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Commissioner Of Income-Tax, Gujarat-Iv, Ahmedabad v. Trinity Traders (And Vice Versa)

Gujarat High Court

Oct 13, 1978

Judgment

Subsequent
References

CaseIQ

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Structured Summary of the Opinion

Factual and Procedural Background

These two references arise from the same order of the Income-tax Appellate Tribunal and concern assessment year 1970-71. The assessee is a registered firm operating a spinning mill that purchased cotton waste and manufactured yarn. During scrutiny of the assessment, the Income-tax Officer found that the assessee had made cash payments (each exceeding Rs. 2,500) aggregating to Rs. 48,939 to M/s. Manubhai & Co. of Ahmedabad and aggregating to Rs. 9,791 to M/s. Yogeshchandra & Co. of Bombay. The Income-tax Officer disallowed these payments under section 40A(3) of the Income-tax Act and applied rule 6D (as noted in the assessment) and rule 6DD of the Income-tax Rules, 1962, as applicable. The Appellate Assistant Commissioner confirmed the disallowance. On appeal to the Tribunal, the Tribunal concluded on facts that:

Payments to M/s. Manubhai & Co.: The Tribunal rejected the assessee's contention that Manubhai would not accept cheques and therefore disallowed the claim for Rs. 48,939 (i.e., held the payments were not covered by rule 6DD(j)(i) and (ii)).
Payments to M/s. Yogeshchandra & Co.: The Tribunal accepted that payments had historically and during the year under appeal been made only in cash, and, given that Yogeshchandra was a Bombay party and the circumstances described by the assessee, held that these payments (aggregating Rs. 9,791) were covered by rule 6DD(j)(i) and (ii).

Both the assessee and the Revenue referred questions of law to the court arising from the Tribunal's order, resulting in the two questions set out for the court's opinion.

Legal Issues Presented

Whether the Tribunal was right in law and on facts in holding that the payments of Rs. 48,939 made to M/s. Manubhai & Co. of Ahmedabad are not covered by rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962? (Reference at the instance of the assessee.)
Whether the Tribunal was right in law and on facts in holding that the payments of Rs. 9,791 made to M/s. Yogeshchandra & Co. of Bombay are covered by rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962? (Reference at the instance of the Revenue.)

Arguments of the Parties

Appellant (Assessee) — Positions and Explanations

As regards M/s. Manubhai & Co., the assessee asserted that Manubhai were not prepared to accept cheques from the assessee-firm (this was the assessee's explanation for paying in cash).
As regards M/s. Yogeshchandra & Co., the assessee explained that payments both in the past and during the year under appeal had been made only in cash; Yogeshchandra being a Bombay party, their insistence on cash payments could not be ruled out. The assessee relied on these factual circumstances to bring the Yogeshchandra payments within rule 6DD(j)(i) and (ii).

Respondent (Revenue / Income-tax Officer)

The Income-tax Officer, applying the language of section 40A(3), disallowed the cash payments exceeding Rs. 2,500 and relied on the appropriate rule of the Income-tax Rules (the assessment order refers to rule 6D; rule 6DD provides for exceptions under section 40A(3)).
The Appellate Assistant Commissioner affirmed the Income-tax Officer's disallowance on appeal before the Tribunal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474 (Supreme Court)	Describes the approach where a court can either call for a supplementary statement from the Tribunal or decline to answer and leave it to the Tribunal to adjust its decision; highlights the potential injustice if the Tribunal is restricted to evidence on the record.	The court applied the formula in this case: it declined to answer the referred questions because allowing the parties an opportunity to lead evidence in light of subsequent guidance (the Board's Circular) was necessary to avoid injustice, and therefore remitted the matter to the Tribunal.
New Jehangir Vakil Mills Co. Ltd. v. Commissioner of Income-tax [1959] 37 ITR 11 (SC)	Illustrated that if the Tribunal is directed to submit a supplementary statement, it may be restricted to evidence on the record (i.e., not entitled to take additional evidence), which can result in injustice.	Cited in the Indian Molasses passage relied upon by the court to explain why calling for a supplementary statement might be inappropriate if additional evidence is necessary; this influenced the court's decision to decline to answer and remit the matter.
Petlad Turkey Red Dye Works Co. Ltd. v. Commissioner of Income-tax [1963] 48 ITR (SC) 92	Same principle as above regarding limitations on supplementary statements by the Tribunal and the risk of injustice if additional evidence cannot be taken.	Referenced as part of the Supreme Court jurisprudence relied on to justify declining to call for a supplementary statement and instead remitting to the Tribunal for further consideration with opportunity for evidence.
Keshav Mills Co. Ltd. v. Commissioner of Income-tax [1965] 56 ITR 365	Also cited for the position that restricting the Tribunal to existing record evidence on a supplementary statement may be improper where justice requires taking additional evidence.	Used together with the other cited precedents to support the decision to decline answering and to leave the matter for the Tribunal to reconsider with appropriate evidence.

