JUDGMENT

1. In this reference relating to the assessment year 1974-75, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as “the Tribunal”), has referred the following questions for the opinion of this court:

“1. Whether the payments made for the purchase of goods is ‘expenditure’ within the meaning of section 40A(3)?

2. Whether, on the facts and in the circumstances of the case, and having regard to the provisions of rule 6DD(j) of the Income-tax Rules, 1962, the Tribunal was right in holding that the payments of Rs. 4,000 to M/s. Suresh Oil Co., Kota, Rs. 2,602 to M/s. Shivnath Motilal, Kota and Rs. 10,028 to M/s. Rajani Oil Co., Kota, were liable to be disallowed under section 40A(3) of the Income-tax Act, 1961?”

2. M/s. Badrilal Phoolchand (hereinafter referred to as “the assessee”), is a Hindu undivided family dealing in grains and also doing money lending business at village Rodawat in District Sawai Madhopur and it has a branch at Sawai Madhopur City where the assessee was dealing in grain and oil and was also doing commission agency. In the relevant previous year, the assessee paid a sum of Rs. 4,000 in cash to M/s. Suresh Oil Co., Kota, on May 30, 1973, Rs. 2,602.49 in cash to M/s. Shivnath Motilal, Kota, on September 29, 1973, and Rs. 10,028.30 in cash to M/s. Rajni Oil Industries, Kota, on July 2, 1973. Since the said amounts exceeded Rs. 2,500, the Income-tax Officer, Sawai Madhopur, disallowed the aforesaid expenditure of Rs. 16,630.79 under section 40A(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). In the assessment order (annexure “A”) dated January 20, 1975, the Income-tax Officer observed that the assessee had failed to file any satisfactory explanation for making the aforesaid payments exceeding Rs. 2,500 in cash. In appeal before the Appellate Assistant Commissioner of Income-tax, A Range, Jaipur, the assessee submitted that the Income-tax Officer had disallowed the expenditure without affording a proper opportunity to the assessee and the Appellate Assistant Commissioner directed the Income-tax Officer to call Sri Phool Chand, who was looking after the business of the assessee at Sawai Madhopur and examine the issue afresh. Thereafter the Income-tax Officer after examining Shri Phool Chand and the relevant accounts, submitted his report. After considering the report of the Income-tax Officer and the documents which were submitted by the assessee before the Income-tax Officer, the Appellate Assistant Commissioner by his order (annexure “B”) dated August 10, 1976, affirmed the order of the Income-tax Officer and disallowed the aforesaid expenditure under section 40A(3) of the Act. On further appeal, the Tribunal by order (annexure “C”) dated February 28, 1977, and by order (annexure “D”) dated January 10, 1978, has upheld the order of the Appellate Assistant Commissioner in this regard. Hence, this reference at the instance of the assessee. We have heard Shri V.K Singhal, learned counsel for the assessee, and Shri R.N Surolia, learned counsel for the Revenue.

3. Before we deal with the contentions that have been urged by Shri Singhal in support of the reference, we may refer to the provisions of section 40A(3) of the Act which provides as under:

“Section 40A(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 relevant factors.”

4. Section 40A was introduced in the Act by the Finance Act, 1968, with effect from 1st April, 1968 with the object of checking tax evasion. Subsection (3) of section 40A seeks to achieve this object by directing that an expenditure would not be allowed as a deduction in cases where it exceeds Rs. 2,500 unless it is paid by a crossed cheque drawn on a bank or by a crossed bank draft. The second proviso to section 40A(3) reduces the rigour of the main clause and permits a departure 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. In rule 6DD of the Income-tax Rules, 1962 (hereinafter referred to as “the Rules”), the circumstances in which payment of a sum exceeding Rs. 2,500 may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft are prescribed. Clause (j) of the said rule is relevant for our purpose and it reads as under:

“(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.” In Kanti Lal Purshottam & Co. v. Commissioner Of Income-Tax., [1985] 155 ITR 519, this court has considered the provisions of section 40A(3) of the Act as well as rule 6DD of the Rules and it has been observed as under (p. 528):

“Income-tax is a tax on the real income and the purpose of introducing section 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 section 40A(3) shows that the Legislature intended not to make the provision of section 40A(3) very strict and absolutely mandatory. The rigour of the whole restriction was loosened by the proviso and by making rule 6DD in pursuance thereof. Clause (j) of rule 6DD has given a discretionary power to the Income-tax Officer 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 section 40A(3).”

