Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 12 of 2000

Attorney(S)

For the Appellant: P.K.R. Menon & SC, George K. George, Senior SC.
For the Respondent: P. Balachandran, Preetha, S. Nair, Advocates.

Judges

G. Sivarajan
J.M James, JJ.

Acts

provisions of section 40A(3) read with rule 6DD(j) of the Rules
provisions of rule 6DD(j) of the Income-tax Rules
section 40A(3) read with rule 6DD(j) of the Rules
provisions of section 40A(3) and rule 6DD
section 40A(3) and rule 6DD(j)
sub-section (3), rule 6DD
Finance Act of 1968
FINANCE ACT 1995
2) Act, 1996,

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Smart Summary

Court Opinion Summary — G. Sivarajan, J.

Factual and Procedural Background

The Income-tax Appellate Tribunal (ITAT), Cochin Bench, by direction of this Court, referred the following question of law for decision:

“Whether the provisions of rule 6DD(j) of the Income-tax Rules apply to the facts of the case, vis-avis section 40A(3) of the Income-tax Act, 1961?”

The assessee is an exporter of cashew kernels. For the assessment year 1990-91 the assessee purchased raw cashewnuts from various places, including Orissa, and transported them to the assessee's factories in Kanyakumari for processing. The assessee claimed transport and coolie charges of Rs. 10,98,698. The Assessing Officer disallowed Rs. 10,28,350 under section 40A(3) because those payments were made otherwise than by crossed cheques or bank drafts. The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the disallowance, observing that the assessee had not proved that the proviso to section 40A(3) read with rule 6DD(j) applied. On further appeal the ITAT allowed the claim, accepting the assessee's explanation that truck drivers had insisted on cash payments and that it was impracticable to obtain crossed cheques or drafts or confirmatory letters later. The Revenue (Government of India, Taxes) sought a question of law to be referred by this Court to decide the applicability of rule 6DD(j) in relation to section 40A(3).

Legal Issues Presented

Whether the provisions of rule 6DD(j) of the Income-tax Rules apply to the facts of this case in relation to section 40A(3) of the Income-tax Act, 1961 — i.e., whether payments made in cash, otherwise than by crossed cheques or bank drafts, fall within the exclusionary proviso enacted through rule 6DD(j).

Arguments of the Parties

Applicant / Revenue (Government of India) — submissions by senior counsel

Admitted that payments of Rs. 10,28,350 were made otherwise than by crossed cheques or bank drafts, thereby attracting section 40A(3).
Contended that the assessee did not substantiate by evidence that the proviso to section 40A(3) read with rule 6DD(j) applied; therefore the disallowance by the Assessing Officer and confirmation by the CIT(A) were correct.
Argued that the ITAT committed a serious error by holding the circumstances claimed by the assessee were definitely exceptional or unavoidable so as to bring the case within clause (i) of rule 6DD(j), because the assessee had not established applicability of the exclusionary clause.

