1984-VIL-530-PAT-DT

Equivalent Citation: [1987] 163 ITR 697, 55 CTR 316

PATNA HIGH COURT

Date: 07.08.1984

COMMISSIONER OF INCOME-TAX

Vs

CHANDMULL RADHA KISHUN

BENCH

Judge(s)  : S. K. JHA., NAZIR AHMAD

JUDGMENT

NAZIR AHMAD J.--A statement of case under section 256(1) of the Income tax Act, 1961 (hereinafter referred to as "the Act"), has been submitted by the Income-tax Appellate Tribunal, Patna Bench, referring the following questions of law for the opinion of this court:

" 1. Whether, on the facts and in the circumstances of this case, the Tribunal were correct in law in holding that section 40A(3) of the Income-tax

Act, 1961, is applicable in case of inflated expenditure but is not attracted in cases of payments made for purchase price of stock ?

2. Whether, on the facts and in the circumstances of this case, the Tribunal was correct in holding that the case is covered by rule 6DD(j) of the Income-tax Rules, 1962 ?"

The facts of the case may be briefly stated as found in the statement of the case. The assessee is a registered firm and the assessment year involved is 1970-71, for which the accounting period is from October 1, 1968, to September 16, 1969. During the year under reference, the assessee made payments amounting to Rs. 45,799 by cash on account of purchase of goods. Out of the amount of Rs. 45,799, payments to the extent of Rs. 35,682, were made in respect of purchases made prior to April 1, 1969. The Income-tax Officer added the entire amount under section 40A(3) of the Act since he found that the payments were for more than Rs. 2,500 at a time and were made otherwise than by crossed cheque or crossed bank draft. A copy of the order of the Income-tax Officer is annexed to the statement of the case and is marked as annexure-A.

The assessee appealed before the Appellate Assistant Commissioner. It was submitted before the Appellate Assistant Commissioner on behalf of the assessee that the entire payment was made for purchase of stock of cloth and that the confirmatory letters from the respective parties to whom payment had been made were produced before the Income-tax Officer and, therefore, the provisions of section 40A(3) of the Act were not applicable to this case. The Appellate Assistant Commissioner, after hearing the submissions made on behalf of the assessee, held that the provisions of section 40A(3) of the Act should not have been invoked in this case because the payments were made for purchase of goods and the genuineness of the payments was established by furnishing confirmatory letters from the parties concerned. He also held that the payments were from the commercial point of view and the assessee had reason for not operating through a bank. He, therefore, deleted the addition of Rs. 45,799. A copy of the order of the Appellate Assistant Commissioner is annexed to the statement of the case and is marked as annexure-B.

The Department appealed before the Appellate Tribunal challenging the deletion by the Appellate Assistant Commissioner. It was argued on behalf of the Revenue that the payment to the extent of Rs. 35,682 in respect of purchases made prior to the April 1, 1969, only should have been deleted. It was also submitted that for payment of the balance amount by cash, the assessee could not produce any satisfactory reason for non-payment through the banks, in spite of availability of banking facilities at places like Bettiah and Muzaffarpur from where purchases were made. It was also claimed on behalf of the Revenue that rule 6DD(j) of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules"), was not applicable to this case and so the deletion was not justified. The Tribunal held that at the material period, the assessee had no bank account and that the amounts were paid towards purchase price of stock of cloth. The Tribunal also held that the genuineness of the payments was not disputed and the arguments of the departmental representative were confined to the allowance of Rs. 10,117, being payment for the purchases made after April 1, 1969. The Tribunal also considered that in a number of cases cheques were not acceptable by the parties from whom the purchases were made. The Tribunal also came to the conclusion that the assessee's case was covered under rule 6DD(j) of the Rules on the ground that the assessee had to pay the purchase price of stock in cash from a commercial point of view. The Tribunal also came to the conclusion that section 40A(3) of the Act was to check inflated expenditure in many cases but not to the cases of genuine purchase of stocks. A copy of the order of the Tribunal is annexed to the statement of the case and is marked annexure-C.

Mr. B. P. Rajgarhia, senior standing counsel for the Revenue, invited our attention to the assessment order of the Income-tax Officer at page 3 which shows that the payments were made between April 2, 1969, and May 20, 1969, and, so the Income-tax Officer made an addition of Rs. 45,799. Mr. B. P. Rajgarhia also referred to section 40A(3) of the Act which lays down that where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than March 31, 1969) as may be specified in this behalf by the Central Government by a notification in the Official Gazette, in sum exceeding two thousand five hundred rupees 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. The argument of Mr. B. P. Rajgarhia is to the effect that as all the payments were made after April 1, 1969, they will be covered by section 40A(3) of the Act. Under such circumstances, I have only to see whether the amount of Rs. 45,799 is covered by the provisions of rule 6DD(j) of the Rules. If once it is held that the entire amount of Rs. 45,799 is covered by the provisions of rule 6DD(j), then the first question will become purely academic. It is under these circumstances that it is necessary to consider whether the amount of Rs. 45,799 is covered by the provisions of rule 6DD(j) of the Rules.

