- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. Nikko Auto Ltd.
Case Summary — N.K. Sud, J.
Factual and Procedural Background
The Revenue filed a petition under section 256(2) of the Income-tax Act, 1961 seeking an order directing the Income-tax Appellate Tribunal, Delhi Bench "C" to draw up a statement of case and refer the following question of law to the High Court: whether the Tribunal was right in law in holding that a payee's insistence on cash payment by itself constitutes an exceptional circumstance exempting the transaction from the requirement of section 40A(3).
The assessee (a company manufacturing automobile parts) filed its return for assessment year 1989–90 showing a loss. In assessment under section 143(3) for that year an amount of Rs. 5,59,000 was disallowed under section 40A(3) in respect of 13 cash payments made to a sister concern, Alpha Toyo Ltd. The assessee explained that each payment was made in cash at the insistence of the payee because the payee needed cash to make payments to sales tax, excise and customs departments and to meet labour payments. Alpha Toyo Ltd. confirmed the payments and the payee's identity and tax registration details were established and the receipts were accounted for in the payee's books.
The Assessing Officer rejected the explanation on grounds that the two companies were under the same management, both had bank accounts in Faridabad and payments could have been made by bank draft or crossed cheque, and that the number of payments (13) indicated a non-isolated default. The Commissioner of Income-tax (Appeals) deleted the disallowance, relying on prior authorities. The Tribunal upheld the Commissioner (Appeals). The Revenue applied under section 256(1) to the Tribunal requesting reference of the stated question of law; the Tribunal declined to refer the question, and the Revenue then instituted the present petition under section 256(2).
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Tribunal was right in law in laying a general rule that as and when the payee asks for payment in cash, that by itself becomes an exceptional circumstance leading to exemption from the requirement of section 40A(3) of the Income-tax Act, 1961?
Arguments of the Parties
Revenue / Assessing Officer
- The Assessing Officer's recorded reasons for disallowance were that the payee (Alpha Toyo Ltd.) and the assessee were companies under the same management and both maintained bank accounts at Faridabad, suggesting that payments could have been made by bank draft or crossed cheque.
- The Assessing Officer also regarded the presence of 13 cash payments as indicating that the default was not an isolated occurrence and thus found the assessee's explanation unsatisfactory.
- The Revenue pursued the question whether the Tribunal erred in treating a payee's insistence on cash payment as, by itself, an exceptional circumstance under rule 6DD(j).
Assessee
- The assessee contended that each of the 13 payments was made in cash at the insistence of the payee, Alpha Toyo Ltd., which needed cash to make payments to sales tax, excise and customs departments and for labour.
- Alpha Toyo Ltd. confirmed receipt and accounted for the payments in its books; its identity and tax registration particulars were furnished and not disputed.
- The Commissioner of Income-tax (Appeals) and the Tribunal accepted that these facts attracted the exception under clause (j) of rule 6DD of the Income-tax Rules, 1962.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Attar Singh Gurmukh Singh v. ITO, [1991] 191 ITR 667 (Supreme Court) | The Commissioner (Appeals) placed reliance on observations of the Supreme Court in this case (as recorded in the record of the case). | The High Court notes that the Commissioner (Appeals) relied on observations in this Supreme Court decision in deleting the disallowance. The High Court's opinion records that reliance but does not detail further application beyond noting the reliance. |
| CIT v. Avtar Singh and Sons, [1992] 194 ITR 80 (Division Bench of this Court) | Division Bench observations as to business exigencies and circumstances constituting exceptional and unavoidable circumstances under rule 6DD(j); the case supports treating urgent business need for cash as an exception. | The High Court expressly holds that the matter stands concluded by this decision and cites a passage (quoted in the opinion) in support of the assessee's position; the Court applies Avtar Singh and Sons as controlling on the point and relies on it to refuse to refer the question of law. |
| The Janambhumi v. CIT, [1997] 225 ITR 517 (Gauhati High Court) | Illustrates acceptance of an assessee's explanation where identity and genuineness were undisputed and where business exigencies (need for cash) made cheque/draft method hazardous or cumbersome. | The High Court references this decision as dealing with an almost identical situation and as supporting the view that urgency and business convenience can constitute exceptional circumstances under rule 6DD(j). |
Court's Reasoning and Analysis
The Court's analysis proceeds in a sequence rooted in the statutory scheme, the relevant rules and Board circulars, and the factual record:
- Identity and genuineness: The Court first observed that there was no dispute about the identity of Alpha Toyo Ltd. It was a regular income-tax and sales-tax assessee; its sales-tax number and permanent account number were furnished; the payments were accounted for in the payee's books and thus the genuineness of the transactions and the parties was not in dispute.