Court's Reasoning and Analysis

The court proceeded by reference to the statutory framework and to subsequent administrative clarification:

The court examined section 40A(3) of the Income-tax Act which disallows deductions for payments in excess of Rs. 2,500 made otherwise than by a crossed cheque or crossed bank draft, subject to prescribed exceptions in a proviso.
Rule 6DD(j) of the Income-tax Rules, 1962, prescribes cases and circumstances in which such payments may be made otherwise than by crossed cheque/draft without disallowance; rule 6DD(j) includes two sub-clauses relied on in these references: (i) due to exceptional or unavoidable circumstances, or (ii) because payment by cheque/draft was not practicable or would have caused genuine difficulty to the payee, and requires evidence satisfying the Income-tax Officer as to the genuineness and identity of the payee.
The court considered Circular No. 220 dated May 31, 1977, issued by the Central Board of Direct Taxes, which clarified examples of circumstances that would meet rule 6DD(j) (including illustrative instances such as a purchaser being new to the seller, lack of bank accounts, bank holidays, seller refusing cheques where purchaser's business interest would suffer, commission-agent situations, and specific cash discounts). The Circular also explained that a letter from the seller with particulars could satisfy requirements for identification and genuineness for the Income-tax Officer.
The court emphasized that the Circular did not exist at the time the Income-tax Officer, the Appellate Assistant Commissioner, or the Tribunal decided the matter, and therefore those authorities could not have considered the categories of cases described by the Circular when making their factual findings.
Relying on the Supreme Court's approach in CIT v. Indian Molasses Co. P. Ltd. and related authorities, the court identified two possible procedural routes (calling for a supplementary statement from the Tribunal or declining to answer and remitting the matter). The court noted that calling for a supplementary statement might restrict the Tribunal to the existing record and prevent it from taking additional evidence, which could produce injustice.
Given the Circular's clarification and the potential need for additional evidence to determine the applicability of rule 6DD(j) as described in the Circular, the court concluded that it would be unjust to answer the questions without giving the assessee and the Revenue an opportunity to lead such evidence. Therefore the court declined to answer the questions and remitted the appeals to the Tribunal for disposal under section 260(1) of the Income-tax Act, 1961, in the light of the Board's Circular and the court's observations.

Holding and Implications

CORE RULING: The court declined to answer the referred questions and remitted the matters to the Tribunal for fresh disposal under section 260(1) of the Income-tax Act, 1961, allowing the parties an opportunity to lead evidence in the light of the Central Board of Direct Taxes' Circular dated May 31, 1977.

Implications / Consequences

The Tribunal is to dispose of the appeals pending before it under section 260(1) in the light of the observations made by the court and the Board's Circular (May 31, 1977), giving the assessee and the department an opportunity to lead evidence regarding the applicability of rule 6DD(j)(i) and (ii).
The effect on the parties is procedural: the Tribunal must reconsider the factual determinations (including, if necessary, taking additional evidence or obtaining seller letters/particulars as referred to in the Circular) and then decide whether the respective payments fall within rule 6DD(j)(i) and (ii) and thus are deductible.
There will be no order as to costs in respect of these two references.

The opinion itself does not decide the substantive applicability of rule 6DD(j) to the payments in question; it instructs the Tribunal to reconsider the matter with the benefit of the Board's Circular and with opportunity for evidence.

Show all summary ...

1. These two references arise out of one and the same order of the Tribunal. Hence we will dispose of both the matters by this common judgment. In this case, at the instance of the assessee the following question has been referred for our opinion :

"Whether the Tribunal was right in law and on facts, in holding that the payments of Rs. 48,939 made to M/s. Manubhai & Co. of Ahmedabad are not covered by rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962 ?"

2. The following question has been referred at the instance of the Revenue.

"Whether the Tribunal was right in law and on facts in holding that the payments of Rs. 9,791 made to M/s. Yogeshchandra & Co. of Bombay are covered by rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962 ?"

