The Judgment of the Court was delivered by

N.V Balasubramanian, C.J:— Pursuant to the direction of this court in T.C.P No. 369 of 1981 dated April 19, 1982, the following question of law has been referred by the Appellate Tribunal to this court under section 256(2) of the Income-tax Act, 1961.

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that there was no case for any disallowance under section 40A(3) of the Income-tax Act, 1961, for the assessment year 1974–75?”

2. The facts as found by the Appellate Tribunal are as under: The Income-tax Officer, in the course of assessment proceedings of the asses-see for the assessment year 1974–75, the previous year ending on March 31, 1974, disallowed, inter alia, the payment of a sum of Rs. 16,35,590 relating to purchase of semi-processed goat skins from India Leather Corporation (Pvt.) Ltd. (hereinafter referred to as I.L.C Ltd.). One Nagappa Chettiar was the chairman of the assessee and he was also the managing director of I.L.C Ltd. The assessee has a tannery, but it had no purchasing centres or set up other than I.L.C Ltd. The said I.L.C Ltd. has not only purchased goat skins on behalf of the assessee, but also supplied on its own to the assessee. The assessee did further processing of goat skins which came to it at semi-processed stage from other sister concerns through I.L.C Ltd. The purchases of raw skins were largely from shandies and the purchases from shandies have been made on payment of cash by I.L.C Ltd. The upcountry tanneries who bought good exportable items for sale expect ready cash and I.L.C Ltd. was keeping substantial cash in its hands to meet such contingencies and cheques were rarely accepted. The assessee and I.L.C Ltd. had bank accounts in the same branch and both the companies had overdraft facilities. The assessee as well as I.L.C Ltd. thought that the issue of cheque and encashment of the same would delay the process of purchase, because of the existing overdraft and hence payment of cash was made by the assessee. The Income-tax Officer, on perusal of the accounts of the assessee, held that the assessee is not a purchaser within the meaning of sub-rule (f) of rule 6DD of the Income-tax Rules on the ground that the assessee's purchases were not of raw skins from primary producers like butchers and I.L.C Ltd. was not a “producer” as it sold only tanned skins and not skins in the raw form. The Income-tax Officer also found that I.L.C Ltd. had only “South India Tanneries” as its own factory and other semiprocessed skins were purchased by them from other sister firms under the management of Nagappa Chettiar. The Income-tax Officer, therefore, held that the requirements of section 40A(3) of the Income-tax Act read with rule 6DD(f) of the Income-tax Rules were not satisfied and since the purchases were made in cash, he added back the amount of Rs. 16,35,590 and assessment was made on the assessee. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the provisions of sub-rule (f)(ii) of rule 6DD of the Income-tax Rules were complied with on the ground that the exemption to raw skins would also include tanned, semi-tanned and semi-dressed skins. He referred to the provisions of section 14 of the Central Sales Tax Act, 1956 and according to him, the dressed hides and skins were also hides and skins and the persons who dressed them would also be regarded as producers and any sale by such persons would qualify for exemption under the provisions of rule 6DD(f)(ii) of the Income-tax Rules. The Commissioner also held that the assessee would be entitled to exemption under sub-rule (j) of rule 6DD of the Income-tax Rules on the ground that the debits given by the I.L.C Ltd. to the assessee totalled to Rs. 53,81,315 while the purchases made were only to the extent of Rs. 16,22,392. There were a number of payments made by I.L.C Ltd. on behalf of the assessee for its purchases effected through them like payment of freight charges on its behalf. The payments made by the assessee to I.L.C were Rs. 58,26,302 including cash drawn from Central Bank of India, Madras, and paid Rs. 55,62,743.91 and similar payments were drawn from the State Bank of India and paid Rs. 53,500. The case of the assessee before the Commissioner of Income-tax (Appeals) was that the payments were practically paid by self-cfieques drawn by the assessee and since Nagappa Chettiar was the chief executive in both the concerns, the payments by self-cheques should be regarded as payments by cheque. The Commissioner of Income-tax (Appeals) did not accept this contention of the assessee holding that the payments made were not by cash. He, however, agreed that the assessee's case would fall under sub-rule (j) of rule 6DD of the Income-tax Rules on the ground that the genuineness of the payments and the identity of the payee were not disputed. The Commissioner of Income-tax (Appeals) also held that it was not practicable to pay by crossed cheques on every occasion and there was trade necessity to keep cash in hand for immediate cash purchases. According to the Commissioner of Income-tax (Appeals), payments through crossed cheques would delay the business operation and having regard to the nature of the relationship between the assessee and the payee and the need for keeping the cash by the seller who was under the same management and who was acting on behalf of the assessee for both the purchases and export sales, the Commissioner of Income-tax (Appeals) held that the requirements of rule 6DD were satisfied and, hence, the entire payment of Rs. 16,35,590 was held to be admissible.

