9911796707
TMI Blog1985 (8) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee-company is as under : . Patel Bros., Astan Dr. Cr. Rs. Rs. 2,00,000 Paid by cheque 31,51,185 Op. balance as on 1-10-1976 43,20,419 Paid by cash 13,69,234 Purchases credited on 31-5-1977 ----------- ---------- 45,20,419 45,20,419 18, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --- ----------- The above summary shows that the assessee-company, during the year, purchased goods worth Rs. 13,69,234 from Patel Bros., Astan. There was opening credit balance of Rs. 31,51,185 in the account of this firm. Thus, the assessee was required to pay total amount of Rs. 45,20,420 to this firm which has been paid during the year. The details of payment shows that Rs. 2,00,000 (Rupees two lakhs) are paid by cheque and balance amount of Rs. 43,20,219 is paid by cash on different dates. Presuming that the opening credit balance of Rs. 31,51,185 is paid first, the balance cash payments of Rs. 13,69,234 are for the goods purchased during the year. Similarly, the assessee purchased goods worth Rs. 66,19,524 from Patel Bros. Co., Astan and paid Rs. 38,20,000 by cash on different dates an the balance is carried forward. The assessee-company has made cash payments each exceeding Rs. 2,500 for purchase of goods as under : Rs. Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction of the Talati of the village and has an independent identity from the neighbouring town Bardoli. (3) Now village Astan where the assessee-company and the said two firms have been carrying on their business was not served by any bank during the relevant period and the payments have been made to the said firms in village Astan itself. As stated above the two firms to whom the payments have been made have been carrying on their business at village Astan and the said payments have been made in the said village only and, therefore, the payments fall in the exemption provided in clause (h) of rule 6DD of the Income-tax Rules, 1962. (4) The fact that village Astan was not served by any bank is supported by a certificate from the Talati of village Astan in that connection, which is filed herewith. (5) Even apart from the exemption provided in clause (h), the same is still covered by sub-clause (2) of clause (j) of rule 6DD on the ground that payment by crossed cheque would have caused genuine difficulty to the payee with regard to the nature of transactions and necessary (sic) of expenditure settlement thereof. In this connection, the assessee can identify payees and satisfy you ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inviting the latter's objections thereto. On 26-3-1981, the assessee wrote a letter to the ITO wherein it stated 'that it is not proper in law and on facts to disallow expenditure of Rs. 51,89,234 on purchases under section 40A(3) on the grounds discussed in the draft assessment order'. Thereafter, the assessee vide its letter dated 22-8-1981 addressed to the IAC gave detailed explanations as to why Rs. 51,89,234 should not be disallowed under section 40A(3). For our purpose, the following extract from the said letter is relevant : "(iv) The case is, therefore, covered by the provisions of sub-clause (1) of clause (j) of rule 6DD and, therefore, it becomes necessary for the assessee to furnish evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee ; From the summaries of individual transactions filed herewith it would be found that the two firms who had received the payments are on the records of the Income-tax Department. They are regularly assessed to tax, their books of account were produced before the Income-tax Officer assessing the assessee-company. Even it was possible for the Income-tax Officer to know ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee of the staff to withdraw cash from its banks at Surat and carry it to Astan. (3) The assessee-company and the two partnership firms were doing business almost entirely on borrowed capital and were all the times in great pressure in realising their collection. It was, therefore, commercially expedient to settle the transactions by cash. (4) The firms to whom payments were made merely acted as purchasing agents of the assessee-company at the fixed margin of 0.5 per cent. The said firms, on account of all time financial pressure were not ready to accept payments by crossed cheques. The provisions of Circular No. 220 dated 31-5-1977 were clearly applicable to the facts of the case. (5) The two firms to whom payments were made have been regularly assessed to income-tax. It was possible to locate the disposal of money by them and, therefore, the purpose and intent of provisions of section 40A(3) were not prejudiced." 