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Commissioner of Income-tax, Gujarat-iv, Ahmedabad Vs. Trinity Traders - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax References Nos. 102 and 103 of 1975
Judge
Reported in[1987]163ITR381(Guj)
ActsIncome Tax Act, 1961 - Sections 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 40A, 40A(3) and 260(1)
AppellantCommissioner of Income-tax, Gujarat-iv, Ahmedabad;trinity Traders
RespondentTrinity Traders;commissioner of Income-tax, Gujarat-iv, Ahmedabad
Advocates: J.P. Shah and; N.V. Raval, Advs.
Cases Referred and Keshav Mills Co. Ltd. v. Commissioner of Income
Excerpt:
.....been referred to us for our opinion. 2,500 may be made otherwise than by a crossed cheque or a crossed bank draft and the rule says that no disallowance under sub-section (3) of section 40a shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by crossed bank draft in the cases and circumstances specified therein, namely :(j) in any other case, where the assessee satisfies the income-tax officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft -(i) due to exceptional or unavoidable circumstances, or (ii) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature..........two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. the first proviso to section 40a(3) is not material for the purpose of this judgment. under the second proviso, no disallowance under the sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. it may be noted here that in february 1969, the central government specified, by notification in the.....
Judgment:

Divan, C.J.

1. These two references arise out of one and the same order of the Tribunal. Hence we will dispose of both the matters by this common judgment. In this case, at the instance of the assessee the following question has been referred for our opinion :

'Whether the Tribunal was right in law and on facts, in holding that the payments of Rs. 48,939 made to M/s. Manubhai & Co. of Ahmedabad are not covered by rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962 ?'

2. The following question has been referred at the instance of the Revenue.

'Whether the Tribunal was right in law and on facts in holding that the payments of Rs. 9,791 made to M/s. Yogeshchandra & Co. of Bombay are covered by rule 6DD(j)(i) and (ii) of the Income-tax Rules, 1962 ?'

3. The facts leading to these two references are as follows : 'We are concerned with assessment year 1970-71. The assessee is a registered firm which derives income from a spinning mill. It purchases cotton waste and manufactures yarn which is used in manufacturing rough clothes, mats, carpets, etc. At the time of the assessment, the Income-tax Officer, while scrutinising the accounts, found that the assessee had made cash payments aggregating to Rs. 48,939 to M/s. Manubhai & Co. and each of those payments exceeded Rs. 2,500. The assessee, in the course of the same assessment proceedings, was also found to have made payments aggregating to Rs. 9,791 to Messrs Yogeshchandra & Co. and each of those payments also exceeded Rs. 2,500. As these payments were made in cash, the Income-tax Officer, in view of the language of section 40A(3), disallowed these payments and passed the order in the light of rule 6D of the Income-tax Rules, 1962. On appeal filed by the assessee, the Appellate Assistant Commissioner confirmed the decision of the Income-tax Officer. The assessee took the matter in further appeal before the Tribunal and before the Tribunal it was not disputed that the assessee had made various payments to M/s. Manubhai & Co., between April 3, 1969 and October 1, 1969. Each of those payments was in excess of Rs. 2,500. Each of those payments was otherwise than by a crossed cheque or crossed draft and the total amount paid to M/s. Manubhai & Co., in the course of that period April 3, 1969, to October 1, 1969. aggregated to Rs. 48,939. Similarly, the assessee had admittedly made payments to M/s. Yogeshchandra & Co., between April 19, 1969, and September 1, 1969. The total came to Rs. 9,791. Each of these payments was in excess of Rs. 2,500 and was made otherwise than by a crossed cheque or crossed draft. The Tribunal came to the conclusion that, on facts, the assessee's contention that M/s. Manubhai & Co., were not prepared to accept cheques from the assessee-firm could not be accepted and it, therefore, disallowed the claim for Rs. 48,939. As regards payments made to M/s. Yogeshchandra & Co., the Tribunal found that all along in the past as well as during the year under appeal, the payments, past as well as during the year under appeal, were made only in cash and therefore the explanation put forth by the assessee had some merit. The Tribunal again took the fact into consideration that Yogeshchandra & Co. was a Bombay party and their insistence on cash payments in the light of the facts stated by the assessee could not be ruled out. The Tribunal therefore held that the payments made to Yogeshchandra & Co. must be held to be covered by rule 6DD(j)(i) as well as rule 6DD(j)(ii) of the Income-tax Rules, 1962. Thereafter, at the instance of the assessee as well as at the instance of the Revenue, the two questions which we have hereinabove respectively set out have been referred to us for our opinion.

