Giridharilal Goenka v. Commissioner Of Income-Tax.

Ajit K. Sengupta, J.:— At the instance of the assessee, the following question of law has been referred to this court under section 256(2) of the Income-tax Act, 1961, for the assessment year 1975-76:

“Whether, on the facts and in the circumstances of the case and on a proper interpretation of rule 6DD of the Income-tax Rules, 1962, read with the Central Board of Direct Taxes Circular No. 220 dated May 31, 1977 (see [1977] 108 ITR (St.) 8), the Tribunal was justified in upholding the disallowance of Rs. 22,098 in terms of sub-section (3) of section 40A of the Income-tax Act, 1961?”

2. The facts leading to this reference are that the assessee, an individual, is a wholesale dealer in jaggery. Before the Income-tax Officer, it was submitted on behalf of the assessee that he started a proprietary business styled Dilip Stores on December 13, 1973. The assessee paid an aggregate sum of Rs. 37,048 consisting of amounts paid in cash in excess of Rs. 2,500. The payments in question were made to Mangilal Nathmal of 45 A, Adya Sardhya Ghat Road, Calcutta, against the following bills:

Bill No. Date Amount paid in cash Rs. 5590 11-9-1974 14,906 5547 5-9-1974 8,682 5592 11-9-1974 13,416

3. The assessee was required by the Income-tax Officer to explain the above cash purchases in excess of Rs. 2,500. The explanation offered by the assessee was that he was new to the business and, therefore, the parties refused to accept his cheques. The Income-tax Officer examined a list of sundry creditors of the assessee and found that many creditors were there including Mangilal Nathmal to whom the assessee had paid in cash. So, the assessee's explanations that he was new to the business and that the parties were insisting on cash payments were not acceptable to the Income-tax Officer as correct and genuine. Some of the payments made towards the beginning of the accounting year were, however, accepted by the Income-tax Officer on account of his being new, and in his opinion, it was likely that cash payments had to be made to begin with to establish his credibility in the market, but when the parties in question had become familiar with the assessee, they started to give credit to him and, therefore, the latter cash payments in excess of Rs. 2,500 were, in the opinion of the Income-tax Officer, clearly not explainable. The Income-tax Officer, accordingly, made an addition of Rs. 37,048 to the total income of the assessee under section 40A(3) of the Income-tax Act, 1961.

4. The assessee appealed to the Appellate Assistant Commissioner of Income-tax challenging the addition of Rs. 37,048 made under section 40A(3). Before him, it was pleaded that the cash payment to Mangilal Nathmal had had to be made under exceptional and unavoidable circumstances and one of the circumstances pointed out was that he was new to the business and, therefore, made payments in cash. It was also pointed out by him that had the payments not been made by him in cash, his business might have suffered. The Appellate Assistant Commissioner, however, did not find the explanation of the assessee to be convincing. In his opinion, the reason made out by the assessee neither brought his case within rule 6DD of the Income-tax Rules, 1962, nor did the circular of the Central Board of Direct Taxes, explaining the provisions of rule 6DD, cover the assessee's case. He found no truth in the assessee's averment that he had no credit in the market. The Appellate Assistant Commissioner further pointed out that the assessee had not replied to the observation of the Income-tax Officer that he had been allowed considerable credit by the end of the previous year by the parties in question. He further noted that the bills in respect of which cash payments had been made were themselves in fact credit purchases and that the goods in respect of which they had been made out were lifted by the assessee on earlier dates and the payments had been made on later dates. Thus, the Appellate Assistant Commissioner pointed out that Bill No. 5547, dated September 5, 1974, had been paid on October 18, 1974, Bill No. 5590, dated September 11, 1974, had been paid by the assessee on September 16, 1974, and Bill No. 5592 dated September 11, 1974, had been paid almost a month and a half later on October 26, 1974. Thus, in the opinion of the Appellate Assistant Commissioner, the gap between the date of purchase and the date of payment itself indicated that the cash payment was not a necessary factor and the seller could have waited for the encashment of the cheques. He, accordingly, rejected the assessee's plea and sustained the addition made by the Income-tax Officer. The Tribunal opined that there may be justification for making payment in cash in case the creditor wanted such payment and the granting of special discount for cash payment is enough indication of the mind of the creditor. Taking a liberal view of the matter, the Tribunal held that there may be justification for the payment of Rs. 14,906 in cash provided the factual averment made in the grounds of appeal is borne out on verification. The Tribunal noted that the assessee did not appear to have taken any such plea at the earlier stage. The Tribunal, therefore, restored the matter to the Income-tax Officer on this point and directed him to ascertain the facts for himself and to re-examine the matter from the point of view of the instructions of the Central Board of Direct Taxes contained in Circular No. 220 dated May 31, 1977 ([1977] 108 ITR (St.) 8). With regard to the other credits, the Tribunal held that no case whatsoever was made out by the assessee justifying interference. The Tribunal agreed with the reasons given by the Appellate Assistant Commissioner. The Tribunal, accordingly, confirmed the addition made under section 40A(3) to the extent of Rs. 22,098 in respect of the remaining two items.

5. At the hearing, it has been contended by Mr. Murarka, for the assessee, that the certificate which was issued by the seller has not been disputed by the Revenue authorities and the Tribunal misconstrued the instructions contained in the circular. It is the assessee's first year of business and, accordingly, the assessee's case is fully covered by the said circular.

