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TMI Blog1993 (10) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... of amounts exceeding Rs. 2,500 at a time to sub-contractors as well as some payments by bearer cheques of similar amounts, totalling Rs. 23,07,483, the particulars of which are given below : Rs. Rs. "1. Shrikripa Construction 13,31,173 2. Shri P.P. Kharpatil : Cash payments 1,44,000 Bearer cheques 4,51,260 5,95,260 -------- 3. M/s. Thakur Thakur 1,00,000 4. Vanita Construction 62,350 5. Laxmansheth Kukereja 2,18,700 --------- 23,07,483" --------- 5. When asked to show cause why the amounts should not be disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, the provisions of section 40A(3) of the Act were not applicable. However, the Assessing Officer did not accept the genuineness of the four separate bills since the amount shown in the assessee's books was a single figure of Rs. 10,000, as was the case also in the statement of the account prepared by the party. Further, he found it unacceptable that the party approached the assessee four times in quick succession for the amount. Lastly, he found it unusual that these four receipts had not been produced earlier on 11-3-1988 when bills and receipts of other parties had been produced. 10. A similar situation was found in the case of Shri Gajanan Pilaji, where a payment of Rs. 9,000 in cash was shown in assessee's petty cash book on 4-1-1985. In this case, the assessee produced four cash receipts, out of which three were for Rs. 2,500, dated 4-1-1985 and one was for Rs. 1,500 of the same date. These receipts were produced only on 22-3-1985 and not on 11-3-1988. For the same reasons, this explanation was rejected. 11. The Assessing Officer further observed that unavoidable circumstances necessitating cash payments had not been established by evidence despite sufficient opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediate cash payment had to be made to the labour. According to him, at most of the places involved, both the parties did not have bank accounts and non-local cheques take substantial time in encashment. Further, many payments had to be made after banking hours and on holidays. Similarly, for own-works, some payments for labour and for material are made in cash. He, therefore, held that the cash payments were covered under the exemption of rule 6DD(j) of the Income-tax Rules, 1962, r.w. CBDT circular. 14. Thereafter, the CIT(A) observed that he had "a much stronger reason" to delete the addition under section 40A(3) of the Act, for both kinds of payments. The Assessing Officer had rejected the book results after invoking the provisions of section 145 of the Act and adopting a net profit rate for the entire contract work. In such a case, he took a view that it was not proper on the part of the Assessing Officer to again disallow a chunk of the payment by invoking the provisions of section 40A(3) since "this will go against all principles of accounting estimating rationally appellant's real taxable profits under section 145 and also the principles of natural justice". His reasoni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not deductible in certain circumstances. It will be useful to reproduce sub-section (1) of this section, hereunder : "Expenses or payments not deductible in certain circumstances : 40A(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession." The non obstante clause in section 40A(1) makes it clear that it has an overriding effect in the computation of income. 17. Thereafter, it is laid down in sub-section (3) of section 40A, that where the assessee incurs any expenditure in a sum exceeding Rs. 2,500 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. It is evident that these provisions are subject to the non obstante clause in section 40A(1), reproduced above. 18. With this background, the decision of the Tribunal in the case of New Narayan Builders may now be seen. It was held that where the provisions of section 145(2) of the Act are invoked and the income of the assessee is estimated by applying a flat rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, would not be deductible if the conditions of section 40A(3) of the Act, are satisfied. Thus, we reverse the conclusion of the CIT(A) on this legal proposition and hold that a disallowance under section 40A(3) is permitted even in a case where the net profit has been estimated at a flat rate on the receipts. 21. We may mention here that our above decision is fortified by the observations of the Gujarat High Court in the case of CIT v. Bharat Vijay Mills Ltd. [1981] 128 ITR 633 at page 638, and the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 at page 597. 22. Having come to the above conclusion, we would like to add that although a disallowance is permissible under section 40A(3) of the Act, some adjustments may be necessary for the amount of additional net profit estimated by applying a flat rate of net profit to the receipts. For instance, in the present case, the additional net profit estimated in own-contracts of the firm by the Assessing Officer was Rs. 2,65,492 and the additional net profit estimated in sub-contracted works was Rs. 90,620. 23. Now, in the trading accounts, the receipts have not been distributed since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour engaged by the sub-contractors at these far away places was required to be paid on daily basis by the sub-contractors and, therefore, according to him, these were exceptional circumstances under which cash payments were made and exemption should be allowed under rule 6DD(j) of the Income-tax Rules, 1962, r.w. CBDT circular. 26. We have considered the rival submissions carefully. Rule 6DD(j) of the Income-tax Rules, 1962 provides that no disallowance under section 40A(3) shall be made where the assessee satisfies the Assessing Officer that the payment could not be made by way of a crossed cheque 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." 27. The CBDT have issued Circular No. 220, dated 31st May, 1977, where it is mentioned that all the circumstances in which the condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssarily carried by the assessee and not the sub-contractor. This is particularly so, since the sub-contractors, except Shri P.P. Kharpatil, were having bank accounts, though not at the site. In view of these significant factors and looking to the entire facts and circumstances of the case, we are of the opinion that the assessee has not been able to establish that exemption should be given under rule 6DD(j) of the Income-tax Rules and the CBDT circular. We, therefore, hold that section 40A(3) is applicable to the payments under consideration to the sub-contractors. 29. Regarding the payments for own-works for purchases, we are unable to accept the belated explanation in two instances that payments of Rs. 10,000 and Rs. 9,000 were really made up of separate amounts not exceeding Rs. 2,500. If that had been the case, then there would have been corresponding entries in the books of the assessee and the statement of account of the parties, and the explanation would have been given in the first instance itself. Further, no confirmatory letters were filed from the parties and only some general explanation has been given. We, therefore, hold that the assessee has not been able to establ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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