Kanti Lal Purshottam & Co. v. Commissioner Of Income-Tax.

The Judgment of the Court was delivered by

Bhargava, J.:— This is a reference under s. 256(1) of the I.T Act, 1961. Following two questions of law have been referred for opinion of this court by the Income-tax Appellate Tribunal, Jaipur Bench:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the word ‘expenditure’ as used in subsection (3) of section 40A would include the cost of purchasing the goods meant for resale?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee was not entitled to exemption under clause (f) or clause (j) of r. 6DD in respect of the payment regarding the purchase of the goods from other traders?”

2. The assessee-firm is carrying on business of commission agency and kirana goods at Ramganj Mandi. The assessee-firm purchased “dhania” goods and out of the total purchases, those paid for in cash in excess of Rs. 2,500 between April 1, 1969, to June 2, 1969, amounted to Rs. 41,922. According to the ITO, such payments were caught within the mischief of sub s. (3) of s. 40A of the I.T Act, 1961 (hereinafter to be referred to as “the Act”), which was inserted from April 1, 1969, and the assessee had not been able to show any exceptional or unavoidable circumstances for the payment in cash or that the payment was impracticable or would have caused genuine difficulty to the payee. As such, the amount of Rs. 41,922 was treated as the assessee's income from undisclosed source and was added to his total income. On appeal, the A AC of Income-tax came to the conclusion that a sum of Rs. 18,371 could not be added to the income of the assessee in terms of s. 40A(3), but the remaining amount aggregating to Rs. 23,551 was in his opinion covered by s. 40A(3). On further appeal before the Tribunal, the assessee contended that the genuineness of the purchase was not in doubt. Therefore, the amount should not have been added to his total income. He further submitted that the word “expenditure” used in sub-s. (3) of s. 40A could never cover purchases, since purchases were not an expenditure in the same sense as payment for salary or wages or rent, etc., was. It was in fact an investment. He further submitted that his case was covered by the provisions of els. (f) and (j) of r. 6DD. But all the contentions of the assessee were turned down by the Tribunal and the Tribunal came to the conclusion that;

“Cl. (f) of r. 6DD of the Income-tax Rules, 1962, did not cover the assessee's case. The payments in question were not made ‘to the cultivator or producer of such articles or produce’ as were referred to in cl. (f) of r. 6DD

The case of the assessee was also not covered by cl. (j) of r. 6DD as, in the opinion of the Tribunal, the ignorance of law or non-clarity of the law to the assessee did not constitute exceptional or unavoidable circumstance in which he could not make the payments to the sellers by crossed cheques or by crossed bank drafts”;

3. And also that the amount was an expenditure* and, therefore, covered by the mischief of s. 40A(3). The assessee, therefore, submitted an application under s. 256(1) of the Act and the Tribunal allowed the said application and referred the above-mentioned two questions of law to this court for our opinion. Learned counsel for the assessee brought to our notice that there is divergence of opinion between the various High Courts as far as question No. 1 is concerned. The Punjab and Haryana High Court in CIT v. Avtar Singh and Sons, [1981] 129 ITR 671 held that the word “expenditure” used in s. 40A(3) did cover expenditure on purchase of stock-in-trade and the Supreme Court has already granted special leave to appeal against the said judgment of the Punjab and Haryana High Court and the matter is pending before the Supreme Court and therefore, he had frankly conceded that no useful purpose would be served by expressing any opinion on question No. 1.

4. Before we discuss question No. 2, it will be profitable to reproduce s. 40A(3). It is as follows:

“(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 a sum 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:

Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the, previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto; the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made:

Provided further that no disallowance under this 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 a 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 relee vant factors.”

5. Clauses (f) and (j) r. 6DD are as follows:

“6DD. Cases and circumstances in which payment in a sum exceeding two thousand five hundred rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.—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 hereunder, namely:—………

(f) where the payment is made for the purchase of—

(i) agricultural or forest produce; or

(ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or

(iii) fish or fish products; or

(iv) the products of horticulture or apiculture; to the cultivator, grower or producer of such articles, produce or products,……

(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 settler ment 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.”