- Statutory background: The Court set out the legislative purpose of section 40A(3), noting it was inserted by the Finance Act, 1968 to counter tax evasion through cash payments and to ensure investigatory transparency. The Court quoted Circular No. 6P (dated July 6, 1968) explaining that the provision targets payments in cash exceeding Rs. 2,500 not made by crossed cheque or draft.
- Rule-based exceptions: The Court explained that the proviso to section 40A(3) authorised the Board to notify exceptions in the Income-tax Rules; these exceptions appear in rule 6DD. Because not all exceptional circumstances can be foreseen, rule 6DD(j) provides a residuary exception for payments which the assessee establishes could not be made by crossed cheque or draft due to exceptional and unavoidable circumstances, provided evidence of genuineness and identity is furnished.
- Interpretation of "exceptional and unavoidable circumstances": The Court pointed out that the question of what constitutes such circumstances has been litigated and that courts consistently view these circumstances from the standpoint of a businessman, considering business exigencies. The Court referred to Board Circular No. 220 (May 31, 1977), which lists illustrative circumstances (including seller's refusal to accept crossed cheque or draft) and prescribes production of a letter with particulars to enable verification.
- Application to facts: The Court addressed whether the payee's insistence on cash (needed to make payments to sales tax, customs and excise departments and to labour) amounted to an exceptional circumstance. The Court drew support from the Division Bench decision in Avtar Singh and Sons and the Gauhati High Court's decision in The Janambhumi, both of which accepted similar explanations where identity and genuineness were not disputed and where cheque/draft payment would have been hazardous or cumbersome.
- Assessment of AO's reasons: The Court found the Assessing Officer's rejection rested primarily on the facts that the companies were sister concerns and shared a banking location, and that there were 13 payments; the Court held that these factors, in the circumstances of the present case, were not sufficient to reject the assessee's claim when the payee's need for cash was not disputed and receipts were verifiable.
- Conclusion on referability: Having concluded that the facts fell within the exceptions provided by section 40A(3) read with rule 6DD(j) and the Board circular, the Court found that no referable question of law arose out of the Tribunal's order.
Holding and Implications
Holding: The petition under section 256(2) is dismissed. The Court held that the case of the assessee was covered by the exceptions in section 40A(3) read with rule 6DD(j) and the Board circular, and therefore no referable question of law arose from the Tribunal's order.
Implications:
- The Tribunal's and the Commissioner of Income-tax (Appeals)'s orders, which had deleted the disallowance under section 40A(3), are sustained by this dismissal of the Revenue's petition.
- The Court expressly relied on and treated the Division Bench decision in CIT v. Avtar Singh and Sons as dispositive on the legal question in issue, noting that the matter was concluded by that decision.
- The decision is confined to the direct effect on the parties (i.e., the Revenue's petition is dismissed and the earlier deletions of disallowance stand). The opinion does not posit a new, broader principle beyond applying existing authority and does not refer a new question of law to the Court.
Disposition recorded in the opinion: "In the result, we find no merit in this petition, which is accordingly, dismissed."
N.K Sud, J.:— The Revenue has filed this petition under section 256(2) of the Income-tax Act, 1961 (for short “the Act”) seeking a direction to the Income-tax Appellate Tribunal, Delhi Bench “C”, New Delhi (for short “the Tribunal), to draw up a statement of the case and refer the following question of law for the opinion of this court:
“Whether, on the facts and circumstances of the case, the Tribunal was right in law in laying a general rule that as and when the payee asks for payment in cash, that by itself becomes an exceptional circumstance leading to exemption from the requirement of section 40A(3) of the Income-tax Act, 1961?”
