TMI Blog1995 (8) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed by the assessee has not been stated in the assessment orders. For the assessment year 1989-90 it filed return of income on 23-3-1990 declaring a total income of Rs. 13,00,783, but the Assessing Officer has computed the total income at Rs. 16,42,140 after making certain additions. For the assessment year 1990-91, the assessee filed return of income on 31-12-1990 declaring income of Rs. 3,69,880, but the Assessing Officer determined the total income at Rs. 25,74,110 after making certain additions. These additions were sustained by the CIT(A) by his consolidated order dated 12-10-1992. 4. At the time of hearing, the learned counsel for the assessee Shri K.A. Sathe and the learned departmental representative Shri Gautam Kar have been heard at great length and the paper compilations filed by them in the course of arguments have also been duly considered. 5. The common point involved in these appeals relates to taxability of certain deposits received by the assessee, such as deposit for installation of transformer, stamp duty, water development, M.S.E.B. and formation of society, from the flat purchasers. Such deposits collected amounted to Rs. 2,64,766 for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived certain other amounts under various heads and the flat-holder was under contractual obligation to pay these amounts. He also made an observation that the flat-holder had no real option but to pay these amounts to the builder. Therefore, he agreed with the conclusion of the authorities that these amounts collected were nothing but trading receipts in the light of the judgment of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. The CIT(A) also noted the fact that the assessee had not incurred any expenditure for the purpose for which the amounts were collected and there was also no obligation on the part of the assessee to refund these amounts to the persons concerned, but to transfer the balance amount to the cooperative society of flat-holders as and when it would be formed. In view of this fact, he relied on the ratio of the Supreme Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd [1988] 172 ITR 321 wherein the Supreme Court held that the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions. The CIT(A) also rejected the contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenditure, there was no obligation at all to refund these amounts to flat-holders. He also pointed out the fact that in certain circumstances, these amounts had to be repaid did not alter the nature of the trading receipts. Accordingly, he confirmed the additions made by the authorities. 8. Shri K.A. Sathe, learned counsel for the assessee has been heard at great length. He has reiterated the same arguments as were urged before the CIT(A) and Assessing Officer. He referred to clauses 15 and 16 of the model agreement entered into by the assessee with the flat-holders which read as under: "15: The purchaser hereby agrees to deposit an amount of Rs. 4,000 with the vendors towards the due performance of the terms and conditions of this agreement in respect of the said outgoings. The said deposit after deducting therefrom the arrears of taxes and/or expenses mentioned hereinabove and the expenses for the formation of Co-op. Housing Society of flat takers will be refund by the vendor to the Co-op. Hsg. Society of flat-takers when it is formed and when the entire property is finally transferred to it by the vendors. 16: The purchaser hereby agrees to contribute and pay his propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are made by him in a fiduciary capacity. These cannot be included in the agent's income as his trading receipts". He also relied on the decision of the Bombay High Court in the case of CIT v. Tanubai D. Desai [l972] 84 ITR 713 for the proposition that excess collection made by a solicitor was in a fiduciary capacity only. Another proposition canvassed was that the deposits collected by the assessee were like surcharge collected for charity by the Tollygunge Club Ltd's case wherein the Supreme Court held that the amount of surcharge got diverted by an overriding title for the purpose of charity for which it was collected. The ratio of the Supreme Court in the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 was also relied upon for the proposition that the deposits collected by the assessee were in the nature of Dharmada collected in that case during the course of trade and that the Dharmada was received and held under obligation to spend for charitable purposes only with the result that those amounts were not its trading receipts. The Supreme Court also held that the amounts collected as Dharmada were not price of goods purchased by customers. The Supreme Court poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntified and provided in the profit and loss account and also claimed as liability unlike in the case of the assessee. Therefore, he urged that the deposits collected formed part of the trading receipts. He also pointed out that there is no specific mention in the agreement for alleged transfer of unutilized amounts to the society when it is formed. He referred to the