TMI Blog2003 (7) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the provisions of section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for its opinion: "Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the order made by the Commissioner of Income-tax (Appeals) deleting the disallowance made by the Income-tax Officer attracting the provisions of section 40A(3) of the Income-tax Act, 1961?" Senior standing counsel, Shri M.R. Bhatt, has appeared for the applicantRevenue whereas the learned advocate, Shri R.K. Patel, has appeared for the respondent-assessee. The undisputed facts giving rise to this reference, in a nutshell, are as under: The assessee had appointed a firm, named, M/s. Chidambaram (hereinafter referred to as "the firm"), as an agent, who used to look after the financial affairs of the assessee and the said firm also used to make and receive payments on behalf of the assessee as per instructions given by the assessee. Very often when the assessee had to make payment to a particular person and had also to receive money from that particular person, the said firm used to make necessary adjustments in the account of the assessee and the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of rule 6DD(j) of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules"), and he disallowed in all a sum of Rs. 12,000. Being aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal and deleted the disallowance. Being aggrieved by the order passed by the Commissioner of Income-tax (Appeals), the Revenue filed an appeal before the Tribunal and the said appeal was dismissed by the Tribunal. In the aforesaid circumstances, the abovestated question has been referred to this court for its opinion. Senior standing counsel, Shri M.R. Bhatt, has submitted that the amount of expenditure was rightly disallowed by the Income-tax Officer under the provisions of section 40A(3) of the Act. It has been submitted by him that there were plenty of chances of having underhand dealings by virtue of the arrangement made by the assessee as observed by the Income-tax Officer. It has been also submitted by him that the arrangement of making payment in pursuance of "pay order" was not proper and, therefore, the Income-tax Officer was absolutely justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to whom the assessee had to make the payment. By virtue of the "pay order", no amount was paid but the term "pay order" referred to in the assessment order was nothing more than an intimation or instruction given by the assessee to the firm to make payment of a particular amount to a particular person and when such an instruction or intimation was given to the firm by the assessee, the firm had made payment as per the said instruction to the concerned person by an account payee cheque. Thus, the learned advocate, Shri Patel, appearing for the assessee, has submitted that, in fact, all payments were made by account payee cheques and no payment was ever made by cash to anybody by the assessee or by the firm. In the circumstances, it has been submitted by him that as all payments had been made by account payee cheques, the Income-tax Officer was in error while disallowing the expenditure under the provisions of section 40A(3) of the Act. It has been submitted by him that the Commissioner of Income-tax (Appeals) and the Tribunal had rightly corrected the mistake committed by the Income-tax Officer by deleting the disallowance. Learned advocate, Shri Patel, has referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules read as under: "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.... Provided further that no disallowance under this sub-section shall be made where any payment is 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." "6DD. 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 hereu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue. Unfortunately, the Income-tax Officer appears to have made a mistake in understanding the term "pay order" and the manner in which the payments were made on behalf of the assessee by the firm. In fact, by virtue of the "pay order", no amount was paid or no expenditure had been incurred. The so called "pay order" was nothing but an instruction by the assessee, to the firm, with regard to making payment on behalf of the assessee. In the instant case, it is pertinent to note that the assessee was not making any payment directly to the concerned creditor. She had engaged a firm, which used to look after the financial affairs of the assessee. The firm used to collect and make payments on behalf of the assessee. If a particular payment was to be made to a particular person, and if from the same person the assessee had to recover some amount, the firm, which used to keep ledger accounts of the assessee as well as of the debtors and creditors of the assessee, used to adjust the amount payable to or recoverable from the concerned persons and used to pay or receive the final resultant amount on behalf of the assessee. The aforestated practice was duly revealed before the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork with regard to payment and collection of money was entrusted to the firm. If, in such a set of circumstances, the firm makes payment on behalf of the assessee by account payee cheques, by no stretch of imagination it can be said that there was any cash transaction or there was any possibility of having "chances and opportunities to use or create black money." It is also pertinent to note that this court in the case of Hasanand Pinjomal [1978] 112 ITR 134, way back in 1978, had interpreted the second proviso to section 40A(3) of the Act. This court has observed that the second proviso to section 40A(3) is meant for the purpose of business expediency and therefore practicability has to be judged from the angle of the businessman and not of the Revenue. In the instant case, when the assessee found it practicable and expedient to entrust all her business transactions to the firm as her agent, and as the firm had made payments by account payee cheques to the concerned persons, and when identity of all persons to whom payments were made was revealed from the books of account, in our opinion, the Tribunal was justified in confirming the order passed by the Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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