1. By this reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Indore Bench, Indore, has referred the following question of law for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the disallowance of Rs. 16,400, paid in cash to Shri Santosh Kumar, under Section 40A(3) of the Income-tax Act, 1961 ?'
2. The facts giving rise to this reference briefly stated are as follows: During the assessment year 1971-72 relevant to the accounting period ending Diwali 1970, the assessee was assessed to tax in the status of an association of persons. The assessee derived income from manufacture and sale o oil engines and pumping sets. Daring the course of scrutiny of accountsthe ITO found that Shri Santosh Kumar was paid various amounts aggregating to Rs. 30,482 during the relevant accounting period. The assessee contended before the ITO that Shri Santosh Kumar was paid the above amount by way of commission as he worked for the assessee in bringing new customers. The ITO found that out of the aforesaid amount of Rs. 30,482 credited to the account of Shri Santosh Kumar, he was paid various amounts in cash exceeding Rs. 2,500 and such cash payments were to the extent of Rs. 16,400 out of the total amount of Rs. 30,482. Since the assessee failed to establish that the various payments in cash exceeding Rs. 2,500 to Shri Santosh Kumar were made in exceptional and unavoidable circumstances, the ITO invoked the provisions of Section 40A(3) of the Act and disallowed the said cash payment totalling Rs. 16,400.
3. On appeal by the assessee the disallowance was upheld by the AAC. On further appeal by the assessee the Income-tax Appellate Tribunal has also upheld the disallowance. At the instance of the assessee the Tribunal has referred the aforesaid question of law arising out of the order of the Tribunal for the opinion of this court.
4. Now, the Tribunal has found that payments in cash exceeding Rs. 2,500 to the extent of Rs. 16,400 were made by the assessee to Shri Santosh Kumar and the assessee has failed to establish that the said cash payments were made under exceptional and unavoidable circumstances. Under the circumstances the provisions of Section 40A(3) of the Act are clearly attracted and the Tribunal did not commit any error of law in upholding the disallowance of the said amount by the ITO.
5. The learned counsel for the assessee placed reliance upon Rule 6DD(e) of the I.T. Rules, 1962, and contended that the Tribunal committed an error of law in upholding the disallowance of the said amount. The contention of the learned counsel for the assessee has no force. Rule 6DD(e) of the I.T. Rules is as follows :
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 or by a crossed bank draft......
(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 assessee to such payee.'
6. Apparently the above rule is not attracted in the present case. In the present case no liability was incurred by the payee, Santosh Kumar, for any goods supplied or services rendered by the assessee to him. In fact the position is exactly the reverse. The commission was paid by the assessee to Santosh Kumar for services rendered by him to the assessee and, therefore, the provisions of the above rule relied upon by the learned counsel for the assessee are not applicable to the present case. In view ofthe finding of the Tribunal that payments in cash exceeding Rs. 2,500 tothe extent of Rs. 16,400 were made by the assessee and the assessee failedto prove that the said payment in cash were made in exceptional orunavoidable circumstances, the tribunal had not committed any error oflaw in confirming the disallowance of the said amount of Rs. 16,400 paidin cash by the assessee to Shri Santosh Kumar under Section 40A(3) of the Act.
7. As a result of, the discussion aforesaid, our answer to the questionreferred to us by the Tribunal is in the affirmative and against the assessee. In the circumstances, the parties shall bear their own costs of thisreference.