decision of the Tribunal, Special Bench, in the case of Shri Chatrapati Sahakari Sakhar Karkhana Ltd v. Dy. CIT [1992] 40 ITD 117 (Pune) wherein it has been observed that various deductions made from sale price of sugarcane were made under the directions of Sugar Directorate, but not such direction is contained here. Even the balance amounts collected but remained unutilised formed part of receipts of the assessee for which the decision of the Supreme Court in the case of Punjab Distilling Industries Ltd was relied upon. 10. We have duly considered the rival submissions and verified the relevant portion of the model agreement and the paper compilation filed by the assessee. The authorities have proceeded on the basis that the various amounts collected were nothing but trading receipts. The case of the assessee was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned a separate account in respect of the various deposits collected and the accounts were debited as and when the amounts were incurred. If the assessee fails to spend them for the purpose for which they were collected, a civil or criminal suit could be filed for breach of trust or for cheating and the assessee would face severe consequences. In fact, under section 5 of the Maharashtra Ownership Flats Act, the promoter is required to maintain separate account of sums taken as advance or deposit and to be trustee therefor and disburse them for the purpose for which they were given. Clause 19 of the model agreement reads as under: "Clause 19: The purchaser hereby agrees that in the event of any amount by way of premium to the corporation or the State Government for betterment charges or development tax or any her tax or payment of a similar nature becoming payable to the vendors the same shall be reimbursed by the purchaser to the vendors in the proportion to the area of the flat agreed to be purchased by the purchaser, and in determining such amount, the decision of the vendors shall be final, conclusive and binding upon the purchaser." In this sense, there is an overriding char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convinced amount the factum of the assessee having maintained mercantile method of accounting for all the transactions of the business. In any case, the assessment orders do not bear this point in favour of the assessee. It is universally true that the flat builders receive amounts from flat purchasers either in cash or in cheque in various instalments during the course of construction of the flats. It is inconceivable that any builder could account for all the flat purchase price in the first year of construction itself on the basis of mercantile method of accounting. Similarly, it is impracticable for claiming the expenditure on mercantile method of accounting in the first year of construction itself without completing all the flats. Therefore, the claim of the assessee that the liability should be allowed on accrual basis is not tenable. 12. There is also an interesting aspect which has not been taken into account by the authorities nor canvassed before us. The deposits themselves do not constitute income even if they are regarded as trading receipts. In the very case of the assessee, the actual sale price of the various flats have been shown in the trading account and the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst which no expenditure has been incurred by the assessee. In short, the net balance arrived at by deducting the expenditure incurred during the year from the gross collections including opening balance was assessed by the Assessing Officer for these assessment years 1989-90 and 1990-91 as additional income which is factually incorrect as indicated above. Even according to the basis adopted by the authorities, the actual amount collected during the assessment year less the amount spent, if any, could be regarded as trading receipts and not including the opening balance. Thus, there is factual discrepancy in the matter of quantum of income computed by the Assessing Officer. It is also noticed that in the later assessment year 1991-92, the amount collected for the assessment year 1991-92 towards formation of Society and MSEB was Rs. 91,000 against which the expenditure incurred was Rs. 2,65,353 which shows the expenditure was greater than the amount collected. Therefore, it could be inferred that notwithstanding the fact that the assessee had not immediately spent various deposits collected and used the funds for its business, nonetheless, the factum of assessee having ultimately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t side contained dates and amounts which totalled up to Rs. 2,35,000. When confronted with these transactions, the assessee stated that the amounts were not paid as stated in the sheets, but offered for disclosure the entire amount which is included in the disclosure of Rs. 3,45,000 made by the assessee for the assessment year 1991-92. The Assessing Officer did not accept the claim because the dates and amounts were clearly mentioned in the sheets which would reveal cash payments which were not recorded in the books of account. Therefore, he proceeded to assess the unrecorded cash payments on Financial Year basis according to