6. These rules were published in the Gazette of India, Extraordinary, Part II, s. 3(ii), page 215, dated February 14, 1969.

7. Learned counsel for the assessee has vehemently argued that the purpose of introducing s. 40A(3) was to block the loopholes so that the tax liability may not be reduced artificially by deduction of expenditure and in this connection brought to our notice a portion of the speech of the Deputy Prime Minister and Minister of Finance delivered on February 29, 1968, while introducing the Finance Bill, 1968, which is found in [1969] 67 ITR (Statutes) p. 15:

“Tax liability is sometimes artificially reduced by diverting profits to relatives and associate concerns in the form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often with a view to frustrating investigation as to the identity of the recipients and the genuineness of the claim. To plug these loopholes, I propose to provide that payments made in businesses and professions to relatives or associate concerns will have to pass the test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after a date to be notified later will be allowed as a deduction only if these are made by crossed cheques or by crossed bank drafts.”

8. And, therefore, he submitted that the very purpose of introducing this new section was to have a check over the dishonest assessee who wants to make false deductions on account of expenditure incurred in cash and this intention is further fortified by reference to r. 6DD(j) wherein it has been provided that the ITO is to be satisfied that the payment could not be made by a crossed cheque or a crossed bank draft due to exceptional or unavoidable circumstances and he is to be satisfied about the genuineness of the payment and the identity of the payee. The rigour of this clause is, however, relaxed by the proviso to the said sub-section which provides that no disallowance under this sub-section shall be made where any such payment is made otherwise than by a crossed cheque or a 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. And it was only with this object that the CBDT has framed r. 6DD. Counsel for the assessee has further submitted that since the assessee was purchasing agricultural produce, he was exempted from the operation of s. 40A(3), in view of cl. (f) of r. 6DD. According to him, the words “to the cultivator, grower or purchaser of such articles, produce or products” apply and govern only sub-clause (iv) of cl. (f) and it does not govern els. (i), (ii) and (iii) and since the assessee was dealing in agricultural purchase like dhania, he was covered by cl. (f)(i) of r. 6DD, Learned counsel for the assessee brought to our notice that since some doubt was expressed or created regarding the interpretation of cl. (f) of r. 6DD, the CBDT published another notification as corrigendum—”Income-tax (Amendment) Rules, 1969, amending r. (f) as under —See ([1969] 72 ITR (St.) 20):

“(f) where the payment is made for the purchase of—

(i) agricultural or forest produce; or

(ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or

(iii) fish or fish products; or

(iv) the products of horticulture or apiculture,

to the cultivator, grower or producer of such articles, produce or products;”

9. It was published in the Gazette of India, Extraordinary, Part II sec. 3(ii), page 393, dated March 25, 1969, and, therefore, he has submitted that even the Board of Direct Taxes thought it necessary to issue a corrigendum so as to amend cl. “(f)” of r. 6DD so that the words “to the cultivator, grower or purchaser of such articles, produce or products” govern all the four clauses of cl. (f), and, therefore, it was obvious that the assessee's contention, that the words govern only sub-cl. (iv) of cl. (f) was perfectly justified and there was nothing wrong if on the basis of that interpretation, he thought that it was not necessary for him to make the payment through crossed cheque or crossed draft as he was dealing in agricultural produce, was fully justified.

10. Even cl. (j) was substituted, vide Notification No. S.O 3769 dated November 18, 1970, “with effect from April 1, 1970”, and the substituted clause (j) runs as under ([1971] 79 ITR (St.) 29):

“(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.”