5. The first question that has been referred for the opinion of this court is with regard to the meaning of the word “expenditure” in section 40A(3) and as to whether the payments made for purchase of goods can be regarded as expenditure under section 40A(3) of the Act. The case of the assessee is that the payments in question were made by it for the purchase of goods and that the said payments, therefore, could not be regarded as expenditure for the purpose of section 40A(3) of the Act. The said question has been considered by various High Courts and it has been held that the term “expenditure” is of a wider import and includes payments made for purchase of goods during the course of business. In Sajowanlal Jaiswal v. Commissioner Of Income-Tax, Orissa., [1976] 103 ITR 706, the Orissa High Court has held that the payment made by the assessee for the purchase of sugar was expenditure under section 40A(3) of the Act. In the said case, it has been observed that the word “expenditure” is not defined in the statute and that all outgoings could broadly come under this head and that payment for purchase of goods would certainly be an expenditure. Similarly in U.P Hardware Store v. Commissioner Of Income-Tax, U.P, [1976] 104 ITR 664, the Allahabad High Court has held that payments made for purchase would be covered by the word “expenditure”. This court has taken the same view in Fakri Automobiles v. Commissioner Of Income-Tax, [1986] 160 ITR 504. In this case also, it has been held that the payment made for goods purchased would constitute expenditure under section 40A(3) of the Act. In view of the aforesaid decisions, we are of the opinion that payments made for the purchase of goods is “expenditure” within the meaning of section 40A(3) of the Act and question No. 1 should be answered in the affirmative.

6. Question No. 2 relates to the interpretation of rule 6DD(j) of the rules. We have already referred to the second proviso to section 40A(3) of the Act and rule 6DD(j) of the rules. The provisions of clause (j) of rule 6DD of the Rules have been considered by the Gujarat High Court in Hasanand Pinjomal v. CIT, [1978] 112 ITR 134 and in this case the learned judges have observed as under (p. 146):

“Accordingly, the word ‘practicable’ in rule 6DD(j)(2) must be held to signify that which is feasible, that is to say, capable of being put into practice, done, or accomplished with the available means and resources. Besides, in determining practicability for the purpose of rule 6DD(j)(2), regard will have to be had to the facts and circumstances of each case, for, in the ultimate analysis, it is the actuality which must be the decisive factor. It is in this light that the taxing authority must approach a case which falls to be decided under rule 6DD(j)(2)… Practicability for the purposes of rule 6DD(j)(2) must be judged from the point of view of the businessman and not of the Revenue”.

7. The learned judges have not accepted the contention urged on behalf of the Revenue that the word “practicable” is governed by the expression “having regard to the nature of the transaction and the necessity for expeditious settlement thereof” and that it is only from these two points of view that the practicability or otherwise of payment by a crossed cheque or crossed bank draft has to be adjudged. According to the learned judges, the correct interpretation would be to give to the word “practicable” a wide and liberal meaning and leave it to the Income-tax Officer to judge in each case whether or not from the standpoint of the business or profession, it was practicable to make payment by crossed cheque or a crossed bank draft.

8. In this context, it may also be stated that the Central Board of Direct Taxes has issued a circular dated May 31, 1977, wherein, after referring to the provisions of clause (j) of rule 6DD of the Rules, it has been mentioned that various representations had been received by the Board regarding difficulties that are being experienced by taxpayers due to lack of uniformity in the interpretation of the provisions of rule 6DD(j) of the Rules by the Income-tax Officers and after considering the said representations, the Board has decided to lay down certain guidelines to ensure uniformity of approach among Income-tax Officers in this behalf. After stating that all the circumstances in which the conditions laid down in rule 6DD(j) would be applicable cannot be spelt out, the Board has enumerated some of those circumstances which would meet the requirements of the said rule and the same are as follows:

“(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.”

9. In the said circular it has also been stated that—

“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 transactions. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of rule 6DD(j).

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).”

10. It is no doubt true that the said circular was not available at the time when the Income-tax Officer passed the assessment order and the Appellate Assistant Commissioner considered the appeal of the assessee. The guidelines contained in the said circular can, in our opinion, be taken into account for the purpose of considering as to whether the payments in question can be regarded as falling within the ambit of rule 6DD(j) of the Rules.

11. As noticed earlier, the following payments made by the assessee have been disallowed:

(i) Rs. 4,000 paid to M/s. Suresh Oil Co., Kota, on May 30,. 1973.

(ii) Rs. 2,602.49 paid to M/s. Shivnath Motilal, Kota, on September 29, 1973.

(iii) Rs. 10,028.30 paid to M/s. Rajani Oil Industries, Kota, on July 2, 1973.