4. Under section 40A, notwithstanding anything to the contrary in sections 30 to 39, the amounts set out in section 40 shall not be deducted in computing income chargeable under the head 'Profits and gains of business or Profession' Under sub-section (3), where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in sums exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. The first proviso to section 40A(3) is not material for the purpose of this judgment. Under the second proviso, no disallowance under the sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. It may be noted here that in February 1969, the Central Government specified, by notification in the Official Gazette, that 31st March, 1969, was the specified date under section 40A(3). Rule 6DD of the Income-tax Rules, 1962, provides for cases and circumstances in which payment in the sum of Rs. 2,500 may be made otherwise than by a crossed cheque or a crossed bank draft and the rule says that no disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by crossed bank draft in the cases and circumstances specified therein, namely :

'(j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft -

(i) due to exceptional or unavoidable circumstances, or

(ii) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof,

and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee'

5. Our attention has been drawn to Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes. The circular is directed to all Commissioners of Income-tax and is headed 'Section 40A(3) of the Income-tax Act, 1961 - Rule 6DD(j) of the Income-tax Rules, 1962 - Clarification regarding'. This circular clarified the circumstances in which the conditions laid down in rule 6DD(j) have been made applicable, and in paragraph 4, the circular states (See [1977] 108 ITR (St.) 8, 9) :

'4. All the circumstances in which the conditions laid down in rule

6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are :

(i) The purchaser is new to the seller; or

(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or

(iii) The transactions and payments are made on a bank holiday; or

(iv) The seller is refusing to accept payment by way of crossed cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller; or

(v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or

(vi) Specific discount is given by the seller for payment to be made by way of cash.'

7. The circular makes it clear that these are merely illustrative instances of cases in which rule 6DD(j) would be applicable. The circular also points out that the requirements of rule 6DD(j) can be satisfied if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, Sales-tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. It is obvious that when the Income-tax Officer passed the assessment order and subsequently when the matter came up before the Income-tax Appellate Tribunal, the Circular of May 31, 1977, was not and could not have been available to them and hence the cases which, according to the Board, would be covered by the rule 6DD(j), could not be considered either by the Income-tax Officer or by the Appellate Assistant Commissioner or by the Appellate Tribunal.

8. Under these circumstances, it will be better to apply the formula adopted by the Supreme Court in CIT v. Indian Molasses Co. P. Ltd. : [1970]78ITR474(SC) of the Reports, the Supreme Court has pointed out.

'Two courses are now open to us; to call for a supplementary statement of the case from the Tribunal; or to decline to answer the question raised by the Tribunal and to leave it to the Tribunal to take appropriate steps to adjust its decision under section 66(5) (of the old Act) in the light of the answer of this court. If we direct the Tribunal to submit a supplementary statement of the case, the Tribunal will, according to the decisions of this court in New Jehangir Vakil Mills Co. Ltd. v. Commissioner of Income-tax : [1959]37ITR11(SC) ,Petlad Turkey Red Dye Works Co. Ltd. v. Commissioner of Income-tax : [1963]48ITR92(SC) , and Keshav Mills Co. Ltd. v. Commissioner of Income-tax : [1965]56ITR365(SC) , be restricted to the evidence on the record and may not be entitled to take additional evidence. That may result in injustice. In the circumstances, we think it appropriate to decline to answer the question....'.

9. We are unable to answer the questions referred to us because we feel that it would work out injustice if the assessee and the department are not allowed an opportunity to lead evidence on the point of applicability of rule 6DD(j) as meant to be applied by the Circular of the Board dated May 31, 1977. It will be open to the Tribunal to dispose of the appeal pending before it under section 260(1) of the Income-tax Act, 1961, in the light of the observations made by us after determining the question which ought to be decided in the light of the Circular of the Board dated May 31, 1977. There will be no order as to costs of these two references. Orders accordingly.


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