Commissioner Of Income-Tax Iv, Chennai v. A.d.jayaveerapandia Nadar & Sons, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 25.10.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) No.154 of 2003 Commissioner of Income-tax IV,Chennai. .. AppellantVs.A.D.Jayaveerapandia Nadar & Sons,Chennai...Respondent T.C. Appeal filed against the order of the Income-tax AppellateTribunal, A-Bench, dated 24.2.2003 made in I.T.A. No.1911(Mds)/98 for theAssessment Year 1993-94 against the Order of the Commissioner of IncomeTax [Appeals] VI, Chennai 34 dated 30.7.98 in IT/GT/Appeal No.35/96-97/DC-98/VIII against the order of the Addl. Commissioner of Income Tax, Spl.Range VIII Madras dated 31.1.1996 in GIR.No.300-J/93 PAN/GIR No.47-002 FY-9981 For Appellant:Mr.T.Ravikumar For Respondent:Mr.J.BalachanderJUDGMENT (Delivered by P.D.DINAKARAN, J.) Challenging the order of the Income-tax Appellate Tribunal dated24.2.2003 made in ITA.No.1911/Mds/98, the Revenue has preferred thisappeal raising the following substantial questions of law:1. Whether in the facts and circumstances of the case, theTribunal was right in holding that the amounts paid to associateconcerns by way of reimbursement of day to day expenses wouldnot be hit by section 40A(3)? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether in the facts and circumstances of the case, theconditions under section40A(3) that payments should be made onlyby crossed cheque or demand draft do not apply to payments madeto associate concerns? 2. The brief facts of the case are as follows:2.1. The respondent/assessee is a partnership firm carrying on thebusiness of export of garments and textiles. The assessee filed a 'nil'return of income for the assessment year 1993-94 on 29.10.1993. Thereturn was processed under section 143(1)(a) of the Income-tax Act, 1961(hereinafter referred to as 'the Act') and an intimation dated 2.3.1994was sent to the assessee. 2.2. Then, notice under section 143(2) of the Act was issued and adetailed questionnaire dated 30.6.1995 eliciting explanation on variouspoints was also served on the assessee. The assessee appeared for thehearing, and after considering the statement of the assessee relating tocash payments exceeding Rs.10,000/- which frustrated section 40A(3) of theAct, as then existed, the assessing officer held as under: "Assessee paid Rs.34,97,760/- as machining charges to ARJTextiles P.Ltd. U/s.40A(3), expenses paid in excess ofRs.10,000/- in cash is not allowable as explained earlier. Thetotal machining charges amounting to Rs.27,61,100/- have beenpaid in cash. The explanation given by the assessee is in thecase of M/s.ARJ Textiles. The day-to-day expenses like salarypayments etc. are to be met out of machining charges payable bythe assessee and hence, the amounts are paid in cash by theassessee. The argument of the assessee is not acceptable.U/s.40A(3) total expenditure incurred in violation of provisionsof section 40A(3) should be disallowed. However, taking intoaccount the fact that M/s.ARJ Textiles P.Ltd. is accounting themachinery charges received from the assessee and difficultiesexplained, 20% of the amount of Rs.27,61,100/- is estimated asdisallowance u/s.40A(3). The disallowance comes toRs.5,52,220/-. This included in the income of the assessee." 2.3. Aggrieved by the said 20% disallowance out of total payment ofRs.27,61,100/- paid in cash under section 40A(3) of the Act, the assesseepreferred an appeal before the Commissioner of Income-tax (Appeals), who,by order dated 30.7.1998, held as follows: 2.3. Aggrieved by the said 20% disallowance out of total payment ofRs.27,61,100/- paid in cash under section 40A(3) of the Act, the assesseepreferred an appeal before the Commissioner of Income-tax (Appeals), who,by order dated 30.7.1998, held as follows: "The appellant pleaded that the payment made to theassociate concern were only reimbursement expenses incurred andtherefore the question of application u/s.40A(3) does not arise.It is not known under what circumstances the above said paymentof Rs.27,51,100/- had been made in cash. However, as thisconcern obviously an associate concern, since the same isexcluded from the applicability of sec.40A(3), no addition iscalled for. The addition made on this account to the extent of Rs.5,52,220/- is deleted as the payment refers to the associateconcern." 2.4. It appears that the Commissioner was convinced to set aside thedisallowance of 20% of total payment paid in cash on the ground that thepayments were made to associate concerns for reimbursement of certainexpenses incurred by the said associate concerns and section 40A(3) is nottherefore attracted. 2.5. Challenging the said reason, the Revenue preferred appeal beforethe Tribunal contending that section 40A(3) does not contemplate asituation to disallow any part of cash payments, merely for the reasonthat the payments were made to associate concerns. However, the Tribunal,without going into the legal issues raised by the Revenue, dismissed theappeal and confirmed the order of the Commissioner of Income-tax (Appeals)on the ground that the amount paid by the assessee to the associateconcerns was for the purpose of reimbursement of day-to-day expenses andtherefore, the claim of the assessee should have been accepted. Hence,this appeal by the Revenue raising the substantial questions of lawreferred to above. 