TMI Blog2005 (2) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer disallowed a sum of Rs. 43,35,715 being the purchase price which was paid in cash in relation to the business which was detected in the course of a search conducted after the return was filed. It was admitted during the course of such search proceedings that the assessee was carrying on unaccounted business which was not reflected in the regular books of account maintained by the assessee. The explanation of the assessee that such unaccounted transactions are always made in cash and hence, the provisions of section 40A(3) of the Act cannot apply, and alternatively the case would be governed by the exception carved out in rule 6DD(j) of the Income-tax Rules, 1962 ("the Rules"), as well as Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes, was rejected by the Assessing Officer holding that the provisions of section 40A(3) of the Act were mandatory and were also applicable in the case of illegal business as held by the Andhra Pradesh High Court in the case of S. Venkata Subba Rao v. CIT [1988] 173 ITR 340. The contention regarding the applicability of rule 6DD(j) of the Rules was also rejected by stating that qua the same parties the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed only in accordance with provisions under the Act. Mr. Naik placed reliance on the following decisions: (i) Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC); (ii) S. Venkata Subba Rao v. CIT [1988] 173 ITR 340 (AP); and (iii) Hasanand Pinjomal v. CIT [1978] 112 ITR 134 (Guj). The facts of the case are absolutely clear. It is an accepted position on record that the petitioner-company was carrying on business and was maintaining regular books of account. It appears that during the course of search proceedings certain documents were seized which reflected unaccounted business transactions admittedly in the same line of business. In the business which was not reflected in the books of account the transactions were in cash and after ascertaining the purchases for such business on a perusal of the seized documents, the Assessing Officer has disallowed the purchase price as being hit by the provisions of section 40A(3) of the Act. As to what is the object of incorporating section 40A(3) of the Act has been laid down by this court in the case of Hasanand Pinjomal [1978] 112 ITR 134 in the following words: "Before entering into an analysis of the relevant sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court was called upon to decide as to whether payments made by the assessee in cash to the persons from whom the assessee had purchased smuggled goods could be said to be a payment made out of the business expediency within the meaning of the second proviso to section 40A(3) of the Act and was covered by rule 6DD(j) of the Rules? The Andhra Pradesh High Court has reproduced the contentions raised on behalf of the assessee at pages 343 and 344 of the Report. In sum and substance it was contended on behalf of the assessee that where the very business carried on by the assessee is an illegal business, it was not possible to comply with the requirements of section 40A(3) of the Act and in the very nature of things, the assessee could not be called upon to establish either the genuineness of the payment or the identity of the payee. The said contention was turned down by the High Court of Andhra Pradesh holding that the provisions of section 40A(3) were rightly invoked and the payment in question, towards purchase of smuggled goods, could not be said to be covered by rule 6DD(j) of the Rules. The Andhra Pradesh High Court in the process laid down: "Indeed, it is not disputed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified 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:" Under the second proviso it is provided that no disallowance under this sub-section shall be made in the case of any payment exceeding a sum of two thousand five hundred rupees unless made by a crossed cheque or 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. Accordingly, rule 6DD of the Rules has been framed. It sets out cases and circumstances in which payment may be made 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. Clauses (a) to (i) of the said rule lay down various circumstances. However, clause (j) of rule 6DD of the Rules which is in the form of a residuary clause reads as under: "6DD. No disallowance under sub-section (3) of section 40A shall be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expended wholly and exclusively for the purposes of business. In the present case, bearing in mind the aforesaid legal position which flows on a conjoint reading of various provisions as detailed hereinbefore, the facts may be appreciated. Whether in the circumstances of the present case it is possible to state that the case of the assessee is governed by the exceptions carved out by rule 6DD(j) of the Rules? The rule has to be read in the context of the second proviso to sub-section (3) of section 40A of the Act whereunder a disallowance is not permissible if on consideration of business expediency an assessee is able to satisfy the Assessing Officer that he was required to make payment in cash due to exceptional or unavoidable circumstances, or because payment by a crossed cheque or bank draft was not practicable, and/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 further furnishes evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and the identity of the payee. Thus, the position is that even if business expediency is estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... genuineness of the payment and the identity of the payee also remains undischarged. In these circumstances, it is not possible to accept the reasoning which is adopted by the Tribunal. The Tribunal has committed an error in reading the provision of rule 6DD(j) of the Rules when it states that the necessity of the assessee proving genuineness of the payment and the identity of the payee is not connected with sub-clause (1) of rule 6DD(j) of the Rules and the said requirement is only while invoking sub-clause (2) of rule 6DD(j) of the Rules. The aforesaid reasoning adopted by the Tribunal is fallacious when one considers the object with which the provision has been brought on the statute book. It is necessary to bear in mind that even if an exceptional or unavoidable circumstance is pleaded, the Revenue must have data with it to verify the genuineness of the transaction and identify the recipient of the cash payment. If what the Tribunal states is correct, the entire provision is rendered otiose and that interpretation can never be placed on a provision. The need to prove genuineness of the payment and the identity of the payee can be appreciated from a slightly different angle. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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