Respondent / Assessee — submissions by counsel

Pointed out that the Assessing Officer did not doubt (a) genuineness of transport, (b) identity of the transporter, or (c) payment of charges.
Explained it was impracticable at the time of purchase to obtain bank drafts or issue crossed cheques to the transporters or drivers; the transporters/drivers insisted on cash payments and commercial expediency left the assessee no option but to pay in cash.
Stated that obtaining confirmation letters from drivers later was impracticable because they could not be traced; the Tribunal as final fact-finding authority accepted the assessee's explanation and applied clause (i) of rule 6DD(j).
Relied on the Tribunal's factual finding and on a Tribunal decision reported at 44 TTJ 261 (Nuchem Plastic Ltd.) in support of the ITAT's order.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Nuchem Plastic Ltd., 44 TTJ 261 (Tribunal, Delhi)	Support for the proposition that in certain factual circumstances cash payments may not be disallowed under section 40A(3) if rule 6DD(j) applies.	The ITAT relied on this decision in support of allowing the claim; the High Court noted the Tribunal's reliance but still remitted the matter for further proof rather than endorsing the Tribunal's presumption.
Circular No. 220, dated May 31, 1977 ([1977] 108 ITR (St.) 8)	Lists circumstances in which rule 6DD(j) would be attracted (e.g., seller refusing cheques, purchaser or seller lacking bank account, urgent transactions on bank holidays, etc.) and prescribes evidentiary requirements (confirmatory letters with particulars).	The Court relied on the circular as administrative guidance for circumstances contemplated under rule 6DD(j) and noted that a confirmatory letter from the transporter would generally satisfy the rule's requirements.
CIT v. Satish Chandra, [1983] 143 ITR 330 (reported decisions of Allahabad, Delhi, Punjab & Haryana HCs referenced)	Held that existence of exceptional or unavoidable circumstances under rule 6DD(j) is a question of fact.	The Court cited these authorities to emphasize that factual proof is required and that such questions are to be decided on the evidence; this informed the decision to remit for further evidence.
Commissioner of Income-Tax, Delhi v. Union Agencies, [1987] 166 ITR 529	Also cited for the proposition that exceptional or unavoidable circumstances are factual issues for determination.	Used together with other High Court decisions to underline the factual nature of the enquiry under rule 6DD(j) and to support remand for further factual proof.
CIT v. Sawarn Singh Balbir Singh, [1982] 136 ITR 595	Similarly cited for the proposition that existence of exceptional or unavoidable circumstances is a factual question.	Reinforced the Court's approach that the tribunal's presumption required supporting material and that the matter should be reconsidered on appropriate evidence.
Hasanand Pinjomal v. CIT, [1978] 112 ITR 134 (Gujarat High Court)	Consideration of scope and content of second proviso to section 40A(3) and rule 6DD(j); interpretation in light of legislative purpose (curbing evasion and black money) and practical considerations.	The Court relied on the Gujarat High Court's elaboration of legislative intent and interpretation of rule 6DD(j) to frame the standard for evidence and to justify giving the assessee another opportunity to produce confirmatory evidence.
Attar Singh Gurumukh Singh v. ITO, [1991] 191 ITR 667 (Supreme Court)	Considered constitutional validity of section 40A(3) and rule 6DD; held section 40A(3) must be read with rule 6DD, is not absolute, and permits assessee to furnish circumstances showing payment by cheque/draft was not practicable; emphasised purpose of preventing use of unaccounted money.	The Court relied on these Supreme Court observations to stress that the statutory regime permits exemptions under rule 6DD(j) but that the assessee must satisfy the Assessing Officer; this supported remitting the matter for further evidence rather than upholding the ITAT's presumption.
Mudiam Oil Company v. ITO, [1973] 92 ITR 519 (AP)	Referenced as authority concerning the regulatory intent behind section 40A(3) and rule 6DD (prevent misuse of unaccounted money).	Used to underscore the legislative mischief the provisions sought to remedy and to justify a cautious evidentiary approach when cash payments are claimed to be genuine.

Court's Reasoning and Analysis

The Court proceeded through the following analytical steps, grounded in the statutory text, administrative guidance and precedents cited in the opinion:

