S.P. Goyal, J.
1. The Commissioner of Income-tax has moved this petition under Section 256(2) of the I.T. Act (for short, called 'the Act') for a mandamus directing the Tribunal to refer the following two questions of law to this court for its opinion:
'(1) Whether, on the facts and in the circumstances of the case, the assumption by the Appellate Tribunal, that the cash payments made by the assessee, in contravention of Section 40A(3) of the I.T. Act, 1961, were made to identified payees is supported by any relevant or admissible evidence on the record ?
(2) Whether, on the facts and in the circumstances of the case, on a proper interpretation of Section 40A(3) of the Act and Rule 6DD of the I.T. Rules, 1962, the Appellate Tribunal was justified in law in holding that, in the instant case, an exceptional circumstance as contemplated by Rule 6DD(j) did exist and that the prohibition contained in Section 40A(3) was, therefore, not attracted ?'
2. The assessee, assessed as an association of persons, carried on business of speculation in gur and shakkar. It also indulged in gambling activity described as 'Ghaiwala Dara Satta'. In the assessment year 1971-72, the assessee declared an income of Rs. 2,35,405, but the ITO made an addition of Rs. 6,45,568, holding that the expenditure shown to have been incurred by the assessee to that extent was hit by the prohibition contained in Section 40A(3) of the Act, inasmuch as it consisted of payments exceeding Rs. 2,500 made otherwise than by crossed cheque or crossed draft to 34 persons. It may be mentioned that the ITO did not doubt that such payments had been genuinely made by the assessee to identified payees. He, however, refused to recognise the payments holding that no exceptional or unavoidable circumstances, as contemplated by Sub-clause (1) of Clause (j) of Rule 6DD of the I.T. Rules had been established. Before the Tribunal, the assessee submitted that since the activity of 'Ghaiwala Dara Satta' was an unlawful activity exposing the assessee to criminal prosecution, the payment to the winners had to be made in cash to avoid prosecution. This, according to the assessee, was an exceptional circumstance, as contemplated by the said Rule 6DD(j) and the prohibition contained in Section 40A(3) was not attracted. Vide order dated March 1, 1976, the Tribunal agreed with the contention of the assessee and upheld the deletion of the said amount by the AAC who had done so on different grounds. Dissatisfied with the order of the Tribunal, the Revenue moved an application under Section 256(1) of the Act for reference of the above-noted two questions to this court which was declined, holding that question No. 1 did not arise from its order and question No. 2 related purely to a finding of fact.
3. As would be apparent from the order dated March 1, 1976, of the Tribunal, the finding of the assessing authority that the payments were made to identified payees was not challenged either before the AAC or the Tribunal. The Tribunal, therefore, was right in holding that question No, 1 did not arise from its order. As regards the second question, the Tribunal certainly went wrong in holding that the finding as to the existence of the exceptional circumstances as contemplated by Rule 6DD(j) was a finding of fact. The contention of the Revenue was that the fact that the activity in which the assessee was engaged was prohibited by law and as such if the payments were made by crossed cheques it would expose the assessee to criminal prosecution would furnish no exceptional circumstances within the meaning of the said rule. According to the learned counsel for the Revenue, it was the activity itself which exposed the assessee to criminal prosecution and not the payments simpliciter. It was further contended that the exceptional circumstances must be such as arise from a lawful activity. On the proved facts, the question thus raised, according to the learned counsel, was a question of law and not offact. Whatever may be the merits in the contention raised, there can be no manner of doubt that a question of law does arise from the order of the Tribunal, as to whether the facts proved constitute exceptional circumstances as contemplated by the said Rule 6DD(j).
4. Consequently, this petition is partially allowed and the Tribunal is directed to draw up a statement of case and refer question No. 2 to this in accordance with law. No costs.
P.C. Jain, J.
5. I agree.