3. Since we are convinced that both the questions are inter-relatedand revolves on the point whether cash payments made by the assessee tothe associate concerns would attract section 40A(3) of the Act andtherefore the said payments are deductible, we propose to deal with boththe questions together. 4.1. Before proceeding further, it is apt to refer tosection 40A(3), as it then existed, which reads as under:"Expenses or payments not deductible in certain circumstances:40A. (1) xxx (2) xxx (3) Where the assessee incurs any expenditure inrespect of which payment is made, after such date (not beinglater than the 31[st] day of March, 1969) as may be specified inthis behalf by the Central Government by notification in theOfficial Gazette, in a sum exceeding ten thousand rupeesotherwise than by a crossed cheque drawn on a bank or by acrossed bank draft, such expenditure shall not be allowed as adeduction" 4.2. By virtue of Finance (No.2) Act, 1996 which came into effect from1.4.1997, the quantum of Rs.10,000/- was increased to Rs.20,000/-. 5. It is also relevant to refer Rule 6DD(j) of Income-tax Rules, 1962(hereinafter referred to as 'the Rules'), framed in exercise of the powersconferred by section 295 of the Act, which reads thus: 6DD. No disallowance under sub-section (3) of section 40Ashall be made where any payment in a sum exceeding ten thousandrupees is made the cases and circumstances specified hereunder,namely:- Cases and circumstances in which payment in a sum exceedingten thousand rupees may be made otherwise than by a crossedcheque drawn on a bank or by a crossed bank draft. (a) to (i) xxx (j) in any other case, where the assessee satisfied theAssessing officer that the payment could not be made by acrossed cheque drawn on a bank or by a crossed bank draft - (1) due to exceptional or unavoidable circumstances, or 6DD. No disallowance under sub-section (3) of section 40Ashall be made where any payment in a sum exceeding ten thousandrupees is made the cases and circumstances specified hereunder,namely:- Cases and circumstances in which payment in a sum exceedingten thousand rupees may be made otherwise than by a crossedcheque drawn on a bank or by a crossed bank draft. (a) to (i) xxx (j) in any other case, where the assessee satisfied theAssessing officer that the payment could not be made by acrossed cheque drawn on a bank or by a crossed bank draft - (1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was notpracticable, or would have caused genuine difficultyto the payee, having regard to the nature of thetransaction and the necessity for expeditioussettlement thereof,and also furnishes evidence to the satisfaction of the Assessingofficer as to the genuineness of the payment and the identityof the payee." 6. The Central Board of Direct Taxes (CBDT) also issued Circular withreference to the interpretation of section 40A(3) of the Act and Rule 6DD(j) of the Rules on 31.5.1977 and Clauses 4 to 6 of the said Circular readas follows: "4. All the circumstances in which the conditions laid downin rule 6DD(j) would be applicable cannot be spelt out.However, some of them which would seem to meet the requirementsof the said rule are: a. The purchaser is new to the seller; or b. The translations are made at a place where either thepurchase or the seller does not have a bank account; or c. the transactions and payments are made on a bankholiday; or d. the seller is refusing to accept the payment by way ofcrossed cheque/draft and the purchaser's business interestwould suffer due to non-availability of goods otherwisethan from this particular seller; or https://hcservices.ecourts.gov.in/hcservices/ e. the seller, acting as a commission agent, is required topay cash in turn to persons from whom he has purchased thegoods; or f. specific discount is given by the seller for payment tobe made by way of cash. 5. It can be said that it would, generally, satisfy therequirements of rule 6DD(j), if a letter to the above effect isproduced in respect of each transaction falling within thecategories listed above from the seller giving full particularsof his address, sales tax number/permanent account number, ifany, for the purposes of proper identification to enable theIncome-tax Officer to satisfy himself about the genuineness ofthe transaction. The Income-tax Officer will, however, recordhis satisfaction before allowing the benefit of rule 6DD(j). 6. It is further clarified that the above circumstances arenot exhaustive but illustrative. There could be cases otherthan those falling within the above categories which would alsomeet the requirements of rule 6DD(j)." 7. The question relating to the interpretation of the rule 6DD(j) andsection 40A(3) came up for consideration before various High Courts andthe ratio laid down by the said Courts on the point in issue is as under:- (i) (a) The object of the provision of section 40A(3) is to checkevasion of taxes so that the payment is made from the disclosedsources. Both the payer and the payee would be showing in therespective account the payments made and received. It presupposesthat the transactions must be genuine transactions. (b) The object of the rule is to relax the rigour of sub-section (3)of section 40A in genuine and bona fide cases to avoid hardship andharassment. Practicability for the purpose of rule 6DD(j)(2) must bejudged from the point of view of the businessman and not of theRevenue. For the purposes of carrying on his business, a businessmanmay have to make payment otherwise than by crossed cheque or draft incertain circumstances voluntarily