Statutory framework: The Court examined section 40A(3) as it stood for the assessment year 1990-91 (payments exceeding Rs. 10,000 made otherwise than by crossed cheque/draft are not allowable). It noted the existence of the second proviso to sub‑section (3), and that rule 6DD was framed to specify circumstances where such payments may be made otherwise than by crossed cheque/draft without disallowance.
Content of rule 6DD(j): The Court set out the four distinct factual circumstances in rule 6DD(j) (exceptional circumstances; unavoidable circumstances; not practicable having regard to the nature/expeditious settlement; causing genuine difficulty to the payee), and reiterated that the assessee must satisfy the Assessing Officer by furnishing evidence of genuineness of payment and identity of payee.
Evidentiary posture below: The AO had recorded that the assessee made 16 cash payments above Rs. 10,000 totalling Rs. 10,63,350 and had not established that payments could not be by cheque. The CIT(A) accepted identity and genuineness of transactions later but held that the assessee had not proved it was forced to make cash payments or obtained confirmatory evidence from the transporter that they refused cheques/drafts.
Tribunal's approach: The ITAT accepted the assessee's explanation that drivers insisted on cash and that confirming letters could not be procured later; it concluded such insistence would amount to exceptional or unavoidable circumstances under rule 6DD(j) and relied in part on a Tribunal decision (Nuchem Plastic Ltd.).
Precedential and purposive considerations: The Court reviewed Circular No.220 and authorities (Gujarat High Court in Hasanand Pinjomal and the Supreme Court in Attar Singh) that emphasise (a) the legislative mischief—curbing tax evasion/black money—and (b) that exceptional/unavoidable circumstances are questions of fact requiring evidence. The Supreme Court's decision was noted for the proposition that section 40A(3) must be read with rule 6DD and that genuine transactions may be saved by appropriate evidence.
Finding on evidence: The Court concluded that the ITAT's acceptance of the drivers' alleged insistence on cash amounted to a presumption without supporting material (no confirmatory letters from the transporter that they refused cheques/drafts). Given the statutory purpose and the need for factual proof identified in precedent and the circular, the Court was not prepared to endorse the Tribunal's presumption.
Remedy adopted: In light of the above, the Court set aside the Tribunal's order and remitted the matter to the Tribunal for fresh consideration after affording the parties an opportunity to produce confirmatory letters from the transporting agency to show they were unwilling to receive payments by crossed cheque/draft and insisted on cash. The Court directed the Tribunal to pass fresh orders in accordance with law and the principles laid down by the Gujarat High Court and the Supreme Court.

Holding and Implications

Holding:

The order of the Income-tax Appellate Tribunal (which allowed the claim and deleted the disallowance of Rs. 10,28,350) is set aside, and the matter is remitted to the Tribunal for fresh consideration after affording the parties an opportunity to produce confirmatory evidence from the transporting agency; the Court declines to answer the referred question.

Implications:

The direct effect is that the Tribunal's allowance is vacated and the matter returns to the ITAT for reconsideration on evidence: the assessee is to be given an opportunity to produce confirmatory letters from the transporter stating that payment by crossed cheque/draft was refused and that they insisted on cash.
The Court required the Tribunal to apply the principles articulated by the Gujarat High Court (Hasanand Pinjomal) and the Supreme Court (Attar Singh Gurumukh Singh) in reassessing whether rule 6DD(j) displaces the application of section 40A(3) on the facts.
The opinion does not establish a new legal principle or precedent beyond applying and reiterating existing authorities; it directs further fact-finding consistent with established case law and the statutory and administrative framework.
A certified copy of this judgment is to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as directed by the Court.

This summary is based exclusively on the information contained in the provided opinion and does not add or infer facts beyond that text.

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Commissioner Of Income-Tax v. J. Rajmohan Pillai

G. Sivarajan, J.:— The Income-tax Appellate Tribunal, Cochin Bench, at the instance of the Revenue has referred the following question of law as per direction issued by this court in the judgment dated October 5, 1999, in O.P No. 22075 of 1999 for decision by this court:

“Whether, the Tribunal was justified in holding that the provisions of rule 6DD(j) of the Income-tax Rules apply to the facts of the case, vis-avis section 40A(3) of the Income-tax Act, 1961?”

