TMI Blog1982 (2) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... ft. It was made applicable from 1st April, 1969. However, certain exceptions were specified in rule 6DD of the I.T. Rules, 1962. Before the ITO the assessee stated that the abovementioned cash payments should be treated as payments towards the old credit balance of Rs. 75,684 which was outstanding on 1st April, 1969. But the ITO observed that the copy of the accounts of M/s. G. R. Co., Chandni Chowk, Delhi, revalued that payments amounting to Rs. 72,500 had been received by crossed cheques and cash by 9th July, 1969. Thus, relying on the principles of accountancy, he, adjusted the old balance in chronological order and, after deducting the payment of Rs. 72,500 from Rs. 75,684. held that there was a balance of Rs. 3,184. This amount was again chronologically adjusted against the first payment made thereafter on 21st July, 1969. The said payment of Rs. 6,500 was made in cash. Subtracting the amount of Rs. 3,184 from the total cash payment of Rs. 24,500 he held that the sum of Rs. 21,316 was to be disallowed in terms of s. 40A(3) of the Act. On appeal by the assessee, the AAC affirmed the order of the ITO. On further appeal the learned Accountant Member of the Income-tax App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s he of the opinion that the amount due had become a loan. But he was of the view that " expenditure under s. 40A(3) had " reference to expenses incurred by an assessee in the course of carrying on his trading activity ". Such expenses were distinct from the payment of price for merchandise in which the assessee was trading ; this price not being deductible from the gross profits but the profits being determined after taking into account the purchase price and the price at which the assessee disposed of the merchandise. Though he noticed that rule 6DD envisaged payment of price to be also by crossed cheque he felt that the rules were clarificatory of the main section and could not go beyond the scope of the main provision. The Commissioner being aggrieved moved the Income-tax Appellate Tribunal to state a case and refer for our opinion a question of law. As the Tribunal was of the view that a question of law did arise out of its order it referred the following question for our consideration: "Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the payment of Rs. 21,316 made by the assessee to various creditors are not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under : "6DD. Cases and circumstances in which payment in a sum exceeding two thousand five hundred rupees may be made otherwise than by a crossed cheque drawn on a bank by a crossed bank draft. 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 crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely: (e) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessees to such payee; ...... (j) in any other case, where the assessee satisfies the Income-tax Officer 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 transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Incometax O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been relied on for this proposition. The question as to the scope of the word " expenditure " in sub-s. (3) of s. 40A raises an interesting issue. However, in view of the decision that we are going to take with regard to the second point urged before us, we feel that it is not necessary to decide this wider question and it can be determined in a more appropriate case. Coming then to the question of appropriation of payments to the amounts due, it is necessary to examine ss. 59, 60 and 61 of the Indian Contract Act, 1872. The question posed is whether the first item on the debit side of the account has to be discharged or reduced by the first item on the credit side, i. e., chronologically ? Mr. Wadhera, for the revenue, relying on the rule in Clayton's case [1816] 1 Mer. 572, 608, and s. 61 of the Indian Contract Act, so contended. Section 61 provides that where neither party makes, any appropriation the payment shall be applied in discharge of the debts in order of time. The point to be noticed is that this section comes into operation when a debtor from whom distinct debts are due makes a payment but neither he nor the creditor makes any apportionment. According to s. 60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t orders of payment to the debenture-holders were for payment towards principal and interest generally and it was common ground that if all the payments made to the debenture-holders were attributed to principal that would be insufficient to discharge the full amount due. The Inland Revenue intervened to claim that all the payments made on account generally ought to be attributed to interest in the first place and that tax ought to be deducted therefrom. Byrne J. decided that the provisions in the trust deed for payment of interest in the first place was inserted for the benefit of the debenture-holders, and could be waived by them in the absence of opposition by the debtors; that, as between themselves and the trustees, the debenture-holders must elect whether they would take the money as principal or interest, without prejudice to the question whether in their hands it would be treated differently. This was substantially affirmed by the Court of Appeal. Romer L. J. pointed out that, when the Crown raised a question in this regard, the debenture-holders were entitled to say: " This estate is insolvent; it is to our interest now to have these sums appropriated, if they have not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso what he did. Applying the above principle, that the assessee is entitled to appropriate payments in the manner least disadvantageous to himself, to the present case, we think that the assessee is entitled to say that the cash payments may be treated as having been made in payment of purchases, effected prior to 1st April, 1969, and this, it would appear to us, is the assessee's attitude and approach. Though the assessee may not have expressed itself explicitly with regard to the appropriation, it is clear that this was its intention. This can be gathered from, inter alia, its written reply dated 24th August, 1971, filed before the ITO. It has specifically stated therein that these cash payments should be adjusted against the old credit balance of Rs. 75,684 and the payments by way of cheques be treated as having been made for the purchases made during the year under consideration. The ITO treated the written reply as untenable. He held that it disregarded the principles of accountancy which required adjustment chronologically. However, he failed to appreciate that the assessee was entitled to have the payments applied to the discharge of a particular debt for the reasons disc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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