2. The assessee-company carries on business of manufacture of automobile parts. It filed its return of income for the assessment year 1989–90 declaring a loss of Rs. 48.94 lakhs. The assessment under section 143(3) of the Act was completed on March 26, 1991, at a loss of Rs. 41,23,126. At the time of assessment an amount of Rs. 5,59,000 was disallowed under section 40A(3) of the Act on account of 13 cash payments to a sister concern, Alpha Toyo Ltd. The assessee had taken the plea that the amount had been paid in cash on each occasion at the insistence of the payee as it needed cash to make payments to sales tax, excise and customs departments as well as for labour payments. Alpha Toyo Ltd., duly confirmed that the payments had been made at their insistence. The identity of the said party, which is a regular income-tax assessee also stood established. The Income-tax Officer, however, rejected this explanation as not satisfactory on the ground that “Alpha Toyo Ltd., is a company under the same management. Both the companies are having their bank accounts in Faridabad and payments could have been made through bank drafts or crossed cheques. The total number of payments are 13 and this indicates that the default is not an isolated one.” On appeal by the assessee, the Commissioner of Income-tax (Appeals) deleted the disallowance by holding that in view of the facts stated above, the transactions clearly fell within the exceptions provided in clause (j) of rule 6DD of the Income-tax Rules, 1962 (for short “the Rules”). The Commissioner of Income-tax (Appeals) placed reliance on the observations of their Lordships of the Supreme Court in Attar Singh Gurmukh Singh v. ITO, [1991] 191 ITR 667. He also placed reliance on the decision of this court in CIT v. Avtar Singh and Sons, [1992] 194 ITR 80.
3. The Revenue filed an appeal before the Tribunal which upheld the findings of the Commissioner of Income-tax (Appeals). Thereafter the Revenue filed an application under section 256(1) of the Act before the Tribunal requiring it to refer the aforesaid question of law for our opinion. The prayer was declined vide order dated October 22, 1999, on the ground that the matter stood concluded by the judgment of this court and as such no referable question of law arose out of the order of the Tribunal. Hence, the present petition.
4. We have heard Mr. R.P Sawhney, learned counsel for the Revenue, and we agree with the Tribunal that the matter stands concluded by the decision of this court in Avtar Singh and Sons' case, [1992] 194 ITR 80. It is evident from the facts as already noticed above that there is no dispute about the identity of the payee, Alpha Toyo Ltd. The said concern is a regular income-tax and sales tax assessee and the information about its sales tax number as well as its permanent account number had duly been furnished. The payments stand duly accounted for in the books of that concern and are fully verifiable. Thus neither the genuineness of the transactions nor the genuineness of the parties is in dispute.
5. Section 40A(3) was inserted by the Finance Act, 1968, and was made applicable to payments made after March 31, 1969. The object of introduction of this provision was explained in para. 76 of Circular No. 6P, dated July 6, 1968, issued by the Central Board of Direct Taxes as under:
“76. Sub-section (3) of new section 40A makes a provision for the disallowance of expenditure incurred in business and professions for which payment is made in an amount exceeding Rs. 2,500, otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. This provision will apply in respect of payments made after a date to be notified by the Government-being a date not later than March 31, 1969. This provision is designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and the reasonableness of the payment.”
6. The proviso to section 40A(3) confers powers on the Board to notify in the Income-tax Rules any exceptions to the aforesaid provision keeping in view the available banking facilities, business exigencies and other relevant factors. These exceptions have been set forth in rule 6DD of the rules. Since all the exceptional circumstances cannot be visualised, a residuary exception has been provided in clause (j). This clause excludes from the purview of section 40A(3) such cases where the assessee establishes that the payment could not be made by a crossed cheque or a draft due to exceptional and unavoidable circumstances and also furnishes evidence as to the genuineness of the payment and the identity of the payee.
