TMI Blog1985 (8) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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 18,040 TDS adjusted 1,80,403 Interest credited on 30-9-1977 1,62,363 Balance c/f. ----------- ---------- 47,00,822 47,00,822 ----------- ---------- B. Patel Bros. Co., Astan Dr. Cr. Rs. Rs. 38,20,000 Paid by cash 66,19,524 Purchases credited on 30-5-1977 23,854 TDS adjusted 30,14,216 Balance c/f. 2,38,546 Interest credited on 30-9-1977 ----------- ----------- 68,58,070 68,58,070 ----------- ----------- The ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 your honour regarding the genuineness of the payments. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt : "(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 exactly what happened to the amounts received by the said firms. Photocopies of the receipts issued by the firm in support of payments made to them are filed herewith. It would be found from these facts that there is no doubt regarding the genuineness of the payment and identity of the payees. Even the Income-tax Officer has not expressed any dissatisfaction regarding this aspect in his draft assessment order ; (v) The Income-tax Officer in his draft assessment order has tried to show that the payer and the payees were the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial 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 not be attracted. However, regarding the amount of Rs. 13,45,000, the IAC directed the ITO to disallow the same, as under: "18. So far as other transactions listed above are concerned, (S. Nos. 1, 2, 5, 6, 7, 9, 10, 12, 13, 15, 17, 18, 22, 25, 26, 29, 30, 33, 35 and 37 totalling Rs. 13,45,000), the payments were made after withdrawing the amount from the bank from Bardoli. No sufficient materials have been brought on record to show that payments could not have been made by crossed cheques or drafts. When there were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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, therefore, hold that the provisions of section 40A(3) are clearly applicable to the assessee and accordingly disallow the expenditure of Rs. 13,45,000 in respect of which payment is made exceeding Rs. 2,500 otherwise than by a crossed cheque or crossed bank draft." 11. Being aggrieved by the order of the ITO, the assessee went up in appeal before the Commissioner (Appeals) and reiterated the submissions which were made before the ITO/IAC and urged that the ITO was not justified in disallowing Rs. 13,45,000 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A. 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 consideration, the Finance Minister made a speech on April 29, 1968, in which he pointed out that the provision in question was intended to serve the objective of checking tax evasion. Though the Finance Minister did not elaborate, it is obvious that the intention of the Legislature in enacting section 40A(3) particularly was to ensure that payments exceeding the sum specified are made by a crossed cheque drawn on a bank or by a crossed bank draft so that it will be easier to ascertain, when deduction is claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention 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 circumstances obtaining in that year, the Commissioner has taken action under section 263 of the Act in view of the fact that in the year under consideration the Commissioner (Appeals) has upheld the action of the ITO making disallowance of Rs. 13,45,000. 17. The learned representative for the department, on the other hand, strongly relied on the orders of the income-tax authorities and justified their action. 18. We have carefully considered the rival submissions of the parties as well as the material a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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