which three payments amounting to Rs. 70,000 came to be assessed for the assessment year 1989-90. The addition was made by the Assessing Officer after getting direction from the Dy. CIT under section 144A of the Income-tax Act, 1961. The claim of the assessee before the Dy. CIT that the entire amount should be considered according to the disclosure in the assessment year 1991-92 was rejected and he directed the Assessing Officer to assess the various amounts in respect of various assessment years only. Accordingly, the Assessing Officer brought to tax the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transactions contained therein were unrecorded in the books of account maintained by the assessee, they are certainly in the nature of unexplained investment in land which went to increase the value of the land in terms of section 69 of the Income-tax Act, 1961 and the value of such investment may be deemed to be the income of the assessee of such financial year. It can also fall under section 69B because while the assessee has accounted for the cheque payments, cash payments were not recorded as seen from page 42 of the paper compilation filed. Therefore, it is a case of not fully disclosing the investment in land and in view of the disclosure made by the assessee, such amount may be deemed to be income of the assessee of such financial year. It can also be brought under section 69C as unexplained expenditure because the amount paid was an expenditure and which may be deemed to be income of the assessee for such financial year. Thus from all prescriptions contained in sections 69, 69B and 69C such amount may be deemed to be the income of the assessee for such financial year. The disclosure of the assessee confirms this fact. Therefore, the Assessing Officer was quite justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection what is your say? Reply : The said amount of Rs. 13,42,000 is declared by me under section 132(4) in the assessment year 1990-91." It is seen that according to the bills for work done by M/s. Mehta Constructions Co. the total amount worked out to Rs. 40,51,418 whereas verification of the ledgers of the assessee revealed total payment shown at Rs. 26,39,200. The enquiry made with M/s. Mehta Construction Co. showed that they have confirmed receipt of amount of Rs. 13,42,000 from the assessee in cash. But this amount was nowhere shown in the account books of M/s. Mehta Construction Co. Therefore, the Assessing Officer concluded that the amount has been received in cash by M/s. Mehta Construction Co. and paid in cash by the assessee. In reply, the assessee quite readily declared the sum of Rs. 13,42,000 under section 132(4) of the Income-tax Act, 1961 in the assessment year 1990-91. 21. In the proceedings before the Dy. CIT, the assessee did not furnish details of various payments made to M/s. Mehta Construction Co. though it had been admitted by the assessee. The Dy. CIT observed that though the assessee dealt with M/s. Mehta Construction Co. throughout the year, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the payment in cash it would have caused genuine difficulty to the payee and hence the assessee paid the amount in cash. The payment is said to have been made by the assessee in cash in order to avoid inconvenience to the payee. In this regard confirmation letter filed by M/s. Mehta Construction Co. stating that he required cash payment because payment by cheque would have been inconvenient was relied upon. Therefore, it was urged that the disallowance was not called for". In this connection, the statement given by Shri Prakash B. Mehta, partner of M/s. Mehta Construction Co. under section 133A of the Income-tax Act, 1961 contained in pages 34 to 36 of the paper compilation has been referred to. The relevant question and answer read as under: "Q: You have stated above that the total payment made by M/s. Sharma Associates in respect of the project at a Popular Heights in approx. Rs. 40 lakhs. Have the above amount been entirely received by cheque? A: Cheque payments are recorded in the ledger accounts amounting to Rs. 27.09 lakhs in the case of M/s. Mehta Construction Co. The total payment of Rs. 40.6 lakhs approximately has been made to M/s. Mehta Construction Co. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld go to support the stand of the department rather than that of the assessee. He pointed out that the Calcutta High Court in the case of Giridharilal Goenka pointed out the object of section 40A(3) is to check tax evasion and not to deny deduction. Since the assessee has resorted to tax evasion, the benefit of deduction was not admissible to the assessee. He referred to the judgment of Patna High Court in the case of Chandmull Radhakishun and Gujarat High Court in Hasanand Pinjomal's case to contend that one has to look to the surrounding circumstances and if so considered, it will be clear that provisions of section 40A(3) were rightly invoked. Referring to the judgment of the Tribunal, Calcutta Bench in the case of Victory Iron Works (P.) Ltd., the learned departmental representative contended that the concept of business expediency should not be stretched too far to defeat the provisions of section 