TMI Blog2003 (5) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... come up for answer by us at the instance of the assessee for the assessment year 1987-88. The assessee, however, had framed four questions in its reference application under section 256(1) of the Act. The learned Tribunal, however, rejected the reference application on the ground that no question of law, in fact, arose and the findings of the learned Tribunal were based on findings of facts only. On the application of the assessee under section 256(2), this court by an order dated November 11, 1997, directed reference observing that the first and the second questions, in fact, covered the case of the assessee. The said two questions are as follows: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that payments in sums exceeding Rs. 2,500 amounting to Rs. 4,83,000 made to Hanuman Sugar and Industries Ltd., made in respect of delivery of cotton yam are hit by the provisions of sub-section (3) of section 40A of the Income-tax Act, and that, therefore, such payments should be added to the total income in terms of the aforesaid section? 2. Whether, on the facts and in the circumstances of the case and on a proper interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, however, won the battle and the said sum of Rs. 4,83,000 was deleted from the assessee's income. Being aggrieved by the said order of the Income-tax Commissioner (Appeals), the Department preferred an appeal to the learned Tribunal. The learned Tribunal held that the Commissioner of Income-tax (Appeals), was not correct in deleting the said addition of Rs. 4,83,000 and as such the order of the Commissioner of Income-tax (Appeals) was set aside and the order of the Assessing Officer was restored. Mr. J.P. Khaitan, learned counsel for the assessee, raised a very interesting question as to whether the said cash payments were covered by rule 6DD(j) of the Income-tax Rules, 1962, and if the answer to this question was in the affirmative, then and in that event, it saved the assessee from the disallowance of the said sum of Rs. 4,83,000, under section 40A(3) of the 1961 Act. Under section 40A(3), as the said section stood at the material time, it was provided that the expenditure in respect of which payments were made in a sum exceeding Rs. 2,500, otherwise than by a crossed cheque or by a crossed bank draft, was not allowed as a deduction. The second proviso to the said s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted position. The assessee had business transactions with the said Hanuman Sugar and Industries Ltd. was also an admitted fact. In such circumstances, if the cash payments which were made came within the exceptions provided under the second proviso of section 40A(3), read with rule 6DD(j), then and in that event, the disallowance could not be made as the assessee was protected by the provisions of the said rule 6DD(j). It was, however, submitted on behalf of the assessee that the questions raised by the assessee, which were also directed to be referred by this court, were questions of law involving the interpretations of the provisions of section 40A(3) and its second proviso, the interpretation of rule 6DD(j) of the rules and Circular No. 220 dated May 31, 1977. Thus, according to Mr. Khaitan the question requiring: to be decided herein is as to whether on a proper interpretation of the said section 40A(3), rule 6DD(j) and having regard to the facts as found by the Tribunal, the case of the assessee fell within the exceptions provided in rule 6DD(j) and as such the cash payments made by the assessee could not, therefore, be disallowed under the said section 40A(3). On be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble mind would support such decision having regard to the said facts and the circumstances of that case. The authorities relied upon in support of the case of the assessee are briefly mentioned herein (i) In CIT v. Suraj Bhan and Co. [1984] 148 ITR 743 (P H); (ii) In Sarda Plywood Industries Ltd. v. CIT [1999] 238 ITR 354 (Cal); (iii) In Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC); (iv) In Giridharilal Goenka v. CIT [1989] 179 ITR 122 (Cal); (v) In CIT v. Ram Agya Shyam Narain [1991] 189 ITR 470 (All); (vi) In CIT v. Chaudhary and Co. [1996] 217 ITR 431 (All); (vii) In Walford Transport (Eastern India) Ltd. v. CIT [1999] 240 ITR 902 (Gauhati); and (viii) In CIT v. Nikko Auto Ltd. [2002] 256 ITR 476 (P H). Suraj Bhan and Co.'s case [1984] 148 ITR 743 (P H), was cited for the proposition that the question whether the facts proved constituted exceptional circumstances as provided by rule 6DD(j), was a question of law. In the case of Sarda Plywood Industries Ltd. [1999] 238 ITR 354 (Cal), one of the questions for consideration was as to whether the amounts spent for presentation of silver boxes to dealers amounted to advertisements within the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the "Income-tax Officer" should take a practical approach to the problems in hand and strike a balance between the direction of law and the hardship to the assessee. At page 128 of the said judgment it was said: "There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances." The only question raised in the above reference was almost similar to the second question raised in the instant reference. However, the said question was answered by the Division Bench as a question of law. It is true that whether the facts and the circumstances of a particular case satisfy the requirements of section 40A(3) and rule 6DD, are matters of fact indeed, but what degree of proof of facts and circumstances of a particular case would satisfy the requirements of the provisions of the said rule is, in my opinion, a question of law to be decided on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court were relied upon by Mr. Khaitan on behalf of the assessee. The following are the said observations: "What constitutes an exceptional and unavoidable circumstance? This question became a subject-matter of controversy giving rise to protracted litigation. The courts have been consistent in their view that the exceptional circumstances are to be seen from the point of view of a businessman keeping in view the exigencies of business... section 40A(3) has been enacted to check the flow of black money and is basically directed towards the transactions which cannot be cross checked and cross verified." Mr. P.K. Mallick, learned senior counsel, appearing on behalf of the Revenue, with learned counsel Mr. Dipak Deb, submitted that the object of the provisions of section 40A(3) of the Act