The second proviso to section 40A(3) of the Act lays down that "no disallowance under this sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors" In view of the second proviso to section 40A(3), rule 6DD(j) was framed. According to rule 6DD(j) of the Rules, no disallowance under sub- section (3) of section 40A shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by crossed cheque drawn on a bank or by a crossed bank draft in the cases "where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft (a) due to exceptional or unavoidable circumstances ; or

(b) 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 Income-tax Officer as to the genuineness of the payment and the identity of the payee."

In the instant case before us, the genuineness of the payments and identity of the payees are not disputed. The only question which has to be considered is whether the payment was made in exceptional and unavoidable circumstances and that the payment by a crossed cheque drawn on a bank or by a crossed bank draft would have caused a genuine difficulty to the payee and the payment in that manner was not practicable.

The Income-tax Officer has only said that banking facilities are available at Bettiah as also at Muzaffarpur. The assessee is of Bettiah. The Appellate Assistant Commissioner has held in paragraph No. 8 of his judgment that it was asserted on behalf of the assessee that no doubt banking facility was available both at Bettiah and Muzaffarpur, but for commercial reasons, very often a man has to be sent and he after contacting various parties has to decide then and there where it is more profitable to purchase. The Appellate Assistant Commissioner has held that from a commercial point of view, the assessee has a case for not operating through bank. The Tribunal, while considering the cases of both the parties, came to a finding that during the material period, the assessee had no bank account The Tribunal also considered that in a number of cases cheques were not acceptable to the parties. The Tribunal, therefore, came to the conclusion that the assessee's case was fully covered under the provisions of rule 6DD(j) of the Rules as the assessee had to pay the purchase price of stock in cash from the commercial point of view.

Thus, both the Appellate Courts have come to a finding that payments were not acceptable by the parties through crossed cheques or crossed bank draft and so from the commercial point of view, payments had to be made in cash and the assessee had no bank account at the relevant time. It appears that the findings as given by the Tribunal were accepted subsequently by the CBDT, vide Circular No. 220 dated 31-5-1977-[1977] 108 ITR (St) 8, where it was clarified that if transactions are made at a place where either the purchaser or the seller does not have a bank account and where the seller refuses to accept the payment by way of crossed cheque or crossed bank draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from the particular seller, in such cases, the provisions of rule 6DD(j) of the Rules would apply. No doubt, this circular was issued by the Central Board of Direct Taxes in May, 1977, but it can be used as a clarification laying down circumstances in which the provisions of rule 6DD(j) of the Rules would be attracted. Under such circumstances, the Tribunal as also the Appellate Assistant Commissioner, were right in accepting the case of the assessee that the sellers insisted on cash payments and that the assessee had no bank account during the relevant period. In view of this finding, the Tribunal came to the conclusion that the payment by the assessee in cash fell within the scope of the provisions of rule 6 DD (j ) of the Rules. This finding of the Tribunal is a finding of fact and is not vitiated by any perversity and as such it is binding on this court.

I, therefore, hold that on the facts and in the circumstances of the case, the Tribunal was correct in holding that the case was covered by the provisions of rule 6DD(j) of the Rules. So, the second question of law referred by the Tribunal is answered in the affirmative, against the Revenue and in favour of the assessee.

In view of my findings on question No. 2, question No. 1 becomes academic and so I decline to answer question No. 1.

In the circumstances of the case, the parties will bear their own costs.

S. K. JHA J.--I entirely agree with my learned brother. But in deference to the tenacity of the argument of Mr. Rajgarhia, I feel obliged to add a few words of my own. As a matter of fact, this case needed no reference under section 256(1) of the Act. The question as to whether rule 6DD(j) of the Rules applies or not has been duly considered on facts both by the Appellate Assistant Commissioner as well as by the Tribunal. There is no infirmity in the findings arrived at by the Tribunal, nor do the findings of fact suffer from any perversity. Both the Appellate Assistant Commissioner and the Tribunal have held that the payments could not be made either by crossed cheques drawn on a bank or by crossed bank drafts, because of exceptional or unavoidable circumstances and the payment in the manner aforesaid was not practicable. The assessee had also furnished evidence to the satisfaction of the appellate authorities with regard to genuineness of the payments and the identity of the payees. Therefore, I entirely agree that rule 6DD(j) of the Rules was rightly applied by both the appellate authorities and it warrants no interference by this court. The first question has become purely academic and needs no answer by this court.

 

 

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