40A(3). Referring to the decision of the Punjab Haryana High Court in the case of Sawaran Singh Balbir Singh relied upon by the learned counsel of the assessee, the learned departmental representative pointed out that both the parties are known to each other and most of the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be accounted for by the assessee. The details of payments, whether cash and the dates of payments are required to be proved by the assessee either with reference to its own record or with reference to the record of M/s. Mehta Constructions Co. Although partner Shri Prakash B. Mehta of M/s. Mehta Construction Co. admitted in reply that he had received the money from M/s. Sharma Associates and had used the money for making payments to labours, but he had also no proof for details of labour payments. It is universally true that labour payment is made weekly on Saturday based on the work turned out by the labour during the week. Therefore, if the cash payments could be established to have been made on Saturday in order to enable the payee to effect cash payments to labours, that would satisfy the exceptional circumstances required by law. Therefore, the genuineness of the payment itself is open to doubt, not to speak of the exceptional circumstances under which payments were made. It is also seen that there was no cash payment made by the assessee to M/s. Mehta Enterprises in respect of Anantrao Complex at Rasta Peth. Therefore, there is more than that meets the eye so far as this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had declared a total income of Rs. 25,00,000 inclusive of Rs. 6,13,000 under section 132(4). The assessee had shown this amount in the return of income as its receipts but also claimed the same amount as deduction. The claim was rejected by the Assessing Officer on the ground that the assessee has not proved the genuineness of the expenditure of Rs. 6,13,000. When the matter was referred to the Dy. CIT, he directed the Assessing Officer to disallow the claim of deduction of expenditure of Rs. 6,13,000 in his directions given under section 144A of the Income-lax Act, 1961. 28. Before the CIT(A), the stand taken by the assessee was that although it has declared a sum of Rs. 6,13,000, nonetheless it has expended the same amount. The CIT(A) pointed out that the expenditure was not recorded and the nature and source of such expenditure was also not explained. Section 69C was invoked by the Assessing Officer. Therefore, he held that the addition could be sustained under section 69C. Accordingly, he confirmed the disallowance. 29. At the time of hearing, the learned counsel for the assessee made a pointed reference to the fact that even before the CIT(A) the assessee claimed the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to vouchers found in the loose bundle of vouchers. All that the Assessing Officer stated in para 8 of his assessment order was that "Since the assessee has declared the amount of Rs. 6,13,000 in its return of income, the same has been accepted as income of the assessee. However, the assessee could not prove that the expenses were on account of defective vouchers etc.". In our opinion, the Assessing Officer has misplaced the burden on the assessee instead of proving the same to the hilt, because in the absence of any findings given in the regular assessment order to support the addition of Rs. 6,13,000, he cannot turn round and ask the assessee to prove the expenses on account of defective vouchers. Except the declaration made under section 132(4), there is nothing on record to impeach the veracity of the vouchers found at the time of search. Even though the assessee has disclosed the sum of Rs. 6,13,000 to cover unsigned, defective and unrecorded paid vouchers though under the pressure applied by the search party as claimed by the assessee, there is no material to warrant such findings and conclusion in the regular assessment order passed by the Assessing Officer. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount under section 132(4). Having declared the amount, the assessee could not be asked to prove the expenditure which is an established fact. Therefore, the claim of the assessee deserves to be accepted as the department has misplaced the burden of proof on the assessee without discharging it itself. Consequently, we modify the order of the CIT(A) and direct the Assessing Officer to allow deduction of Rs. 6,13,000. 32. Another dispute relates to the addition of Rs. 50,000 as unexplained cash credits in terms of section 68 of the Income-tax Act, 1961. The assessee has obtained loan of Rs. 10,000 each from 5 persons who were found to be employees of the sister concern of the assessee-firm and some of them were friends of the partners of the assessee-firm. From the books of accounts found and seized at the time of search operation it was found that the amount was credited on 1-4-1989. The assessee had not filed any confirmation letters from these parties at the time of investigation but subsequently confirmation letters were filed. When the Assessing Officer insisted on production of cash creditors with bank pass books for examination, the assessee did not produce cash creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1990-91. This ground relates to the addition of cash payment of Rs. 13,42,000 under the provisions of section 40A(3) of the Income-tax Act, 1961 representing the payments by the assessee to M/s. Mehta Construction Co. which is confirmed by the CIT(A). 