was to check evasion of taxes and ensure that when payments exceeding Rs. 2,500 were made in a given case by crossed cheque drawn on a bank or by a crossed bank draft it would be easier to ascertain whether the payments were genuine and made out of the income from the disclosed sources. The object of rule 6DD(j) was to relax the rigour of section 40A(3), in genuine and bona fide cases in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported by any evidence or the same was perverse or patently unreasonable. In reply it was said, on behalf of the assessee by Mr. Khaitan, that this decision had no application to the present case as the assessee had not challenged any finding of fact recorded by the Tribunal and that it was not necessary for the assessee to raise any question of perversity. In Shri Radhika Prakashan (Raipur) P. Ltd. v. CIT [2002] 257 ITR 675, a Division Bench of the Madhya Pradesh High Court held, on the facts of that case that the assessee had failed to furnish any evidence before the Tribunal in support of the explanation that the party had insisted upon payment in cash and expressed unwillingness to render services without cash payment. It was also found on the facts in that case that no exceptional or unavoidable circumstances for making the payment in cash was made out. In reply, it was pointed out on behalf of the assessee, that the facts of that case revealed that the assessee had consciously split up the several payments so that each payment did not exceed the monetary limit provided in section 40A(3), only to circumvent the provision of law. The following observations were made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have caused genuine difficulties or unnecessary hurdle in the business of the payee. It was pointed out on behalf of the Revenue that it was an admitted fact, as would be evident from the confirmatory letter, that the cash payments were made by the assessee against purchase of cotton yarn. According to the learned Tribunal the payments made in cash to keep harmonious relationship, as explained on behalf of the assessee, were not covered either by rule 6DD of the Income-tax Rules, 1962, or, the circular issued by the Central Board of Direct Taxes, as the terms "harmonious relationship" indicated only general and normal circumstances and not exceptional one as contemplated in rule 6DD(j) of the Rules. Although the learned Commissioner of Income-tax (Appeals), in allowing the appeal of the assessee did not doubt the identity of the payee and the genuineness of the transaction, the learned Tribunal held that in rule 6DD(j), the said requirements were only subsidiary requirements in addition to the main requirement of proving the exceptional circumstances and genuine difficulties which had not been fulfilled by the assessee in the instant case. Thus, in the facts and the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the company and therefore, it could not be said that the cash payments was made against the goods purchased. Hence, there was no application of section 40A(3) of the Act. So far as the evidence and the identity of the payee were concerned, it had not been doubted that the payments had been made to keep a harmonious relationship with the principal under unavoidable circumstances. From the details of accounts of Shri Hanuman Sugar and Industries Ltd., it was found that the assessee had a credit balance, as on June 30, 1986, to the tune of Rs. 3,51,527. The whole essence of the order of the learned Commissioner, it appears, was that the learned Commissioner did not question the genuineness of the transaction and was satisfied that the payments were made to the payee to keep a harmonious relationship under unavoidable circumstances. The learned Tribunal, however, found that the Commissioner of Income-tax (Appeals), had allowed the appeal on the ground that the identity of the payee and the genuineness of the transaction were not in doubt. According to the learned Tribunal, however, these are only subsidiary requirements in rule 6DD(j), in addition to the main requirement of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments were made in cash under the circumstances as explained by the assessee before the Assessing Officer, the learned Commissioner of Income-tax (Appeals) and the learned Tribunal. If the identity of the transaction is found to be not genuine then whether a payment is made under unavoidable circumstances or due to exceptional circumstances becomes secondary altogether as the transaction in question is found to be not genuine and in that event the whole exercise under these provisions falls through. The learned Tribunal, however, found that these two circumstances were not proved that is to say that the payments were made due to exceptional or unavoidable circumstances. The provisions of the rule or the conditions laid down in the said circular do not provide as to what degree of factual proof is required to satisfy the requirements under rule 6DD(j) read with the said circular in question. The factual proof of each case has to be taken into account for the purpose of finding out whether the requirements under the said rule are or are not satisfied. As aforesaid if the assessee satisfies one of such requirements as provided in rule 6DD(j), he is entitled to seek protection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the interest of the Department is protected because the Department can assess those amounts in the hands of the payee and it is not that these amounts will not be assessed at all. Thus, the Department will not suffer in any way." Lastly, the observations of the learned Income-tax Commissioner (Appeals), that the payments had been made to keep harmonious relationship with the principal under unavoidable circumstances, in my opinion, clearly satisfies the requirement under the provisions of rule 6DD(j)(1). Thus, it can be said that the payments were made under unavoidable circumstances only to keep harmonious business relationship with the payee. The genuineness of the business relationship between the payee and the assessee, in the instant case, had or has not been doubted by any authority namely, the Assessing Officer, the learned Commissioner (Appeals) and the learned Tribunal. Lastly, it was pointed out on behalf of the assessee that the amount paid in cash was Rs. 4,83,000, which was quite small compared to the total amount involved in the entire transaction which was over Rs. 2 crores. It was submitted on behalf of the assessee that the supplier on each of the seven ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