12. As regards the payment of Rs. 4,000 made to M/s. Suresh Oil Co., Kota, on May 30, 1973, the case of the assessee is that he had no business dealings with M/s. Suresh Oil Co., Kota, and the assessee wanted to purchase some oil drums from Kota through this party and that when the assessee went to Kota on May 30, 1973, the assessee deposited a sum of Rs. 4,000 with M/s. Suresh Oil Co. Kota, as “anamat” for future transactions, if any, and that on that date the assessee did not purchase anything and did not have any business transaction. Subsequently, on June 5, 1973, oil drums worth Rs. 11,483.52 were purchased by the assessee from the said party and the said amount of Rs. 4,000 which had been deposited on May 30, 1973, was adjusted against the aforesaid purchase. The assessee has filed a copy of the account of M/s. Suresh Oil Industries, Kota, as appearing in the account books of the assessee which shows the payment by Phool Chand of a sum of Rs. 4,000 in cash on May 30, 1973, by way of “anamat” and the said amount was adjusted against Rs. 11,483.52, the price of the oil drums which were purchased on June 5, 1973. The assessee has also filed a confirmatory letter addressed by Shri Ranglal as partner of M/s. Suresh Oil Industries to the Income-tax Officer wherein it has been stated that a sum of Rs. 4,000 was deposited by the assessee as “anamat” on May 30, 1973, and that the said amount was lying in deposit as “anamat” and that subsequently when there was a transaction for purchase of goods by the assessee, the said amount was adjusted against that account. In the said letter, M/s. Suresh Oil Industries have also stated that they are assessed to income-tax under Income-tax Ward, Special Circle I.

13. Shri Singhal, learned counsel for the assessee, has urged that the aforesaid payment of Rs. 4,000 has been wrongly disallowed and that in the facts and circumstances, the said payment should have been allowed under rule 6DD(j) of the Rules. In support of his aforesaid submission, Shri Singhal has pointed out that the assessee had produced material before the Income-tax Officer with regard to the genuineness of the payment and the identity of the payee and further that the assessee had pointed out that since this was the first dealing of the assessee with M/s. Suresh Oil Industries, Kota, it became necessary to deposit the said sum of Rs. 4,000 as “Amanta” towards future dealings with a view to build up business credibility. In our opinion, there is considerable force in the aforesaid submissions of Shri Singhal and the aforesaid payment of Rs. 4,000 could not have been disallowed under section 40A(3) of the Act. In our opinion, it falls within the ambit of payments referred to in clause (j) of rule 6DD of the Rules because the genuineness of the payment and the identity of the payee are fully established from the copy of the account of M/s. Suresh Oil Industries in the account books of the assessee and the confirmatory letter addressed by M/s. Suresh Oil Industries to the Income-tax Officer. Since this was the first dealing of the assessee with M/s. Suresh Oil Industries, the said firm could not have accepted the cheque of the assessee and in these circumstances the payment by cash was the only mode in which the assessee could create confidence in the seller with regard to its business credit. In these circumstances, we are of the opinion that the aforesaid payment was allowable under clause (j) of rule 6DD of the Rules.

14. As regards the payment of Rs. 2602.49 to M/s. Shivnath Motilal, Kota, we find that it relates to a transaction between the assessee and M/s. Rajasthan Cattle Feed Products, Kota. The case of the assessee is that on September 29, 1973, the assessee had gone to Kota and purchased goods worth Rs. 26,102.49 from M/s. Rajasthan Cattle Feed Products, Kota, and handed over a draft of. Rs. 17,500. On October 2, 1973, there was a settlement of accounts between the assessee and the seller and Rs. 8,602.49 remained to be paid by the assessee to the said firm. The said firm first wanted that the account should be settled then and there and the entire amount should be paid but subsequently it agreed that Rs. 6,000 may be sent later from Sawai Madhopur, but Rs. 2602.49 should be paid immediately then and there in full and final settlement of the account. The assessee has also stated that since this was their first transaction with the said firm, they had no alternative but to pay Rs. 2,602.49 in cash in order to save their credit in the market and, therefore, the said payment was made in cash and the balance amount of Rs. 6,000 was sent by draft from Sawai Madhopur through registered post on October 8, 1973. In support of his aforesaid case, the assessee had filed a confirmatory letter dated April 30, 1976, addressed by Shri Nathulal, son of Motilal, as partner of M/s.. Rajasthan Cattle Feed Products, Kota, to the Income-tax Officer, wherein it has been stated that the assessee had purchased from the said firm 34 drums of Alsi oil of the value of Rs. 26,102.49 and that towards payment of the said amount, a draft for Rs. 17,500 had been deposited by the assessee and that on October 2, 1973, Phool Chand came to Kota and he was asked to make payment immediately and that if the payment was not made, the transaction would be cancelled and that thereupon Phoolchand deposited Rs. 2,602.49 on October 2, 1973, and for the balance amount, he sent a draft from Sawai Madhopur. In the said letter it has also been stated that all these transactions are entered in their account books and that they are assessed to income-tax in income-tax Ward, Special Circle I. From the aforesaid confirmatory letter of M/s. Rajasthan Cattle Feed Products, the genuineness of the payment of Rs. 2,602.49 and the identity of the payee were fully established. The said letter also shows the circumstances in which a sum of Rs. 2,602.49 was paid in cash on October 2, 1973, as this was the first dealing of the assessee with M/s. Rajasthan Cattle Feed Products, Kota, and in the event of non-payment of the said amount, the transaction would have been cancelled. Furthermore, October 2, 1973, was a bank holiday on account of the birth anniversary of Mahatma Gandhi. Taking into consideration the aforesaid facts and circumstances, we are of the opinion that the aforesaid payment of Rs. 2,602.49 which was made in cash by the assessee on October 2, 1973, was covered by rule 6DD(j) of the Rules and the said payment should not have been disallowed under section 40A(3) of the Act.