11. This amendment was published in the Gazette of India, Extraordinary, Part II, s. 3(iii), page 1855, dated November 19, 1970. On the basis of this, learned counsel for the assessee has submitted that the amendment brought in the Act by introducing new s. 40A(3) and introducing new r. 6DD and thereafter issuing amendment to the Rules received several queries from various trade associations and members of the public about the operation of the new provisions and, therefore, the first circular was issued on March 25, 1969, and another circular was issued on November 19, 1970, by the Central Board of Taxes and more clarifications were made by the Central Board of Direct Taxes even after 1970. Number of clarifications liberalising the payments have been issued from time to time by the Central Board of Direct Taxes and, therefore, the assessee had a bona fide belief that the restriction provided by s. 40A(3) was not applicable to the purchase of stock-in-trad, as it not an exception in popular sense and cash payment could be made for agricultural produce. The assessee did not make payment by crossed cheque or crossed draft as envisaged by s. 40A(3). It may be at best ignorance of law or that the law was not clear but there was no mens rea and there was no fraud; that the conduct of the assessee was not contemptuous. Two interpretations were possible to cl. (f) of r. 6DD and a liberal interpretation more beneficial to the assessee should be taken if two views are possible and, in this connection, he has placed reliance on CIT v. Shahzada Nand & Sons, [1966] 60 ITR 392 (SC), Commissioner Of Income-Tax, West Bengal-I v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC), CIT v. Naga Hills Tea Co. Ltd., [1973] 89 ITR 236 (SC), CIT v. Simpson & Co., [1980] 122 ITR 283 (Mad) and CIT v. Mahindra & Mahindra Ltd., [1983] 144 ITR 225 (SC) and a Division Bench decision of this court reported in Mansinghka Brothers Private Limited v. Commissioner Of Income-Tax, Rajasthan, Jaipur., [1984] 147 ITR 361 (Raj). On the basis of these authorities, he has submitted that if the language of a taxing provision is ambiguous or capable of more meaning than one, then the court should adopt that interpretation which favours the assessee, more particularly so, where the provision relates to the imposition of a penalty. He further submits that the effect of disallowing this and charging of additional tax burden amount to penalising the assessee. By disallowing such amount, tax is being charged not on real income but on an imaginary income and this can be termed as penal in nature. He has placed reliance on Cement Marketing Co. of India v. Asst. Commr. of S.T, [1980] 124 ITR 15 (SC) and submitted that since the assessee had the bona fide belief and there is no mens rea or wilful fraud, he was entitled to deduction of these amounts from his total income and he should not be penalised.

12. Learned counsel for the petitioner-assessee has placed reliance on the Supreme Court judgment in Motilal Padampat Sugar Mills Co. v. State of UP, [1979] 118 ITR 326, wherein it was observed as follows (p. 339):

“Moreover, it must be remembered that there is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law* Over a hundred and thirty years ago, Maula J. pointed out in Martindale v. Falkner, [1846] 2 CB 706 : ‘There is no presumption in this country that every person knows the law : it would be contrary to common sense and reason if it were so.’ Scrutton L.J also once said : ‘It is impossible to know all the statutory law, and not very possible to know all the common law.’ But it was Lord Atkin who, as in so many other spheres, put the point: in its proper context when he said in Evans v. Bartlam, [1937] AC 473 : ‘…the fact is that there is not and never has been a presumption that every one knows the law. There is the rule that ignorance of the law does not excuse, a maxim of very different scope and application’.”

13. Section 40A(3) came into force from April 1, 1969, and the period during which the cash payments were made ranged between April 3 to June 2, and some margin should also be given for the time taken in publishing the Gazette and receipt of the Gazette by the public. Every assessee does not subscribe to the Gazette and, therefore, the matters published in the Gazette come to the knowledge of the public after some time only. The assessee is entitled to the benefit of cl. (j) and this should be taken as an exceptional or unavoidable circumstance. More so when there is no mens rea or any mala fide intention and the payments have been found to be genuine and the identity of the payee is also not disputed and there was no mischief of tax evasion on behalf of the assessee.

