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TMI Blog1993 (10) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,500 at a time to sub-contractors as well as some payments by bearer cheques of similar amounts, totalling Rs. 23,07,483, the particulars of which are given below : Rs. Rs. "1. Shrikripa Construction 13,31,173 2. Shri P.P. Kharpatil : Cash payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 23,07,483" --------- 5. When asked to show cause why the amounts should not be disallowed under section 40A(3) of the Act, it was stated that cash payments had been made due to "urgent requirements for labour payments which are also supported by vouchers". Confirmatory letters were filed from two of the sub-contractors at serial Nos. 1 and 3 above, but no confirmatory letters were filed from the remaining three contractors at serial Nos. 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proached the assessee four times in quick succession for the amount. Lastly, he found it unusual that these four receipts had not been produced earlier on 11-3-1988 when bills and receipts of other parties had been produced. 10. A similar situation was found in the case of Shri Gajanan Pilaji, where a payment of Rs. 9,000 in cash was shown in assessee's petty cash book on 4-1-1985. In this case, the assessee produced four cash receipts, out of which three were for Rs. 2,500, dated 4-1-1985 and one was for Rs. 1,500 of the same date. These receipts were produced only on 22-3-1985 and not on 11-3-1988. For the same reasons, this explanation was rejected. 11. The Assessing Officer further observed that unavoidable circumstances necessitating cash payments had not been established by evidence despite sufficient opportunity having been allowed. He, therefore, rejected the general explanation and added a further sum of Rs. 1,35,127. 12. When the matter went to the CIT(A), the assessee submitted that payments had been made to the sub-contractors in cash due to exceptional and unavoidable circumstances and were covered by rule 6DD(j) of the Income-tax Rules, 1962 as well as a circular o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, held that the cash payments were covered under the exemption of rule 6DD(j) of the Income-tax Rules, 1962, r.w. CBDT circular. 14. Thereafter, the CIT(A) observed that he had "a much stronger reason" to delete the addition under section 40A(3) of the Act, for both kinds of payments. The Assessing Officer had rejected the book results after invoking the provisions of section 145 of the Act and adopting a net profit rate for the entire contract work. In such a case, he took a view that it was not proper on the part of the Assessing Officer to again disallow a chunk of the payment by invoking the provisions of section 40A(3) since "this will go against all principles of accounting estimating rationally appellant's real taxable profits under section 145 and also the principles of natural justice". His reasoning is reproduced below : "It is of course true that 40A(3) is a provision which comes even after ascertaining that the payments are real and allowable under other provisions of the Act including section 37. But then Assessing Officer has to go by the books of accounts and its entries to invoke 40A(3) item by item. Once the books are rejected for various defects and 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head "Profits and gains of business or profession." The non obstante clause in section 40A(1) makes it clear that it has an overriding effect in the computation of income. 17. Thereafter, it is laid down in sub-section (3) of section 40A, that where the assessee incurs any expenditure in a sum exceeding Rs. 2,500 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. It is evident that these provisions are subject to the non obstante clause in section 40A(1), reproduced above. 18. With this background, the decision of the Tribunal in the case of New Narayan Builders may now be seen. It was held that where the provisions of section 145(2) of the Act are invoked and the income of the assessee is estimated by applying a flat rate of net profit, no separate addition by resorting to section 40A(3) can be validly made. The reasons for this conclusion have been summarised in the head note as under : "This is a case where the method of accounting as well as the account books have been rejected and the profits have been computed by applying a flat rate of net profit on the declared amount of contract receipts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservations of the Gujarat High Court in the case of CIT v. Bharat Vijay Mills Ltd. [1981] 128 ITR 633 at page 638, and the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 at page 597. 22. Having come to the above conclusion, we would like to add that although a disallowance is permissible under section 40A(3) of the Act, some adjustments may be necessary for the amount of additional net profit estimated by applying a flat rate of net profit to the receipts. For instance, in the present case, the additional net profit estimated in own-contracts of the firm by the Assessing Officer was Rs. 2,65,492 and the additional net profit estimated in sub-contracted works was Rs. 90,620. 23. Now, in the trading accounts, the receipts have not been distributed since they are not in dispute and are duly certified by the Government and Public Sector Corporations. The addition to net profit has, therefore, been made only by disallowing the expenses. When a certain expense has already been disallowed as not deductible under sections 28 to 43 of the Act, except section 40A then a further disallowance under section 40A(3) will amount to a double disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 6DD(j) of the Income-tax Rules, 1962 provides that no disallowance under section 40A(3) shall be made where the assessee satisfies the Assessing Officer that the payment could not be made by way of a crossed cheque or by a crossed bank draft : "(1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner 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 Assessing Officer as to the genuineness of the payment and the identity of the payee." 27. The CBDT have issued Circular No. 220, dated 31st May, 1977, where it is mentioned that all the circumstances in which the conditions laid down in rule 6DD(j) of the Income-tax Rules, 1962, would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule have been listed therein. It is further stated that it would generally satisfy the requirements of rule 6DD(j) is a letter to the above effect is produced in respect of each transaction falling within the categories ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er rule 6DD(j) of the Income-tax Rules and the CBDT circular. We, therefore, hold that section 40A(3) is applicable to the payments under consideration to the sub-contractors.
29. Regarding the payments for own-works for purchases, we are unable to accept the belated explanation in two instances that payments of Rs. 10,000 and Rs. 9,000 were really made up of separate amounts not exceeding Rs. 2,500. If that had been the case, then there would have been corresponding entries in the books of the assessee and the statement of account of the parties, and the explanation would have been given in the first instance itself. Further, no confirmatory letters were filed from the parties and only some general explanation has been given. We, therefore, hold that the assessee has not been able to establish that exemption should be given under rule 6DD(j) of the Income-tax Rules and CBDT circular in this case either and, therefore, hold that the provisions of section 40A(3) should be applied in this case also.
30. The cases cited by both the sides are found to have facts which are distinguishable from the facts of the present case.
31. In the result, the appeal is allowed. X X X X Extracts X X X X X X X X Extracts X X X X
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