The Janambhumi v. Commissioner Of Income-Tax

D.N Baruah, J.:— In this income-tax reference, at the instance of the assessee, the following question has been referred by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961 (for short, “the Act”), for opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in sustaining the disallowance made under section 40A(3) of the Act?”

2. The facts for the purpose of answering this reference are:

3. At the material time the assessee was a partnership firm with three partners. Kanak Chandra Sarma was the managing partner. This firm used to publish a daily newspaper known as The Janambhumi. The said newspaper was printed by Janambhumi Press Pvt. Ltd. of Jorhat, a company incorporated under the Companies Act. Kanak Chandra Sarma was also the managing director of the said company. Thus Kanak Chandra Sarma was the managing director of the company as well as the managing partner of the firm. The business of the firm as well as of the company was being carried on from the same premises and both the company and the firm were assessees under the Act.

4. The firm filed its return of income on September 27, 1985, declaring a loss of Rs. 1,82,300. The assessment was completed on February 27, 1987, on a total income of Rs. 1,88,440 by the Income-tax Officer, A-Ward, Jorhat, after making, amongst others, disallowance and additions of income. An amount of Rs. 3,65,885 was disallowed by the Income-tax Officer under section 40A(3) of the Act being the payments made in cash exceeding Rs. 2,500 on various occasions to the said company against printing charges of the daily newspaper The Janambhumi. The identity of the payee and genuineness of payments had not been doubted by the Assessing Officer. Though it was admitted by the Assessing Officer that the payer and the payee was the same person, he did not accept the exceptional circumstances pointed out by the assessee, i.e, the payer and the payee was the same person, and that there was urgency and necessity for cash payment and thus there were special circumstances as envisaged under rule 6DD(j)(1) or (2).

5. Being dissatisfied with the order of assessment, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The appellate authority reduced the amount from Rs. 3,65,885 to Rs. 3,25,885 because of the mistake in calculation but in principle the addition was upheld. Further appeal was preferred before the Income-tax Appellate Tribunal (for short, “the Tribunal”). The Tribunal also upheld the disallowance. Though there was no dispute as to the genuineness of the transaction as well as the identity of the payee, according to the Tribunal, there was no explanation whatsoever from the assessee as to the existence of unavoidable and exceptional circumstances justifying payment in cash over Rs. 2,500. The assessee, thereafter, by a miscellaneous application (No. MA 30/(Gau) of 1991) prayed for rectification of the order of the Tribunal. By order dated April 20, 1993, the Tribunal rejected the said application. Thereafter the assessee prayed for reference of the above question for the opinion of this court. Hence, the present reference.

6. We heard both sides.

7. Mr. R.P Agrawalla, learned counsel appearing on behalf of the assessee, assailed the order of the Tribunal. He submitted before us that the Tribunal's finding being contrary to evidence on record was perverse. The Tribunal also failed to consider the relevant materials oh record and, therefore, the order was bad in law. It was also not a speaking order. Learned counsel further submitted that the expression “exceptional circumstances” under rule 6DD(j)(1) ought to be understood in the context of the objects of section 40A(3). But the Tribunal erred in law in not accepting the circumstances under which the payments had be, en made as exceptional after having accepted the genuineness of the cash transaction and the identity of the payee. Learned counsel emphasised that the circumstances ought to be looked into from the business point of view. The objects of the second proviso to section 40A(3) and rule 6DD(j) was that “exceptional circumstances” was a non-technical expression meaning thereby unusual or uncommon circumstances. He refuted the argument of learned counsel for the Revenue that the provisions of section 40A(3) were mandatory in nature and the Assessing Officer had no discretion to allow expenditure in cash unless it came within the expression “exceptional circumstances”. Learned counsel also submitted that the contention of the Revenue that the assessee could not justify the cash payments by pointing out the circumstances referred to in (1) and (2) above was factually incorrect. The assessee very clearly gave its explanations regarding the exceptional circumstances which were not dealt with in accordance with law. It was further contended that the Tribunal failed to act in accordance with law and misdirected itself in law while dealing with the expression “exceptional circumstances”; no doubt the firm and the company were two different taxable entities. But then, the issue was not who was assessable for which income. The question was whether any practical businessman in the context of the facts found and recorded should hazard the risk of movement of cash for deposit in the bank and then again bring the cash from bank. The object of section 40A(3) read with the second proviso did not intend so. The demand of the Revenue was too rigid which would, according to learned counsel for the assessee, frustrate the object of section 40A(3) read with its second proviso and the Rules framed thereunder. Learned counsel, while making his submission, refuted the contention of the Revenue that the assessee's case was not covered by a Board Circular No. 220 ([1977] 108 ITR (St.) 8), dated May 31, 1977. He pointed out that the circular itself was very clear. The circular very clearly indicated that the circumstances mentioned in the circular were not exhaustive but illustrative.