3. The facts leading to these two references are as follows : "We are concerned with assessment year 1970-71. The assessee is a registered firm which derives income from a spinning mill. It purchases cotton waste and manufactures yarn which is used in manufacturing rough clothes, mats, carpets, etc. At the time of the assessment, the Income-tax Officer, while scrutinising the accounts, found that the assessee had made cash payments aggregating to Rs. 48,939 to M/s. Manubhai & Co. and each of those payments exceeded Rs. 2,500. The assessee, in the course of the same assessment proceedings, was also found to have made payments aggregating to Rs. 9,791 to Messrs Yogeshchandra & Co. and each of those payments also exceeded Rs. 2,500. As these payments were made in cash, the Income-tax Officer, in view of the language of section 40A(3), disallowed these payments and passed the order in the light of rule 6D of the Income-tax Rules, 1962. On appeal filed by the assessee, the Appellate Assistant Commissioner confirmed the decision of the Income-tax Officer. The assessee took the matter in further appeal before the Tribunal and before the Tribunal it was not disputed that the assessee had made various payments to M/s. Manubhai & Co., between April 3, 1969 and October 1, 1969. Each of those payments was in excess of Rs. 2,500. Each of those payments was otherwise than by a crossed cheque or crossed draft and the total amount paid to M/s. Manubhai & Co., in the course of that period April 3, 1969, to October 1, 1969. aggregated to Rs. 48,939. Similarly, the assessee had admittedly made payments to M/s. Yogeshchandra & Co., between April 19, 1969, and September 1, 1969. The total came to Rs. 9,791. Each of these payments was in excess of Rs. 2,500 and was made otherwise than by a crossed cheque or crossed draft. The Tribunal came to the conclusion that, on facts, the assessee's contention that M/s. Manubhai & Co., were not prepared to accept cheques from the assessee-firm could not be accepted and it, therefore, disallowed the claim for Rs. 48,939. As regards payments made to M/s. Yogeshchandra & Co., the Tribunal found that all along in the past as well as during the year under appeal, the payments, past as well as during the year under appeal, were made only in cash and therefore the explanation put forth by the assessee had some merit. The Tribunal again took the fact into consideration that Yogeshchandra & Co. was a Bombay party and their insistence on cash payments in the light of the facts stated by the assessee could not be ruled out. The Tribunal therefore held that the payments made to Yogeshchandra & Co. must be held to be covered by rule 6DD(j)(i) as well as rule 6DD(j)(ii) of the Income-tax Rules, 1962. Thereafter, at the instance of the assessee as well as at the instance of the Revenue, the two questions which we have hereinabove respectively set out have been referred to us for our opinion.

4. Under section 40A, notwithstanding anything to the contrary in sections 30 to 39, the amounts set out in section 40 shall not be deducted in computing income chargeable under the head "Profits and gains of business or Profession" Under sub-section (3), where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in sums 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 first proviso to section 40A(3) is not material for the purpose of this judgment. Under the second proviso, no disallowance under the sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by 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. It may be noted here that in February 1969, the Central Government specified, by notification in the Official Gazette, that 31st March, 1969, was the specified date under section 40A(3). Rule 6DD of the Income-tax Rules, 1962, provides for cases and circumstances in which payment in the sum of Rs. 2,500 may be made otherwise than by a crossed cheque or a crossed bank draft and the rule says that 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 a crossed cheque drawn on a bank or by crossed bank draft in the cases and circumstances specified therein, namely :

"(j) in any other case, 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 -

(i) due to exceptional or unavoidable circumstances, or

(ii) 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"

5. Our attention has been drawn to Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes. The circular is directed to all Commissioners of Income-tax and is headed

"Section 40A(3) of the Income-tax Act, 1961 - Rule 6DD(j) of the Income-tax Rules, 1962 - Clarification regarding"

. This circular clarified the circumstances in which the conditions laid down in rule 6DD(j) have been made applicable, and in paragraph 4, the circular states (See [ 1977] 108 ITR (St.) 8, 9) :

"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 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."

7. The circular makes it clear that these are merely illustrative instances of cases in which rule 6DD(j) would be applicable. The circular also points out that the requirements of rule 6DD(j) can be satisfied if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, Sales-tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. It is obvious that when the Income-tax Officer passed the assessment order and subsequently when the matter came up before the Income-tax Appellate Tribunal, the Circular of May 31, 1977, was not and could not have been available to them and hence the cases which, according to the Board, would be covered by the rule 6DD(j), could not be considered either by the Income-tax Officer or by the Appellate Assistant Commissioner or by the Appellate Tribunal.

8. Under these circumstances, it will be better to apply the formula adopted by the Supreme Court in CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474. At page 482 of the Reports, the Supreme Court has pointed out.

"Two courses are now open to us; to call for a supplementary statement of the case from the Tribunal; or to decline to answer the question raised by the Tribunal and to leave it to the Tribunal to take appropriate steps to adjust its decision under section 66(5) (of the old act) in the light of the answer of this court. If we direct the Tribunal to submit a supplementary statement of the case, the Tribunal will, according to the decisions of this court in New Jehangir Vakil Mills Co. Ltd. v. Commissioner of Income-tax [ 1959] 37 ITR 11 (SC) , Petlad Turkey Red Dye Works Co. Ltd. v. Commissioner of Income-tax [ 1963] 48 ITR (SC) 92, and Keshav Mills Co. Ltd. v. Commissioner of Income-tax [ 1965] 56 ITR 365, be restricted to the evidence on the record and may not be entitled to take additional evidence. That may result in injustice. In the circumstances, we think it appropriate to decline to answer the question...."

9. We are unable to answer the questions referred to us because we feel that it would work out injustice if the assessee and the department are not allowed an opportunity to lead evidence on the point of applicability of rule 6DD(j) as meant to be applied by the Circular of the Board dated May 31, 1977. It will be open to the Tribunal to dispose of the appeal pending before it under section 260(1) of the Income-tax Act, 1961, in the light of the observations made by us after determining the question which ought to be decided in the light of the Circular of the Board dated May 31, 1977. There will be no order as to costs of these two references. Orders accordingly.