Rama Rao, J.:— Under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following questions of law:
“(1) Whether the Appellate Tribunal is justified in holding that section 40A(3) has got application in the case of payments made for the purchase of stock-in-trade?
(2) Whether the amount paid to sellers amounting to Rs. 27,379 for purchase of timber falls within the purview of the Circular of the CBDT No. 220 dated May 31, 1977?”
2. The Income-tax Officer disallowed the expenditure of Rs. 27,379 on the ground that such payments were made in cash in contravention of section 40A(3) of the Income-tax Act, 1961.
3. The Income-tax Officer negatived the plea of the assessee that the payments were made due to unavoidable circumstances and further the genuineness of payment and the identity of the payee are proved. On appeal, the Commissioner of Income-tax (Appeals) and, on further appeal, the Income-tax Appellate Tribunal confirmed the order of the Income-tax Officer.
4. Learned counsel for the assessee raised a two-fold contention, viz., the payments made for the purchase of stock-in-trade are not covered by section 40A(3) and in any event the amounts are paid in unavoidable circumstances, and the genuineness of the payment and the identity of payee are established, and as such, they are exempt from the applicability of section 40A(3) of the Act. On the merits, we are satisfied that the assessee is entitled to exemption for the payments in view of rule 6DD(j) read with clause 4(ii) of Circular No. 220 dated May 31, 1977 (see [1977] 108 ITR (St.) 8) of the Central Board of Direct Taxes. Section 40A(3) provides that the assessee is not entitled to claim deduction with regard to the payment unless such payment exceeding Rs. 2,500 is made by a crossed cheque drawn on a bank or a crossed bank draft. Therefore, if any payment exceeding Rs. 2,500 is made by cash, it shall not be admissible as deduction and is liable to be added to the income of the assessee. Rule 6DD of the Income-tax Rules read with Circular No. 220 of the Central Board of Direct Taxes provides that section 40A(3) is not applicable if the payment in cash is made due to exceptional or unavoidable circumstances, and the payment by cheque is not practicable, and satisfactory evidence is adduced as to the genuineness of the payment and the identity of the payee.
5. Initially, the assessee in their explanation stated that they were obliged to make payments in cash under the threat by the dealers that they would not have transactions with the assessee; but, however, in their explanation dated March 20, 1977, the assessee stated that the cash payments were made as the assessee had no bank accounts at those places, viz., Bavarsha and Damanpet, and further the sum of Rs. 3,881 paid to M/s. Abul Kareem & Co. represented consolidated payment of the small amounts made on different dates. The Income-tax Officer, in the course of the order, stated that the payment and the identity of the parties who sold the goods were established, and the payments were made by hundis mostly, and the C.S.T number and the S.T numbers of the vendors were furnished. It is also further stated by the Income-tax Officer that the assessee might have paid because he has no bank account in those places; but, however, he did not accept this version as the assessee on other occasions paid to the same persons by demand drafts. The explanation with regard to the payment to M/s. Abul Kareem & Co. is negatived on the ground that the copies of the account books disclosed credit entries but not debit entries and the account does not show complete transaction. On appeal, the first appellate authority held that the parties were prepared to receive the drafts and, as such, there was no occasion for the assessee to pay the amount in cash, and with regard to the payment to M/s. Abul Kareem & Co., the appellate authority found the explanation given by the issessee as not true in view of the inconsistent entries in the account books. On further appeal, the Income-tax Appellate Tribunal observed hat it might be that the identity of the parties to whom cash payments were made was established by the appellant and this is not sufficient. The assertion of the assessee that it had no bank account at the concerned places is not relied upon and there is no evidence that the assessee was constrained to make cash payment on account of unavoidable circumstances.
6. It must be stated that the assessee has been consistently stating that he assessee had no bank accounts in the places where cash payments were made. With respect to this assertion, the Income-tax Officer did not make queries as to the existence of any bank account. The absence of bank account is a crucial circumstance and should be considered as an exceptional circumstance to avail of the exemption provided under rule 6(DD). Further, it is also held by the Income-tax Officer as-well as the Income-tax appellate Tribunal that the identity of the persons to whom the payments were made is established, and as a matter of fact, their sales tax registration numbers are also available. In so far as the amounts paid to M/s. Abul Kareem & Co., are concerned the first appellate authority pointed out certain inconsistent entries, but, however, the Income-tax Officer found only one infirmity, viz., that credit entries are only found, and, as such, the transactions are not correct. Therefore, it is ‘evident that the authorities did not approach the issue from a correct perspective and the findings are not supported by a rational approach. In the circumstances, we are satisfied that the assessee is entitled to avail of the exemption provided under rule 6(DD). In view of this conclusion, we think it is not necessary to consider the contention that section 40A(3) is not applicable for the payments made for the purchase of stock-in-trade.
7. In the result, we decline to answer question No. 1. Question No. 2 is answered in favour of the assessee and against the Revenue. The reference is answered accordingly. No costs.