2. The brief facts are as follows: The assessee is an exporter of cashew kernels. The assessee, during the previous year relevant to the assessment year 1990-91, had purchased raw cashewnuts from various places including the State of Orissa and the same was transported to the assessee's factories in Kanyakumari for processing. In the assessment for the year 1990-91, the assessee claimed deduction of a total sum of Rs. 10,98,698 as transport and coolie charges for transporting raw cashewnuts. The Assessing Officer held that out of the said expenses payment of Rs. 10,28,350 had to be subjected to the provisions of section 40A(3) by the Act as the payments were made otherwise than by way of crossed cheques or bank drafts. Since the assessee had effected payment of the said amount in cash in violation of the provisions of section 40A(3) the said amount was disallowed. In appeal filed by the assessee the Commissioner of Income-tax (Appeals) upheld the said disallowance stating that the assessee has not proved that the said payment will come within the exclusionary provisions of rule 6DD(j) of the Income-tax Rules. In further appeal by the assessee the Income-tax Appellate Tribunal allowed the claim. Hence, the reference. We have heard Sri P.K.R Menon, learned senior counsel (Government of India) taxes appearing for the applicant, and Sri P. Balachandran, learned counsel appearing for the respondent. Senior counsel submitted that in regard to the payment of Rs. 10,28,350 towards transportation and coolie charges, admittedly, the payments were made otherwise than by way of crossed cheques or bank drafts and therefore the provisions of section 40A(3) were applicable. Senior counsel further submitted that since the assessee was not able to substantiate by evidence that the proviso to section 40A(3) read with rule 6DD(j) of the Rules applied to exclude the applicability of the main part of section 40A(3) the said amount was rightly disallowed by the Assessing Officer and confirmed by the first appellate authority. Senior counsel submit-ted that the Tribunal had committed a serious error in allowing the claim by holding that the circumstances stated by the assessee would definitely be exceptional or unavoidable circumstances to make the payment eligible for exclusion under clause (i) of rule 6DD(j). Senior counsel submitted that the assessee had not established that the present case would fall under the exclusionary clause contained in rule 6DD(j) of the Rules. On the other hand, the contention of counsel for the assessee is that the Assessing Officer has not doubted the genuineness of the transport of raw nuts from Orissa to Kanya-kumari District as also the identity of the transporter and the payment of the charges. He further submitted that the only circumstance pointed out for rejecting the claim is that the assessee had not produced evidence obtained from drivers of the vehicles in which the raw cashewnuts were transported during the relevant period to the effect that they insisted on payment of the transport and coolie charges in cash. Counsel further submitted that it was impracticable for obtaining bank drafts or for issuing crossed cheques to the transporting company or to the drivers of the vehicle at the time of purchase and that the transporting agency/drivers had insisted on payment of the transporting charges and coolie charges in cash and the assessee had no option but to pay the amount in cash having regard to the commercial expediency. He further submitted that the assessee could not get confirmation letters from the truck drivers to whom the payments were made to the effect that they had insisted on payment in cash only since they could not be contacted at a later stage. Counsel further submitted that the Tribunal, the final-fact finding authority, considering the totality of circumstances had accepted the explanation of the assessee and had held that the assessee had satisfied the exclusionary provisions of clause (i) of rule 6DD(j). Counsel on that basis submitted that no question of law does arise from the order of the Tribunal requiring adjudication by this court.