3. The Revenue preferred an appeal before the Appellate Tribunal and the Appellate Tribunal also held that the payment of cash was justified, having regard to the nature of the transaction and the necessity for expeditious settlement. The Appellate Tribunal found that the fact that I.L.C Ltd. has to keep large amount of cash for making purchases of raw skins from shandies and local butchers was undisputed. The Appellate Tribunal held that the payee was a well-established concern and the transactions have also passed through the books of the parties and the genuineness of the payments and the identities of the payees were not disputed. The Tribunal, therefore, held that there was no intention to avoid payment of tax and in this view the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) regarding the allowance of Rs. 16,35,390.

4. The Income-tax Officer disallowed a sum of Rs. 6,50,303 under the provisions of section 40A(3) of the Income-tax Act. The Commissioner of Income-tax (Appeals), on the appeal by the assessee, granted relief on the entire amount. The Tribunal, after examining each item of disallowance made by the Income-tax Officer, found that in all the cases, the identity of the payee and genuineness of the payee could not be doubted and it was due to exceptional circumstances, the payments were made in cash and the parties were reputed dealers in the same line. The Appellate Tribunal, taking note of the trade practice and the materials furnished, came to the conclusion that the Commissioner of Income-tax (Appeals) was justified in holding that the payments made by the parties in cash are not liable to be disallowed and the requirements of section 40A(3) of the Income-tax Act and rule 6DD(j) of the Income-tax Rules are fully satisfied. The order of the Appellate Tribunal on both items of disallowance is the subject-matter of the tax case reference.

5. Mr. S.V Subramaniam, learned senior counsel appearing for the Department, submitted that the Appellate Tribunal has committed a serious error in law in overlooking the banking practice. According to him, after the Appellate Tribunal has found that the assessee and I.L.C Ltd. had bank accounts in the same branch, the view of the Appellate Tribunal that issue of crossed cheques would amount to delay in encashment is erroneous in law. According to him, where the assessee and the payee are keeping accounts in the same bank, issue of crossed cheque by one to another would not delay the encashment of the cheque. The other reason given by the Tribunal is that both the companies are having overdraft facilities and according to learned counsel, existence Of overdraft facilities in the same branch would not have any effect on the encashment of the crossed cheque. Hence, he submitted that the findings arrived at by the Appellate Tribunal that the existence of the payee is established and hence, it could not be the subject-matter of disallowance under the provisions of section 40A(3) of the Income-tax Act is erroneous in law. Mr. S.V Subramaniam also submitted that under sub-rule (f)(ii) of rule 6DD of the Income-tax Rules, it must be a purchase of animal husbandry including hides and skins and, therefore, the rule contemplates only purchase of animal husbandry, that is, raw hides and skins and it does not include semi-dressed or dressed hides and skins. He, therefore, submitted that the Tribunal was not correct in holding that the provisions of rule 6DD(f)(ii) of the Income-tax Rules, were complied with.

6. Mr. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that the Tribunal has come to the conclusion that the provisions of rule 6DD of the Income-tax Rules were satisfied and the Tribunal has come to the conclusion that the provisions of rule 6DD of the Income-tax Rules were fully complied with and, hence, it is not open to the Revenue to challenge the finding of fact by the Appellate Tribunal.

7. We have considered the rival contentions. The provisions of section 40A(3) of the Income-tax Act along with rule 6DD of the Income-tax Rules deal with the subject of payment made by the assessee in cash and not by cheque or draft for more than the prescribed amount. The constitutional validity of the provisions of section 40A(3) of the Income-tax Act was the subject-matter of consideration before the Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO, [1991] 191 ITR 667, and the Supreme Court, after considering the object of the section held that the payment by crossed cheque or crossed bank draft is insisted upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The Supreme Court also held that consideration of business expediency and other relevant factors are not excluded in examining the applicability of the provisions of section 40A(3) of the Income-tax Act. Genuine and bona fide transactions, as held by the Supreme Court, are not taken out of the sweep of the section, and it is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed under section 40A(3) was not practicable or would have caused genuine difficulty to the payee. The Supreme Court also held that it is open to the assessee to identify the person who has received the cash payment. It is relevant to notice that rule 6DD of the Income-tax Rules provides that an assessee can be exempted from payment by crossed cheque or crossed bank draft in the circumstances specified in the rule. The above decision of the Supreme Court makes it clear that the assessee can be exempted from the requirements of payment by crossed cheque or crossed bank draft where the purchases are made in certain agricultural or horticultural commodity or from a village where there is no banking facility.