14. Learned counsel for the assessee further drew our attention to CIT v. Sawaran Singh Balbir Singh, [1982] 136 ITR 595 (P&H), wherein the Punjab and Haryana High Court has found on the facts of that case that since there was an agreement to pay by cash, it was due to exceptional circumstance that the assessee had to make payment in cash and the disallowance made by the ITO was not valid. He has also brought to our notice CIT v. Kohli Khan Bhandar, [1978] 111 ITR 419 (All), wherein the Allahabad High Court refused to call for a reference as it was satisfied that the Tribunal was justified in giving the benefit of r. 6DD(j) to the assesseie on the ground that this was the very first year of the business of the assessee, that the assessee was not known in the market and hence could not make payment by cheque and looking to the nature of the business, cash payment was unavoidable. He also referred to Hasanand Pinjomal v. CIT, [1978] 112 ITR 134 (Guj), wherein also the Gujarat High Court gave to the assessee the benefit of r. 6DD(j) on the facts of that case on the ground of practicability in making cash payment. On the other hand, learned counsel for the Revenue has placed reliance on a decision of this court in Registhan Pvt. Ltd. v. Commissioner Of Income-Tax, Jaipur., [1934] 146 ITR 620, wherein a Division Bench of this court dismissed an application for reference under s. 256(2) filed by the assessee on the ground that no question of law arose when the Tribunal had taken into consideration the material on record and found that there was no exceptional circumstance for making payments in cash. He has further submitted that the High Court should not look to the statement of objects and reasons for interpreting the provisions of any law and relied on Aswini Kumar v. Arabinda Bose, AIR 1952 SC 369. In rejoinder, Shri Ranka, learned counsel for the assessee, drew our attention to K.P Varghese v. ITO, [1981] 131 ITR 597 (SC), wherein the Supreme Court itself referred to the speech made by the mover of the bill explaining the reasons for its introduction for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object or purpose for which the legislation is enacted. We have given our thoughtful consideration to the whole matter and have also gone through the relevant records and the various citations at the Bar. Income-tax is a tax on the real income and the purpose of introducing s. 40A(3) was to block the loopholes of making cash payment and claim as deductions with a view to frustrate investigation as to the identity of the recipients and the genuineness of the claim. Proviso to s. 40A(3) shows that the Legislature intended not to make the provision of s. 40A(3) very strict and absolutely mandatory. The rigour of the whole restriction was loosened by the proviso and by making r. 6DD in pursuance thereof. Clause (j) of r. 6DD has given a discretionary power to the ITO that if he is satisfied that the payment could not be made by a crossed cheque or a crossed bank draft due to exceptional or unavoidable circumstances and is also satisfied about the genuineness of the payment and the identity of the payee, the assessee will not be covered by the mischief of s. 40A(3). It is also admitted that the assessee used to deal with agricultural produce and if he was under the impression that he is covered by clause (f)(i) of r. 6DD, even if the payment was not made to the cultivator, it was not necessary for him to make payments by crossed cheque or crossed draft as he had a bona fide belief that the interpretation was justified and there is no doubt that cl. (f) as introduced or inserted by the notification dated February 14, 1969, was capable of two interpretations and, therefore, it had become necessary for the Central Board of Direct Taxes to issue a corrigendum and amendment of cl. (f) by notification dated March 25, 1969. Moreover, thereafter also there were some queries by different organisations and associations and as a result thereof, the Central Board of Direct Taxes had to issue several circulars in this respect. All these show that the position of law and the interpretation were not very clear and there were some doubts with regard to its interpretation and the benefit of this doubt should be in favour of the assessee. Since, in the present case, the identity of the payee is not disputed, the transaction has been found to be genuine. Genuineness of the payment has been established. The default even if made is only technical and when there is discretion given to the ITO in cl. (j), in our opinion, in the facts and circumstances of the case, the assessee was entitled to exemption under cl. (f) and cl. (j) of r. 6DD in respect of the payments regarding purchase of goods from other traders in the course of his business.

15. In the result, the answer to question No. 2 is in the negative, in favour of the assessee and against the Revenue. The Tribunal was not right in holding that the assessee was not entitled to exemption under cl. (f) and cl. (j) of r. 6DD in respect of the payments regarding the purchase of the goods from other traders. In view of our decision with regard to the second question, it is not necessary for us to answer question No. 1. The reference is answered accordingly. The parties are left to bear their own costs.