2. To recall the facts, the income-tax authorities carried out the survey proceedings in the premises of M/s. Mehta Construction Co. They came across a paper showing approximate value of construction work carried out by M/s. Mehta Construction Co. for the assessee. On a comparison of this paper with the books of accounts of M/s. Mehta Construction Co. it was noticed that only a portion of payments from the assessee towards the work was recorded. When asked to reconcile the difference the partner of M/s. Mehta Construction Co. admitted that the difference of Rs. 13,42,000 represented cash payments by the assessee i.e., M/s. Sharma Associates from time to time to M/s. Mehta Construction Co. for paying to the labourers. 3. The said partner of M/s. Mehta Construction Co. then offered the said amount to be considered in the hands of M/s. Mehta Construction Co. as a partner of this income. We arc informed that the said firm had been as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that therefore, the provisions of section 40A(3) were applicable. In this case, the department has merely assumed that the individual payments must have been more than Rs. 10,000 because the total payments were amounting to Rs. 13,42,000. We have asked the learned counsel to give the details of payments but he expressed his inability to do so because no details were kept in any form. 5. The department also does not have any data on this point. Then Shri Sathe pleaded that it has been brought on record that the payments were made to M/s. Mehta Construction Co. from time to time to enable them to make payments to their labourers. Such payments are required to be made in cash and payments to M/s. Mehta Construction Co. first by cheque and thereafter to the labourers would have been time consuming and not practical. M/s. Mehta Construction Co. would have found it inconvenient and impracticable. Thus the payment was covered by Explanation provided in Rule 6DD(j) viz. the payment by cheque or draft was not practicable or it would have been caused genuine difficulty to the payees. Shri Sathe relied on the decision of the Gujarat High Court in the case of Hasanand Pinjomal for the propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld presume that the entire amount was a one time payment and thus clearly hit by section 40A(3). He further pointed out that as the assessee did not show the payments from the books there was obviously an admission of suppression and the department is fair in disallowing of Rs. 13,42,000 under section 40A(3). 7. Shri Sathe in his rejoinder pointed out that the purpose of section 40A(3) was to frustrate generously for claiming the expenses by showing cash payments, the verification of which was difficult. In the present case on the other hand, there was no doubt that the actual business expenditure had been incurred on the basis of which the amount was treated as income under section 69C. He stated that what the assessee declared as income was one aspect while claiming the same amount as allowable expenditure was another aspect of the transaction. Since the assessee had not been able to point the sources where the money was found for payment but the actual money spent constituted legitimate business expenditure which the assessee was claiming and it had to be allowed. Since the return of income was not filed at the time of survey and search action were taken, it was presumed to gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practicable. As has been pointed by the Gujarat High Court in the case of Hasanand Pinjomal the practicability is to be seen from commercial point of view. In the present case the genuineness of payment not being in doubt which is the overlapping condition in such case. I have no hesitation to hold that the payment can be said to come under explanation of rule 6DD(j). I therefore, allow the assessee's claim. The amount of Rs. 13,42,000 is allowable deduction, in computing the business income of the assessee. 9. Another fact which came to the notice at the time of search and seizure was that M/s. Mehta Construction Co. had prepared bills of Rs. 40,51,418 and actually it had received by cheque from the assessee Rs. 26,39,200 leaving the balance. The partner of said M/s. Mehta Construction Co. stated in clear terms that it dealt with the assessee throughout the year. This fact had been admitted by the Assessing Officer. Small discrepancy should not come in the way. The assessee's partner in his statement at the time and seizure was under the apprehension and the same statement has been used for drawing an harmful and adverse inference against the assessee. For all these reasons, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the labour payments. They also admitted to have utilised the said sum of Rs. 13,42,000 for the payment of wages to labourers. It was also admitted that the receipt of Rs. 13,42,000 was not accounted for by them in the books of account. M/s. Mehta Construction Co., therefore, declared a sum of Rs. 13,42,000 to be assessed in their hands. 