8. The Central Board of Direct Taxes has issued certain guidelines giving certain circumstances, and those circumstances are illustrative and not exhaustive and the underlying idea of the circular is that if the identity of the payee is known, it would be possible for the Income-tax Officer to cross-check whether the transaction had in fact taken place. The Tribunal took into account the commercial need in keeping cash and referred to the need for keeping cash for making purchases of raw skins from shandies when the upcountry tanneries insist upon payment of ready cash. It was also found that the cheques were rarely accepted. It is no doubt true that the payee is having a bank account in the same branch in which the assessee is having a bank account. But, working hours of the bank are of limited duration. Though both the payee and payer may have accounts in the same branch of the bank, but it may not be possible to issue a crossed cheque after the banking hours. Further, the criticism of Mr. S.V Subramaniam is that the assessee could have made payments in advance in anticipation of purchase. It is well established that it is not for the Revenue to dictate as to how the assessee should carry on his business. The Appellate Tribunal, after noticing the trade practice and the necessity to keep cash in hand, has found, that there was necessity on the part of the assessee to keep substantial cash in its hands to meet contingencies at the time of purchase. It was also found, taking into account other factors, that there was a trade necessity and issue of crossed cheque would delay the business operation. The Tribunal also found that the issue of crossed cheque is not practicable and having regard to the nature of the transaction and the necessity for expeditious settlement and the nature of the relationship between the ayer and payee, it found that the issue of payment by crossed cheque would have caused genuine difficulty to the payee and the identity of the-payee is not doubted and there is no reason to doubt the genuineness of the payee in cash payment. The Appellate Tribunal considered all the relevant materials on record and came to the conclusion that there was no justification to disallow the entire payment, merely because Cash payments have been made. As regards the other amount of Rs. 6,50,303, the Tribunal examined the materials with reference to item-wise expenditure and found that there was justification for the payments to be made in cash. The Tribunal also found that the identity of the payee was established and the genuineness of the payment was established beyond doubt, and the requirements of section 40A(3) of the Income-tax Act and rule 6DD of the Income-tax Rules were fully satisfied. The finding recorded by the Appellate Tribunal is a finding arrived at on the facts of the case. The Tribunal has accepted the materials produced before it in support of its finding that only at the time of purchase, the actual amount would be known and the identity of the party was successfully established and the decision of the Tribunal is based entirely on the facts of the case.

9. The Punjab and Haryana High Court in the case of CIT v. Avtar Singh and Sons, [1992] 194 ITR 80 held that where the identity of the party to whom payments were made was known and the payments were found to be genuine, the payments could not be disallowed on the ground that the payments were made by cash. The Punjab and Haryana High Court also noticed that where money was urgently required after the banking hours and the receipt of the crossed cheque or banking draft would delay the payment and would cause unnecessary hurdles in the proper conduct of the business, it would be a relevant factor in considering the applicability of the provisions of section 40A(3) of the Income-tax Act and rule 6DD of the Income-tax Rules. The insistence on cash payment by the payee where such payee is identifiable and the payment is genuine and is made on business expediency would be sufficient enough not to make any disallowance because the payment was made in cash. The Allahabad High Court in CIT v. Ram Agya Shyarn Narain, [1991] 189 ITR 470 held that such a finding of the Tribunal is a finding of fact. The Punjab and Haryana High Court in the case of CIT v. Brij Mohan Singh and Co., [1994] 209 ITR 753, held that the finding arrived at by the Tribunal on the facts of the case that the provisions of section 40A(3) of the Act were fully satisfied is a finding of fact. We have noticed that the Tribunal has taken note of the relevant factors and found that the payments were duly accounted for in the accounts of the assessee as well as in the accounts of the payee. The Tribunal has taken into account the trading practice and need for keeping cash and found that the identity of the payee was established and genuineness of the payee was successfully established and issue of, cheque would have delayed the transaction. Considering all these materials on record, the Tribunal came to the conclusion that it was not practicable to accept the payment by cheique. We are of the view that the finding arrived at by the Appellate Tribunal is a finding of fact and since the Tribunal has correctly come to the conclusion on the materials available on record, we are of the opinion that no referable question arose out of its order. Since we have held that the payments made by the assessee is not liable to be disallowed while computing the business income, on the facts of the case, it is unnecessary to consider the applicability of rule 6DD(j) of the Rules.

10. We, therefore, answer the question referred to us in the affirmative and against the Revenue. Costs of the reference is Rs. 500.