8. Mr. Joshi, learned senior counsel appearing on behalf of the Revenue, on the other hand, justified the order passed by the Tribunal. According to him, the provisions contained in section 40A(3) were mandatory in nature and the Assessing Officer had no discretion to allow expenditure in cash beyond the amount prescribed unless the assessee demonstrated the “exceptional and unavoidable circumstances” referred to in rule 6DD(j) of the Rules. According to Mr. Joshi, the Assessing Officer found that the assessee-firm (the Janambhumi) made cash payments of various expenditures during the financial years 1984-85 and 1985-86 on several occasions in clear violation of the provisions contained under section 40A(3) of the Act and, therefore, the Assessing Officer was fully justified and well within the jurisdiction in initiating proceedings for disallowing the said expenditure. The provisions of section 40A(3) were mandatory in nature. Sub-section (3) of the said section very clearly indicated that any expenditure in excess of the specified limit of Rs. 2,500 should not be allowed if it was paid otherwise than by crossed cheque or crossed bank draft. The sub-section did not differentiate between genuine or non-genuine expenditure. The words used in the sub-section were “any expenditure”. Expenditure incurred might be genuine and might have been paid to persons whose identity had also been established. But these and such other considerations would not help in coming out of the ambit of section 40A(3). Irrespective of any considerations, the expenditure ought to be disallowed outright if the mode of payment of such expenditure violated the clear provisions of section 40A(3). The provisions of section 40A were of overriding nature and hence the provision of section 40A(3) as provided ought to be given effect to. Mr. Joshi further submitted that sub-section (1) of section 40A declared that the provisions of section 40A should have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to computation of income from profession or business, i.e, under sections 30 to 43A. Thus the provisions of section 40A were of overriding nature so specifically intended by the Legislature. The non obstante clause of the section very eloquently gave such interpretation. Mr. Joshi further submitted that the finding regarding existence of exceptional and unavoidable circumstances by the Tribunal was a question of fact and this court in exercise of the power under section 256(1) might not answer such question of fact. If the challenge was against the finding of the Tribunal on the basis that it was unjustified or perverse or not based on reasonably acceptable evidence, that could be the subject matter of a reference, and in the absence of such challenge the finding of such fact by the Tribunal was not open for any interpretation. In this connection references were made to the following two decisions: (1) P.C Sharma and Sons v. CIT [1979] 116 ITR 758 (Cal); (2) CIT v. Bijoy Kumar Pandya [1993] 200 ITR 667 (Gauhati). On the other hand, Mr. Agrawalla disputed the same inasmuch as if the conclusion was arrived at by the Tribunal without looking to the relevant provisions of law, rules or circulars issued by the authorities, then it would not remain a question of fact and it would, definitely, be a question of law.

9. On hearing learned counsel for the parties we are of the opinion that the findings arrived at by the Tribunal may not always be findings of fact if such findings are not in accordance with law. Before coming to a decision regarding failure to establish exceptional and unavoidable circumstances, the authority must give reasons why it came to such conclusion. The Commissioner of Income-tax (Appeals) in his order observed thus:

“I have gone through the submission made by learned counsel and noted that it was the duty of the appellant to bring his case within the mitigating circumstances which he failed to do. Moreover, it could not be proved that such payment was necessary due to exceptional and unavoidable circumstances or because the 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. Apart from that, the appellant was required to furnish 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, only the last two conditions have been fulfilled and the first two conditions have not been fulfilled and, therefore, I am of the opinion that the disallowance was correctly made and no interference is called for. Moreover, I have gone through the details of the payment and noted that those were not of such a nature that it was necessary to make the payment in cash.”

