1. This judgment shall also dispose of Miscellaneous Civil Case No. 33 of 1982 relating to the same assessee.
2. The Department made an application to the Tribunal for a reference to this court under Section 256(1) of the Income-tax Act, 1961, of the following questions of law, namely :--
'1 (a) Whether there was sufficient evidence or material before the Tribunal to support its finding that the sales of coke made to the partners and recorded as such in the books of account of the firm constituted distribution of assets on dissolution of the firm ?
(b) If question No. 1 (a) above is answered in favour of the Department and against the assessee, whether the Tribunal was right in law in deleting theaddition of Rs. 26,385 made by the Income-tax Officer and upheld by the Commissioner of Income-tax (Appeals) on account of lesser price charged from the partners ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal acted on relevant material in deleting the additions of Rs. 17,052 and Rs. 14,268 made under Section 40A(3) and 40A(2)(a) respectively of the Income-tax Act, 1961 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of Rs. 3,000 made by the Income-tax Officer and upheld by the Commissioner of Income-tax (Appeals) on account of tea, pan, etc., being entertainment expenses ?'
3. The Tribunal came to the conclusion that the aforesaid questions Nos. 1 and 2 were questions of fact which could not be referred but question No. 3 was a question of law. Accordingly, it made a reference under Section 256(1) of the Act for decision of the aforesaid question No. 3 only, which is Misc. Civil Case No. 246 of 1981. Aggrieved by the Tribunal's order, declining to refer the aforesaid questions Nos. 1 and 2, the Department has made an application (Misc. Civil Case No. 33 of 1982) under Section 256(2) of the Act, for a direction to the Tribunal to state the case and refer to this court for decision also the aforesaid questions Nos. 1 and 2. This is how both these matters were heard together by us.
4. The material facts are these. The assessee was a partnership firm, constituted on September 14, 1974. The firm was dissolved on March 31, 1975. During this period, which is the relevant period for the assessment, the assessee purchased 20,000 tons of coke from Bhilai Steel Plant, out of which a part was sold to third parties at the rate of Rs. 45 per ton. It appears that the balance quantity of 5,275 tons was shown as sold to the partners of the firm at the rate of Rs. 40 per ton. The Income-tax Officer valued the entire quantity shown as sold to the partners of the firm at the rate of Rs. 45 per ton resulting in an addition being made of an amount of Rs. 26,375. The Commissioner of Income-tax (Appeals) affirmed the Income-tax Officer's order. On further appeal by the assessee, the Tribunal observed that the remaining quantity of coke belonging to the firm at the time of dissolution of the firm really formed part of the firm's assets and, therefore, its distribution among the partners was a distribution of the assets and not, in substance, sale of the coke. On this view, the addition made of Rs. 26,385, treating the distribution of the remaining quantity of coke between the partners as sale to them, was deleted by the Tribunal. The Tribunal also allowed certain deductions which had been disallowed by the Income-tax Officer and the Commissioner of Income-tax (Appeals) under subsections (2)(a) and (3) of Section 40A of the Act. These items related to theloading charges and other payments made to contractors, exceeding the amountof Rs. 2,500 by cash instead of by crossed cheque or bank draft. These items amounted to Rs. 17,052 and Rs. 14,268. The Tribunal, in permitting these deductions, accepted the explanation of the assesses, which had been rejected by the Income-tax Officer and the Commissioner of Income-tax (Appeals). The explanation given by the assessee was the absence of banking facilities in the village where the business was carried on as well as other exceptional circumstances, creating genuine difficulty in payment being made by crossed cheques or bank drafts, which were also not acceptable to the payee, who had genuine difficulty in accepting payments by that mode. The Tribunal also deleted the disallowance of Rs. 3,000 out of the amount claimed as deductions by the asses-see towards entertainment charges incurred for the customers and employees. The Tribunal took the view that there was no rational basis to disallow this amount of Rs. 3,000 which had been made by the lower authorities.
5. It is on the above facts that the Department claimed a reference of the aforesaid three questions of law, out of which question No. 3 alone has been referred by the Tribunal. In our opinion, even question No. 3 does not raise a question of law and is a question of fact, on which such a reference could not be made. Questions Nos. 1 and 2 were rightly not referred by the Tribunal since they also involve only questions of fact, in the present case.
6. The deletion of disallowance of Rs. 3,000 towards expenses on entertainment is based ultimately on a question of fact. The Tribunal came to the conclusion that there was no basis to disallow the assessee's claim to this extent. It is difficult to appreciate what principle of law is involved in the decision of this question on the facts and circumstances of the present case. It is, therefore, a question of fact in the present case.
7. With regard to questions Nos. 1 and 2, which were referred by the Tribunal, learned counsel for the Revenue contended that the requisite findings were not given by the Tribunal to hoid that the circumstances justified making of payment in excess of Rs. 2,500 in cash and not by crossed cheque or bank draft. It is clear from Section 40A as well as rule 6DD of the Income-tax Rules, 1962, that in certain exceptional circumstances, payment in cash even of an amount exceeding Rs. 2,500 can be justified, notwithstanding the requirement that the same be made by a crossed cheque or a bank draft. Particular reference to Clauses (h) and (j) of Rule 6DD and the second proviso to Sub-section (3) of Section 40A may be made in this connection. The explanation given by the assessee satisfies this requirement and the Tribunal accepted that explanation, which enabled it to grant the relief, which it has done. On the facts found proved by the Tribunal, it is obvious that the conclusion reached by the Tribunal was the only possible conclusion. There is thus no occasion to direct the Tribunal to refer the aforesaid questions Nos. 1 and 2, which it has rightly refused to refer.
8. Consequently, this reference (Miscellaneous Civil Case No. 246 of 1981) is answered against the Department and in favour of the assessee and it is held that the Tribunal was justified in deleting the disallowance of Rs. 3,000 made by the Income-tax Officer and upheld by the Commissioner of Income-tax (Appeals), on account of entertainment expenses. The other case, Miscellaneous Case No. 33 of 1982, is dismissed. There will be no order as to costs.