3. We have considered the rival submissions and had also perused the orders of the Assessing Officer and the two appellate authorities. The Assessing Officer had noted that the assessee had made 16 payments in cash above Rs. 10,000 for a total amount of Rs. 10,63,350 mostly for transporting charges and gunny bag purchase. The assessee had explained before the officer that the lorry drivers and second hand gunny bag dealers will not accept cheques. The Assessing Officer referred to two decisions of the Andhra Pradesh High Court regarding the scope of rule 6DD(j) of the Rules which held that a mere assertion that the recipient was unwilling to accept payment by cheque is not sufficient, but the assessee had to furnish evidence to establish this point and that after establishing the existence of a genuine difficulty the assessee must then furnish evidence of the identity of the payee and genuineness of the transaction. The assessing authority then observed that in the instant case the assessee had not established any of the above points. The Commissioner of Income-tax (Appeals) noted that on an earlier occasion he had remanded the matter to the Assessing Officer to verify the genuineness of the bills and cash receipts produced by the assessee and also to allow the appellant an opportunity to produce necessary evidence from the company regarding their insistence on cash payment. It was also noted that the assessee had later produced the bills and the receipts issued by the Kerala Road Transport Co. but did not furnish any evidence from the company regarding their insistence on cash payment. The Commissioner of Income-tax (Appeals) then noted that although the identity of the payee and genuineness of the transactions have been established, the assessee has not proved that the assessee had been forced to make the payment in cash. It was also observed that there is no use in arguing that the lorry drivers insisted on payment in cash and the ultimate beneficiary of the payments were not the lorry drivers but the transporting company, i.e, the K.T.C It was further observed that the K.T.C is a reputed concern with offices and depots all over India and its headquarters in Kerala itself and that there is absolutely no reason why they would have refused to accept the crossed cheques or crossed D.D from the appellant who himself was a very leading and reputed dealer in his line of business. With these observations the first appellate authority held that the assessee had not discharged his burden of proof that his case will fall under the exclusionary provisions of rule 6DDQ. The Tribunal had considered the contentions of the assessee and the Department in paragraphs 3 and 4 of the appellate order and then observed as follows:

“We have given due consideration to the submissions on both sides and gone through the facts of the case. The assessee was making payment to the truck drivers who were transporting raw cashewnuts from Orissa to Kanyakumari District in Tamil Nadu. The assessee's claim is that the drivers would not accept crossed cheques or demand drafts and that they insisted on the payment in cash only. It was submitted by the learned representative of the assessee that by the time the assessment was made, it was not possible to contact the truck drivers and get letters of confirmation from them to the effect that they had insisted on the payment in cash only. If the assessee had to make the payments in cash to the drivers even though ultimately the money reached the Kerala Road Transport Co., it would not be correct to say that the assessee's case does not fall within the exceptional clause in rule 6DD(j). Rule 6DD(j) provides that no disallowance shall be made in a case where the assessee satisfies the Assessing Officer that the payment could not be made by crossed cheques or bank drafts due to exceptional or unavoidable circumstances. If the truck drivers who were transporting raw nuts from Orissa to the assessee's factories in Kanyakumari District insisted on the payment in cash, that would definitely be exceptional or unavoidable circumstance to make the payment eligible for exclusion under clause (i) of rule 6DD(j). The genuineness of the payment has not been disputed by the revenue authorities. The fact that the assessee had got the raw nuts transported in the trucks belonging to the Kerala Road Transport Co. was also not disputed. The learned representative of the assessee has explained the reason why the assessee could not get evidence or confirmation letters from the truck driver to whom the payment was made. In exceptional and unavoidable circumstances, if the assessee had to make the payment in cash, we are of the view that such payments could not be disallowed under section 40A(3). For this view of the matter, we also find support in the decision of the Tribunal (Delhi Bench) in the case of Nuchem Plastic Ltd. reported in 44 TTJ 261. In the above circumstances, we delete the disallowance of Rs. 10,28,350 in the computation of the total income.”

4. Section 40A of the Act deals with expenses or payments not deductible in certain circumstances. Sub-section (3) thereof as it stood at the relevant time provides that where the assessee incurs any expenditure in respect of which payment is made, in a sum exceeding ten thousand rupees otherwise than by crossed cheque drawn on a bank or by a crossed bank draft, such expendi-ture shall not be allowed as a deduction. Here, it must be noted that as per the lance (No. 2) Act, 1996, the words “ten thousand rupees” were substituted “twenty thousand rupees” with effect from April 1, 1997. Thus at the relent time (assessment year 1990-91) the limit was ten thousand rupees, further, the words “such expenditure shall not be allowed as a deduction” are substituted by the words “twenty per cent, of such expenditure shall not allowed as a deduction” by the Finance Act, 1995, with effect from April 1, 1996. However, the second proviso to sub-section (3) states that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand 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. It is by virtue of the second proviso to sub-section (3), rule 6DD is framed. The said rule deals with cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. Clause (j) of the said Rules which is relevant for the purpose of this case reads thus:

“In any other case, where the assessee satisfies the Assessing 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 Assessing Officer as to the genuineness of the payment and the identity of the payee.”