7. What constitutes an exceptional and unavoidable circumstance? This question became a subject-matter of controversy giving rise to protracted litigation. The courts have been consistent in their view that the exceptional circumstances are to be seen from the point of view of a businessman keeping in view the exigencies of business. Still further, the Central Board of Direct Taxes itself has issued a Circular No. 220, dated May 31, 1977 (reported in [1977] 108 ITR (St.) 8), illustrating the circumstances in which residuary exceptions of rule 6DD(j) are attracted. One of the circumstances mentioned by the Board is that the seller is refusing to accept the payment by way of crossed cheque or a draft. Para. 4 of this circular provides that the requirement of rule 6DD(j) would stand satisfied if a letter is produced by an assessee in respect of each transaction falling within the categories mentioned in the said circular giving full particulars of his address, sales tax registration number, if any, for the purpose of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. It is, therefore, evident that section 40A(3) has been enacted to check the flow of black money and is basically directed towards the transactions which cannot be cross checked and cross verified.
8. Thus, the only point for consideration is as to whether the insistence of a payee on payment in cash required by it for making payments to sales tax, customs and excise departments and also to its labour, constituted an exceptional circumstance or not. The following observations of a Division Bench of this court in the case of Avtar Singh and Sons, [1992] 194 ITR 80, relied upon by the Commissioner (Appeals) do support the claim of the assessee (page 84):
“The important point to be emphasised here is that the identity of the party to whom payments were made is beyond question nor is there any doubt with regard to the genuineness of the payments. There is also in addition, an affidavit from the chief accountant of the Amrit Banaspati Company regarding these payments having been received in cash and duly accounted for in the company's books of account and what is more that these payments were received in cash as money was urgently needed by the company after banking hours and the receipt of it by crossed cheque or draft would have delayed payment and caused unnecessary hurdles in the proper conduct of the company's business. These circumstances, seen in the context of the aspect of business expediency, which as noticed earlier, has been held to be one of the important relevant factors in dealing with such matters, cannot, but lead to the irresistible conclusion that the payments made by the assessee, in cash, to the Amrit Banaspati Company clearly fell within the exemption provided in claiuse (j) of rule 6DD.”
9. In The Janambhumi v. CIT, [1997] 225 ITR 517, the Gauhati High Court was dealing with almost an identical situation. In that case also, the payments had been made in cash by a firm to a sister concern. The identity of the payee and the genuineness of the payments were not doubted by the Income-tax Officer but he did not accept the exceptional circumstances pointed out by the assessee, i.e, that there was urgency and necessity for cash payments and thus there were special circumstances as envisaged under rule 6DD(j). The disallowance was upheld up to the Tribunal. However, the High Court had accepted the explanation of the assessee and observed that while considering the exceptional circumstances, the business exigencies, convenience and security should also be looked into. It was a case where neither the genuineness of the payments nor the identity of the parties was in dispute. Thus the court observed that if the provisions of rule 6DD(j)(1) were insisted on, the payments would have to be made by depositing the money in the bank by issuing cheques to the payee and the payee would have to draw the amount from the bank. This would have been hazardous and cumbersome procedure. In the present case also, the Assessing Officer has not doubted the requirement of cash by the payee for making payments to various Government Departments and also to the labour. Thus insistence on payments by account payee cheque or account payee draft would have involved similar hazardous and cumbersome procedure. In fact, the Gauhati High Court has correctly pointed out that the Board's circular dated May 31, 1977, itself indicates that the circumstances mentioned therein are not the only circumstance which can be said to be exceptional and unavoidable. There may be other exceptional and unavoidable circumstances which may not be put in writing. Thus while considering the exceptional circumstances, the facts and circumstances of each case have to be considered.
10. Thus, in our considered view, the case of the assessee is fully covered by the exceptions provided in section 40A(3) read with rule 6DD(j) and the Board circular. Therefore, no referable question of law arises out of the order of the Tribunal. Before parting with the case we would like to observe that the Assessing Officer had rejected the assessee's explanation merely on the ground that both the companies are sister concerns and have bank accounts at Faridabad. The assessee's explanation that the payments had been made at the insistence of the payee which required cash for making further payments to various Government Departments as also to its labour has not been disputed. Merely because the total number of payments was 13 or the two parties were sister concerns would not, in the circumstances of this case, be enough for rejecting the claim of the assessee. _
11. In the result, we find no merit in this petition, which is accordingly, dismissed.
Alert