15. The third payment relates to the sum of Rs. 10,028.30 paid to M/s. Rajani Oil Industries, Kota, on July 2, 1973. In relation to this payment, the case of the assessee is that M/s. Rajani Oil Industries, Kota, had purchased 10 drums of oil for Rs. 10,028.30 for the assessee but the assessee did not actually purchase the oil from the said firm and that the said 10 drums of oil were sold by M/s. Rajani Oil Industries, Kota, for Rs. 10,603.30 and the aforesaid amount of Rs. 10,603.30 was paid by the said firm to the assessee through bank draft which was credited in the account of the M/s. Rajani Oil Industries with the assessee. The case of the assessee is that there was no transaction of sale or purchase by the assessee and that the said transaction was in the nature of speculative dealing only out of which the assessee has earned Rs. 575 as profit, which amount has been shown in the profit and loss account. In support of the aforesaid case, the assessee has placed on record a copy of the account of M/s. Rajani Oil Industries, Kota, as maintained in the account books of the assessee as well as a confirmatory letter dated May 5, 1976, addressed by Shri Narayan Das as partner of M/s. Rajani Oil Industries to the Income-tax Officer wherein it has been stated that the assessee had entered into a transaction for 10 drums of oil and that there was settlement in the said transaction and no delivery was given and a sum of Rs. 575 by way of difference was paid. In the said letter it has also been stated that the assessee had deposited a sum of Rs. 10,028.30 with M/s. Rajani Oil Industries by way of advance against the said transaction and that the said amount was refunded along with a profit of Rs. 575 by bank draft No. 6,36,575 of Rajasthan Bank and that these receipts and payments are entered in the account books of the firm. In the letter, it is also stated that the firm is assessed to income-tax by the Income-tax Officer, Ward A. In view of the entries in the account books of the assessee as well as M/s. Rajani Oil Industries and the confirmatory letter of M/s. Rajani Oil Industries, it must be held that the genuineness of the payment of Rs. 10,028.30 by the assessee to M/s. Rajani Oil Industries on July 2, 1973, and the identity of the payee, namely, M/s. Rajani Oil Industries, Kota, is established. The question is whether the assessee has succeeded in establishing that the said payment was made in the circumstances referred to in clause (j) of rule 6DD of the Rules? The assessee has offered no explanation for making the payment of Rs. 10,028.30 in cash, except that the said payment was made in connection with a speculative dealing only and not for the purchase of goods. The Tribunal has held that the said payment was made for purchase of oil and that the oil was actually purchased and it was subsequently sold by the assessee. We are in agreement with the said finding of the Tribunal and we are unable to hold that there was no transaction for purchase of oil by the assessee from M/s. Rajani Oil Industries. In the circumstances, we are of the opinion that the aforesaid payment of Rs. 10,028.30 has been rightly disallowed under section 40A(3) of the Act. For the reasons aforesaid, it must be held that the Tribunal was right in holding that the payment of Rs. 10,028.30 made by the assessee to M/s. Rajani Oil Industries Kota, was liable to be disallowed under section 40A(3) of the Income-tax Act, 1961, but the Tribunal was not right in holding that the payment of Rs. 4,000 to M/s. Suresh Oil Industries, Kota, and the payment of Rs. 2,602.49 to M/s. Shivnath Motilal, Kota, were liable to be disallowed under section 40A(3) of the Act.

16. The questions referred are, therefore, answered as under:

Question No. 1. —The payments made for the purchase of goods is expenditure” within the meaning of section 40A(3) of the Act.

Question 2. —On the facts and in the circumstances of the case and having regard to the provisions of rule 6DD(j) of the Income-tax Rules, 1961, the Tribunal was right in holding that the payment of Rs. 10,028.30 to M/s. Rajani Oil Industries, Kota, was liable to be disallowed under section 40A(3) of the Income-tax Act, 1961, but the Tribunal was not right in holding that the payment of Rs. 4,000 to M/s. Suresh Oil Industries, Kota, and Rs. 2,602.49 to M/s. Shivnath Motilal, Kota, were liable to be disallowed under section 40(A)(3) of the Income-tax Act, 1961.

17. No order as to costs.