves. (Besides cigarettes, a small quantity of textiles also have been confiscated, but no deduction was claimed on that account and, therefore, that aspect does not concern us herein). Now, the contention of Mr. Ratnakar is that by virtue of the confiscation of the cigarettes, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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