6. Mr. Dhar, appearing for the Revenue, however, contended that the bill dated September 5, 1974, was paid on October 18, 1974, and the bill dated September 11, 1974, was paid on October 26, 1974. Accordingly, there was no question of making any payment in cash, because there was no urgency. It is also submitted that by that time the assessee had got some footing in the business and, accordingly, there was no reason or justification for making payment in cash.

7. We have considered the rival contentions. The provision of section 40A(3) regarding the allowability of deduction where the amount involved is more than Rs. 2,500 paid in cash has been liberalised. Regarding the provisions contained in rule 6DD of the Income-tax Rules, 1962, the Board has also issued circulars directing the Income-tax Officer to take into account certain circumstances which are not exhaustive but only illustrative for the guidance of the Income-tax Officer.

8. Rule 6DD provides 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 a crossed bank draft in the cases and circumstances specified under the said rule. One of the sub-rules, being sub-rule (j) of rule 6DD, provides as follows:

“(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—

(1) due to exceptional or unavoidable circumstances, or

(2) 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.”

9. The Board, therefore, issued a circular on May 31, 1977, being Circular No. 220 ([1977] 108 ITR (St.) 8), clarifying the provisions of section 40A(3) as well as rule 6DD(j). It has been provided as follows:

“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.

5. It can be said that it would generally satisfy the requirements of rule 6DD(j), 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. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of rule 6DD(j).

6. It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule 6DD(j).”

(emphasis* supplied)

10. Our attention has been drawn to several decisions on the interpretation of the provisions of section 40A(3) and the Rules made thereunder. In Hasanand Pinjomal v. CIT, [1978] 112 ITR 134 (Guj) it was held that section 40A(3) was intended to serve the objective of checking tax evasion and ensure that payments exceeding Rs. 2,500 are made by crossed cheque or bank draft so that it will be easier to ascertain whether the payment was genuine and whether it was made out of income from disclosed sources. The object of the rule is to relax the rigour of sub-section (3) of section 40A in genuine and bona fide cases to avoid hardship and harassment. The court laid down that practicability for the purpose of rule 6DD(j)(2) must be judged from the point of view of the businessman and not of the Revenue. For the purposes of carrying on his business, a businessman may have to make payment otherwise than by crossed cheque or draft in certain circumstances voluntarily and not out of sheer necessity.

11. In Kanti Lal Purushottam and Co. v. CIT, [1985] 155 ITR 519 (Raj), the court held that the rigour of the restriction has also been lessened by the making of rule 6DD which gives a discretionary power to the Income-tax Officer to allow deduction of payments exceeding Rs. 2,500 which could not be made by a crossed cheque or a crossed bank draft. Where the assessee had made payments in cash of value exceeding Rs. 2,500 for agricultural produce under the honest belief that the payments were covered by rule 6DD and the genuineness of the payments and the identity of the payees were not doubted, the deduction could not be disallowed simply on the ground that the payment was made in cash.

12. Our attention has also been drawn to another decision of the Rajas-than High Court in the case of Badrilal Phool Chand Rodawat v. CIT, [1987] 167 ITR 404. There, the court took into consideration the fact that this was the first dealing of the assessee and the firm could not have accepted the cheque of the assessee and the assessee could create confidence by making cash payment only. The genuineness of the payment and the identity of the payee were fully established. Therefore, the payment had to be allowed.

13. We have already set out the facts of this case. The Tribunal was of the view that the Board's circular cannot be made applicable to the cases of payments which have been made long after the date of purchase without any justification whatsoever. In other words, the ground of disallowance of the payments is that there was a time-lag between the date of the bill and the payment made. The object of the provision of section 40A(3) is to check evasion of taxes so that the payment is made from the disclosed sources. Both the payer and the payee would be showing in the respective account the payments made and received. It presupposes that the transactions must be genuine transactions. In this case, genuineness of the transactions has not been disputed by the Revenue authorities. The only ground is the delay in making payment it is not in dispute that it is the first year of the business of the assessee which was started in December, 1973, and the accounting year ended on October 22, 1974, and this was the first year of assessment. The payments were made almost before the close of the accounting year before Dewali. A certificate was produced from the seller, Mangilal Nathmal, who stated in the certificate that they “asked the purchaser to make payment of different bills in cash as there was necessity of liquid funds for the expediency of the business”. Dates of the bills and permanent account number were also mentioned in the certificate. Thus, the seller insisted upon the assessee's paying the bills in cash. The identity of the payee who was an income-tax assessee was established and the genuineness of the transactions was not doubted or disputed. The circular of the Board is not exhaustive but only illustrative. The Income-tax Officer has to take a pragmatic view of the matter. The Income-tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances.

14. On the facts of this case, where the assessee has satisfied the Assessing Officer as to the genuineness of the payment and the identity of the payee, the circumstance that there was a delay in making payment of the bills by itself would not take the case out of the ambit of exceptional or unavoidable circumstances referred to in rule 6DD(j) and deduction of the expenditure which is otherwise allowable to him cannot be denied.

15. For the reasons aforesaid, we answer this question in the negative and in favour of the assessee. There will be no order as to costs.

J.N Hore, J.:— I agree.