5. The aforesaid rule would reveal that it sets out four circumstances in which the rigour of the provision contained in sub-section (3) has to be relaxed, namely, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque or by a crossed bank draft due to (1) exceptional circumstances, (2) unavoidable circumstances, (3) it was not practicable having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and (4) it would have caused genuine difficulty to the payee having regard to the nature of the transaction and the necessity for expeditious settlement thereof. The assessee has to further satisfy the Assessing Officer by furnishing evidence regarding the genuineness of the payment and the identity of the payee. The existence of exceptional or unavoidable circumstances is a question of fact. Circular No. 220, dated May 31, 1977 (see [1977] 108 ITR (St.) 8), issued by the Central Board of Direct Taxes gives some of the circumstances in which the provisions of rule 6DD(j) would be attracted. Some of the circumstances mentioned in the circular which are relevant for the purpose of this case are (1) the purchaser is new to the seller, (2) the transactions are made at a place where either the purchaser or the seller does not have a bank account, (3) the transactions and payments are made on a bank holiday, (4) 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. As held by the Allahabad, Delhi, Punjab and Haryana High Courts in CIT v. Satish Chandra, [1983] 143 ITR 330; Commissioner Of Income-Tax, Delhi Vi v. Union Agencies, [1987] 166 ITR 529 and in CIT v. Sawarn Singh Balbir Singh, [1982] 136 ITR 595 existence of exceptional or unavoidable circumstances is a question of fact. The scope and content of the provisions of the second proviso to section 40A(3) and rule 6DD(j) was very elaborately considered by the Gujarat High Court in Hasanand Pinjomal v. CIT, [1978] 112 ITR 134.

6. Regarding the scope of rule 6DD(j) it was observed as follows (page 142):

“The Legislature found from experience that the existing provisions of the Act were inadequate to deal with evasion of tax under the cloak or guise of permissible deductions and also that many payments were made with unaccounted money possessed by the assessee and deductions were claimed in respect of such payments. In order to remedy such situation, section 40A was added by the Finance Act of 1968 and it came into force with effect from April 1, 1968. While introducing the Bill in the Lok Sabha for its consideration, the Finance Minister made a speech on April 29, 1968, in which he pointed out that the provision in question was intended to serve the objective of checking tax evasion. Though the Finance Minister did not elaborate, it is obvious that the intention of the Legislature in enacting section 40A(3) particularly was to ensure that payments exceeding the sum specified are made by a crossed cheque drawn on a bank or by a crossed bank draft so that it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was made out of income from disclosed sources. While interpreting the provisions of this section, the above mischief which was sought to be remedied will have to be borne in mind.”

7. It was further observed as follows (page 143):

“… The rigour of the rule contained in this sub-section is, however, relaxed to some extent by the second proviso to the said sub-section which provides that no disallowance under the said sub-section shall be made where any such payment 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. As pointed out by the Finance Minister in his speech in the Lok Sabha while introducing the Finance Bill of 1968, this proviso was introduced in order to obviate any difficulties in payment by cheques or bank drafts in rural areas and in certain other cases and circumstances. For that purpose, power was conferred to enact rules to prescribe cases and circumstances in which no disallowance under sub-section (3) shall be made, where any payment in a sum exceeding Rs. 2,500 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.”