9. On 27-8-1981, the IAC issued directions as contemplated under section 144B to the ITO wherein he had accepted the assessee's contention that payments aggregating to Rs. 38,30,419 are covered under clause (j) of rule 6DD and the provisions of section 40A(3) could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany and with the help of the employees of the assessee-company. Mostly, the purchase and sale bills are prepared by the employees of the assessee-company. The price is fixed by the partners who are directors of the assessee-company. After purchase, the goods are stored at the premises of the assessee. All these facts leads to the conclusion that genuineness of the purchase price and payments to the firms as shown by the assessee is not verifiable, particularly when the payments are made in cash to the firms, which obviously are created to divert the profit of the assessee-company. 11. From the facts discussed above, it is very clear that the assessee has in respect of expenditure incurred made total payments amounting to Rs. 13,45,000 in sum exceeding two thousand five hundred rupees otherwise than by crossed cheques or crossed drafts drawn on bank for which there were no exceptional or unavoidable circumstances justifying the assessee's action of making cash payments. Rule 6DD(h) and (j) of the Income-tax Rules does not come to the assessee's rescue. The assessee's case is also not covered by any of the circumstances mentioned in CBDT Circular No. 220 dated 31-5-1977. I, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,30,419, there was no reason for not accepting similar explanation of the assessee regarding payments amounting to Rs. 13,45,000. 14. The learned counsel for the assessee strongly relied on the decision of the Hon'ble Gujarat High Court in the case of Hasanand Pinjomal v. CIT [1978] 112 ITR 134, more particularly the following observation of the report: "Before entering into an analysis of the relevant statutory provisions, it would be necessary to consider the object behind the enactment of section 40A. In the course of business or profession, the assessee has to incur expenditure involving payments made from time to time to different persons under various circumstances. The Legislature found from experience that the existing provisions of the Act were inadequate to deal with evasion of tax under the cloak or guise of permissible deductions and also that many payments were made with unaccounted money possessed by the assessee and deductions were claimed in respect of such payments. In order to remedy such situation, section 40A was added by the Finance Act of 1968 and it came into force with effect from April 1, 1968. While introducing the Bill in the Lok Sabha for its consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to them, the income-tax authorities did not do so and took an adverse inference against the assessee while disallowing Rs. 13,45,000. 16. The learned counsel for the assessee further submitted that since village Astan was not served with a banking facility, the fact that Bardoli had banking facilities and both the assessee and the payees were having account in such banks would not automatically justify the income-tax authorities to disallow Rs. 13,45,000. In this connection, he invited our attention to section 2(14) and section 35CC of the Act with a view to impress upon us that wherever the limit or jurisdiction of an area was required to be specified, the Legislature has mentioned such limits in the statute itself. Therefore, the fact that village Astan was within one kilometre from Bardoli, would not in any way entitle the income-tax authorities to make disallowance of Rs. 13,45,000, in the manner they did. He, therefore, urged that Rs. 13,45,000 should be deleted from the total income of the assessee. The learned counsel for the assessee also stated that in the subsequent assessment year, even though no attempt was made by the ITO to make disallowance on similar circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready brought on record coupled with the fact that payments made to the payees in the Surat transactions were accepted by the income-tax authorities themselves, it is difficult to doubt the genuineness of the payments made to the same payees in respect of village Astan transactions. In this view of the matter, we entirely agree with the stand taken on behalf of the assessee that the income-tax authorities were not justified in disallowing Rs. 13,45,000 by invoking the provisions of section 40A(3). We would, therefore, delete Rs. 13,45,000 from the total income of the assessee. In view of the decision of the Hon'ble Allahabad High Court in the case of U. P. Hardware Store v. CIT [1976] 104 ITR 664, of the Hon'ble Orissa High Court in the case of Sajowanlal Jaiswal v. CIT [1976] 103 ITR 706 and of the Hon'ble Punjab and Haryana High Court in the case of Hari Chand Virender Paul v. CIT [1983] 140 ITR 148, we do not accept the submissions made on behalf of the assessee that the provisions of section 40A(3) would not be applicable in the case of purchase of goods. 19. Before we part with this order, it may be mentioned that the learned counsel for the assessee did not press ground reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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