3. The loose sheet of paper found was also placed by the revenue before the assessee. The assessee also admitted that the cash payment of Rs. 13,42,000 was made by the assessee but was not entered in the books of accounts. The statement of one of the partners of the assessee during the course of search was recorded and the partner declared the said sum of Rs. 13,42,000 under section 132(4) of the Act. 4. The assessee filed a return of income placed at page 10 of the paper book in which the sum of Rs. 13,42,000 was disclosed as income. However, simultaneously, the assessee claimed it as a deduction as the expenditure incurred by the assessee wholly and exclusively for the purpose of business. 5. The Assessing Officer examined the issue and was of the view that the assessee had incurred the liability for the expenditure for which the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the sum of Rs. 13,42,000 was their receipt in their hands on which the tax was willingly paid by them. 9. Even the Income-tax Department, the learned counsel asserted did not doubt the genuineness of the payment. The Assessing Officer, during the course of the assessment proceedings proceeded on the ground that there was a violation of section 40A(3) of the Act. Even for a moment, he did not doubt that the sum of Rs. 13,42,000 was in fact not paid by the assessee to M/s. Mehta Construction Co. The learned counsel also drew my attention to 144A directions issued by the Dy. Commissioner of Income-tax, who also did not doubt the genuineness of the payment. The Dy. CIT merely directed the Assessing Officer to consider the disallowance under section 40A(3)of the Act. The learned counsel thus strongly asserted that as far as the department is concerned, the payment was accepted as genuine. 10. While drawing my attention to the order of the learned Accountant Member, the learned counsel pointed out that he considered the issue with respect to the genuineness of the payment. The learned Accountant Member, according to the learned counsel, did not consider whether the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be justified. 14. The learned counsel further contended that even assuming that section 40A(3) was applicable to some of the payments, the assessee's case was covered by rule 6DD(j) of the Rules. The payment of Rs. 13,42,000 was outside the books of accounts of the assessee and also was not accounted for by the recipient M/s. Mehta Construction Co. In such circumstances, the cheque payment was not practicable as it would have caused hardship to the payee. The practicability, for the purpose of rule 6DD(j) must be judged from the point of view of the businessman and not of the revenue. He submitted that for the purpose of carrying on his business, a businessman may have to make the payment otherwise than by crossed cheques or demand drafts in certain circumstances voluntarily and not out of sheer necessity. In such a situation, the point of view of the businessman is material which should not be lost sight of. The learned counsel took me through the order of the learned Judicial Member and pointed out that the learned Judicial Member had properly understood this aspect of the case. In the opinion of the learned counsel, the case of the assessee is therefore, covered by exceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee nor M/s. Mehta Construction Co. filed the details of payment with respect to Rs. 13,42,000. The loose sheet of papers recovered from M/s. Mehta Construction Co. was the only document from which it could be seen that M/s. Mehta Construction Co. had done the total work of about Rs. 40.51 lakhs whereas the cheque payments were accounted for only to the extent of Rs. 26.39 lakhs. The sum alleged to have been paid in cash was quite substantial and, therefore, it is logical to presume that every payment must have exceeded the statutory limit of Rs. 10,000. Such a substantial amount, in the opinion of the learned Senior Departmental Representative has to be paid in sums exceeding Rs. 10,000. There is no basis to presume that the payment must have been made by the assessee in the sums less than Rs. 10,000. Thus, the provisions of section 40A(3) are clearly applicable in the case of the assessee. 19. The learned Senior Departmental Representative continued and asserted that the provisions of section 40A(3) were enacted to check the case of tax evasion. These provisions are to be strictly applied. The provisions were enacted with a view to ensure the easy cross verification. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sweep of section 40A(3) of the Act. 23. While dealing with the Judicial pronouncements cited by the learned counsel of the assessee, the learned departmental representative pointed out that the ratio laid down in the decisions does not support the case of the assessee. These cases dealt with the situation where the entry with respect to the expenditure was recorded in the books of account. The learned departmental representative therefore, urged that the provisions of section 40A(3) are applicable and the case is not covered by rule 6DD(j) of the Rules. 