8. With reference to the third condition provided in the rule, viz., where payment in the manner provided in section 40A(3) is not practicable the scope and ambit of the word “practicable” used in rule 6DD(j)(2) was considered with reference to the dictionary meaning. It was observed that the word “practicable” 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. It was also observed that in determining the practicability for the purposes 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 and that the taxing authority must approach a case which falls to be decided under rule 6DD(j)(2) in the above light. It was further observed that the 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. Considering the above circumstances the Gujarat High Court observed as follows (page 147):

“We are, therefore, not prepared to unduly restrict the scope of subclause (2) of clause (j) of rule 6DD by holding that in considering the practicability or otherwise of payment by a crossed cheque or a crossed bank draft, only the two circumstances enumerated therein can be taken into consideration. The correct interpretation, in our opinion, would be to give to the word ‘practicable’ a wide and liberal meaning as we have done above and to leave it to the Income-tax Officer to judge in each case whether or not from the stand point of the business or professional man it was practicable to make payment by a crossed cheque or a crossed bank draft.”

9. The Supreme Court in Attar Singh Gurumukh Singh v. ITO, [1991] 191 ITR 667 considered the constitutional validity of section 40A(3) and rule 6DD of the rules. Repelling the challenge the Supreme Court observed as follows (page 672):

“Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the asses-see to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions, (see Mudiam Oil Company v. ITO, [1973] 92 ITR 519 (AP)). If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute, the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.”

10. As already noted, the only ground on which the Assessing Officer had denied the claim for deduction of the transportation and coolie charges is that the assessee had not satisfactorily explained the circumstances under which the payments were made in cash. The Tribunal had considered the explanation of the assessee that the drivers of the vehicle in which raw cashewnuts were transported from Orissa to Kanyakumari District in Tamil Nadu had insisted on payment of the transportation charges/coolie charges in cash and that they were not prepared to receive crossed cheque or demand drafts and further that it is difficult to trace out those drivers for getting confirmatory letters in that regard. As per Circular No. 220 dated May 31, 1977 (see [1977] 108 ITR (St.) 8), already referred to one of the special circumstances contemplated under rule 6DD(j) is that 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. The said circular also states 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.

11. In the instant case, the Kerala Road Transport Company, who was the transporter had issued a certificate to the effect that they have received the transportation charges from the petitioner. It is also relevant to note here that the genuineness of the transport and the identity of the dealer had been established by the assessee. What remained was only the production of a confirmatory letter from the transporters regarding the fact that they insisted for the payment of the charges in cash. The Tribunal, we note, after adverting to the explanation of the assessee, observed thus:

“If the truck drivers who were transporting raw nuts from Orissa to the assessee's factories in Kanyakumari District insisted on the payment in cash, that would definitely be exceptional or unavoidable circumstances to make the payment eligible for exclusion under clause (i) of rule 6DD(j). The genuineness of the payment has not been disputed by the revenue authorities. The fact that the assessee had got the raw nuts transported in the trucks belonging to the Kerala Road Transport Co. was also not disputed. The learned representative of the assessee has explained the reason why the assessee could not get evidence or confirmation letters from the truck drivers to whom the payment was made. In exceptional and unavoidable circumstances, if the assessee had to make the payment in cash, we are of the view that such payments could not be disallowed under section 40A(3).”

12. This is a presumption drawn by the Tribunal. No supporting material is produced. Having regard to the object of introducing section 40A(3) which was considered by the Gujarat High Court and by the Supreme Court and the interpretation placed by the Supreme Court and the Gujarat High Court on the provisions of section 40A(3) read with rule 6DD(j) of the Rules we are of the view that one more opportunity has to be given to the assessee to produce confirmatory letters obtained from the transporting agency to the effect that they were not willing to receive the transportation charges by crossed cheque/draft and that they insisted on payment of the charges in cash. For the said purpose we set aside the order of the Tribunal and remit the matter to the Tribunal for fresh consideration after affording an opportunity to the parties and to pass fresh orders in accordance with law in the light of the principles laid down by the Gujarat High Court and the Supreme Court in the decisions discussed above. In the circumstances we decline to answer the question referred.

13. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

Commissioner Of Income-Tax v. J. Rajmohan Pillai

Court Opinion Summary — G. Sivarajan, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Applicant / Revenue (Government of India) — submissions by senior counsel

Respondent / Assessee — submissions by counsel

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. J. Rajmohan Pillai

Comments