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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 ..... the assessee had made payments in cash of amounts exceeding Rs. 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 1,44,000 Bearer cheques 4,51,260 5,95,260 -------- 3. M/s. Thakur & Thakur 1,00,000 4. Vanita Construction 62,350 5. Laxmansheth Kukereja 2,18,700 --------- 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, 4 and 5. 6. The two confirmatory letters mentioned above were both typed on the letter head of the assessee-firm and besides confirming the total figure of payments, both parties used the same language as under : "We have also received cash payments during the above p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the CBDT. It was explained that in order to avoid delay in clearance of cheques, the assessee had to open bank account at the site wherefrom the contract work was carried out, whereas the sub-contractors had bank accounts at Kalyan and Ulhasnagar. In the case of Shri P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 145 is invoked for a blanket estimate of net profits, going back to the books again for the purpose of 40A(3) is unfair, irrational and not justified by any principles of accountancy or interpretation of Income-tax Act, which aims at quantification and assessment of appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Provisions of section 145(2) have, therefore, been clearly invoked. The provisions of section 40A enumerate exceptions of payments not deductible in certain circumstances. Sub-section (3) of section 40A provides for disallowance out of expenditure claimed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 disallowance. Of course, it is not possible to identify whether the disallowances in the trading account have been made out of those expenses which were incurred in cash or by bearer cheques or they were incurred by crossed cheque or crossed bank draft or, they were incurred o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 listed therein from the seller giving full particulars of his address, sales-tax number, permanent account number, if any, for the purpose of proper identification, to enable the Assessing Officer to satisfy himself about the genuineness of the transaction. It has furth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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