24. In reply, the learned counsel for the assessee pointed out that the purpose of enactment of section 40A(3) is to curb the tax evasion in case of bogus expenditure. In the case of the assessee, the expenditure is admittedly genuine and as a matter of fact, has been accepted as such by the revenue. The learned counsel has also taken us through the rule 6DD(j) and pointed out that the said rule does not speak of bona fide expenditure. Section as well as the rule made thereunder only speaks of genuineness of the payment. Regarding the case of T.G. Mutha the learned counsel pointed out that the said case was decided on its own f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that the expenditure was genuine and the learned Judicial Member was justified in holding it as such. 27. I proceed to answer the second part of the question with some trepidation. The Government felt that the taxpayers were making claims for deduction of the expenses in the large amounts shown to have been paid in cash often with a view to frustrate investigation as to the identity of the recipient and genuineness of the claim. To plug the loop holes the provisions of section 40A(3) were enacted on the statute book. The object of the said provision is to check tax evasion and to facilitate the cross verification. In other words, the object of enacting section 40A(3) is to ensure the payment in respect of which deductions are claimed by the taxpayers are genuinely made and accumulation payments are not claimed as deduction. As the assessee comes under the sweep of section if the expenditure is not genuine or if the case is not covered by the rules made under section 40A(3) of the Act. Section 40A(3) concentrates on the size and manner of payment. What is pertinent to the enquiry under the said section is whether the payment for an item of business expenditure is in a sum ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presumption. It is dangerous to lay down a proposition that section 40A(3) can be invoked on presumption, conjectures or surmises. With a view to invoke the provisions of section 40A(3) a clear finding with evidence is necessary that the single payment by an assessee exceeded the statutory limit as laid down in section 40A(3) of the Act. If the disallowance is based on mere guesswork, untold harm is likely to visit an honest taxpayer. 28. In the case before me, the payment pertains to one full accounting period, and therefore, it is likely that some of the payments may have been below that statutory limit or it is also possible, for the sake of arguments, that all payments were below the statutory limits laid down by section 40A(3). In such a situation, venturing a guess is hazardous and may lead to unintended harm to the assessee. It is enough to mention that in the absence of full details of cash payments the application of section 40A(3) is a very doubtful proposition. In my view, therefore, section 40A(3) does not apply to this case. 29. Assuming that the provisions of section 40A(3) apply to the case before me, I am of the considered view that the disallowance under that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smuggling, it may not be practicable to comply with the requirements of sub-section (3) of section 40A, but that only means that such illegal business ought not to be carried on. It is a business prohibited by law. By taxing its income, it is not legalised or validated. The High Court held that the assessee must establish the genuineness of the payment and the identity of the payee and unless he does that, he cannot take advantage of clause (j) of rule 6DD. For ready reference, the relevant part of the rule is reproduced below: "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; (i) in any other case, where the assessee satisfies the ITO 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 transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions provided in rule 6DD(j)." 30. Since the transaction was outside the books, it was not practicable or advisable to make the payment by account-payee cheque or crossed demand draft. I am therefore, of the view that the case of the assessee is covered by rule 6DD(j) of the Rules. 31. The assessee is also entitled to the deduction of the expenditure. As already mentioned above, the genuineness of the expenditure is not at all in doubt. It is also not in doubt that it was the business expenditure. The revenue has not also brought on record any material to show that the expenditure was disallowable under the provisions of law. Since the assessee declared a sum of Rs. 13,42,000 this has to be included as the income of the assessee and simultaneously deduction has to be allowed. If the assessee has incurred the expenditure in excess of amounts recorded in books, then the unexplained expenditure would be assessable as income under section 69-C of the Act. However, on the same analogy the expenditure has to be allowed as deduction while computing the income of the assessee and net results would therefore, be NIL addition. In this regard, the case of the assessee is supported by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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