10. The Tribunal considered this aspect of the matter and observed thus:

“…. No doubt, concerning the payments made to the Janambhumi Press Pvt. Ltd., there is no dispute as to the genuineness of the transaction as well as the identity of the payee. But no explanation whatsoever has been furnished before the authorities below as to the exceptional and unavoidable circumstances in which payment in cash exceeding Rs. 2,500 was made. Speaking in plain words in the appeal records no evidence was brought by the assessee-firm to show that each and every payment, the details of which have been furnished and kept in paper book, has been made in exceptional circumstances.”

11. Exceptional and unavoidable circumstances may vary depending on the facts of each case. In this connection reference can be made to Circular No. 220 (see [1977] 108 ITR (St.) 8), dated May 31, 1977. In paragraph 4 of the said circular some of the circumstances have been mentioned. We quote paragraph. 4 as under:

“4. All the circumstances in which the conditions laid down in rule 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are:

(i) The purchaser is new to the seller; or

(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or

(iii) The transactions and payments are made on a bank holiday; or

(iv) The, seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability, of goods otherwise than from this particular seller; or

(v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or

(vi) Specific discount is given by the seller for payment to be made by way of cash.”

12. The circular itself indicates that these are not the only circumstances which can be said to be exceptional and unavoidable. There may be some other exceptional and unavoidable circumstances which may not be put in writing. The Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer on the grounds that the assessee failed to establish exceptional and unavoidable circumstances under which payment had to be made in cash exceeding Rs. 2,500. While considering the exceptional circumstances the business exigencies, convenience and security should also be looked into. In the present case, the genuineness of the payment was not disputed. The identity was also not disputed. The partners of the firm (Janambhumi) and the directors of Janambhumi Press Pvt. Ltd. were also one and the same. If the provisions of rule 6DD are to be insisted on, surely the payment had to be made by depositing money in the bank and then to issue cheques by the assessee to the payee, namely, Janambhumi Press Pvt. Ltd., and the payee to draw the amount from the bank. This becomes hazardous and cumbrous procedure. It also involves employment of persons and may entail risk in carrying on business. This type of complicated and hazardous procedure in running a business cannot be said to be just and proper. For smooth running of business money can be transferred in such cases in cash if the genuineness of payment is not doubted and the identity of the payee is known. The object of section 40A(3) and rule 6DD is to discourage frivolous and false payment. In Paul Brothers v. Commissioner Of Income-Tax. [1990] 186 ITR 356, this court observed thus (at page 359):

“In the instant case, the five firms to whom payments were made were all based at Gauhati. The assessee-firm is at Tezpur. Normally, the transactions are made ‘through accounts’. But, in the above five instances, the representatives of the Gauhati firms ‘came to Tezpur’ and ‘insisted’ on cash payment (as in the Calcutta case). The assessee, therefore, had to pay in cash. This explanation was accepted by the Commissioner of Income-tax (Appeals) but not by the Income-tax Officer and the Tribunal. None of the three authorities have doubted the genuineness of these payments. Once the transactions are genuine, what is to be considered is only the explanation offered by the assessee.”

13. A similar view Was expressed by this court in a recent judgment in Income-tax Reference No. 22 of 1991 (Shri Mahabir Industries v. Commissioner Of Income-Tax. [1996] 220 ITR 459).

14. From the above decisions it appears that there may be various circumstances which can be regarded as exceptional and unavoidable circumstances. The circumstance in the present case is one of them.

15. In view of the above, we are of the opinion that the findings of the Tribunal were erroneous. Accordingly, we answer the question in the negative, against the Revenue and in favour of the assessee.

16. A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal, Guwahati.