and not out of sheer necessity. (i) (a) The object of the provision of section 40A(3) is to checkevasion of taxes so that the payment is made from the disclosedsources. Both the payer and the payee would be showing in therespective account the payments made and received. It presupposesthat the transactions must be genuine transactions. (b) The object of the rule is to relax the rigour of sub-section (3)of section 40A in genuine and bona fide cases to avoid hardship andharassment. Practicability for the purpose of rule 6DD(j)(2) must bejudged from the point of view of the businessman and not of theRevenue. For the purposes of carrying on his business, a businessmanmay have to make payment otherwise than by crossed cheque or draft incertain circumstances voluntarily and not out of sheer necessity. (c) Where the amount was paid in cash or received in cash, theassessing officer has to find out whether the transaction is genuineor not and if he finds that the transaction is genuine, he shouldallow the deduction. The circular of the Board is not exhaustive; itis only illustrative and the assessing officer has to take intoaccount the surrounding circumstances, considerations of businessexpediency and the facts of each particular case in exercising hisdiscretion either in favour or against the assessee [vide:Giridharilal v. C.I.T. (Cal) (179 ITR 122)]. (ii) (a) Genuine and bona fide transactions are not taken out of thesweep of the section and it is open to the assessee to furnish to thesatisfaction of the assessing officer, the circumstances under whichthe payment in the manner prescribed under section 40A(3) was notpracticable or would have caused genuine difficulty to the payee. (b) The Central Board of Direct Taxes has issued certain guidelinesgiving certain circumstances, and those circumstances areillustrative and not exhaustive and the underlying ideal of thecircular is that if the identity of the payee is known, it would bepossible for the Income-tax Officer to cross-check whether thetransaction had in fact taken place [vide: CIT v. Chrome Leather Co.Pvt. Ltd. (Mad) (235 ITR 708)]. (iii) While considering the exceptional circumstances, the businessexigencies, convenience and security should also be looked into. Itwas a case where neither the genuineness of the payments, nor theidentity of the parties was in dispute. If the provisions of rule 6DD(j)(1) were insisted on, the payments would have to be made bydepositing the money in the bank by issuing cheques to the payee andthe payee would have to draw the amount from the bank. This wouldhave been hazardous and cumbersome procedure.[vide: C.I.T. v. NikkoAuto Ltd. (P & H) (256 ITR 476)]. (iv) Under the provisions of rule 6DD(j) of the Income-tax Rules,1962, where the assessee satisfies the assessing officer that thepayment could not be made by a crossed cheque drawn on a bank or by acrossed bank draft due to exceptional or unavoidable circumstances orbecause payment in the manner aforesaid was not practicable, or wouldhave caused genuine difficulty to the payee, having regard to thenature of the transaction and the necessity for expeditioussettlement thereof and also furnishes evidence to the satisfactionof the assessing officer as to the genuineness of the payment and theidentity of the payee, the assessing oauthority has got discretion toallow the expenditure [vide: CIT v. Eastern Condiments Pvt. Ltd. (Ker) (261 ITR 76)]. (v) When the genuineness of the transactions was not doubted orcalled in question, the amounts could not be disallowed [vide:Ramaditya Investments v. C.I.T.(Delhi) (262 ITR 491)]. (Ker) (261 ITR 76)]. (v) When the genuineness of the transactions was not doubted orcalled in question, the amounts could not be disallowed [vide:Ramaditya Investments v. C.I.T.(Delhi) (262 ITR 491)]. (vi) (a) The intention of the Legislature in enacting section 40A(3)particularly was to ensure that payments exceeding the sum specifiedare made by a crossed cheque drawn on a bank or by a crossed bankdraft so that it will be easier to ascertain, when deduction isclaimed, whether the payment was genuine and whether it was made outof income from disclosed sources. While interpreting the provisionsof this section, the above mischief which was sought to be remediedwill have to be borne in mind. (b) The word, 'practicable' used in rule 6DD(j)(2) must be held to https://hcservices.ecourts.gov.in/hcservices/ signify that which is feasible, that is to say, capable of being putinto practice, done, or accomplished with the available means andresources. ' (c) The correct interpretation would be to give to the word'practicable' a wide and liberal meaning. (d) In determining the practicability for the purposes of rule 6DD(j)(2), regard will have to be had to the facts and circumstances ofeach case, for, in the ultimate analysis, it is the actuality whichmust be the decisive factor and that the taxing authority mustapproach a case which falls to be decided under rule 6DD(j)(2) inthe above light. The practicability for the purposes of rule 6DD(j)(2) must be judged from the point of view of the businessman and notof the Revenue. (e) The terms of section 40A(3) are not absolute. Considerations ofbusiness expediency and other relevant factors are not excluded.Genuine and bona fide transactions are not taken out of the sweep ofthe section. It is open to the assessee to furnish to thesatisfaction of the assessing officer the circumstances under whichthe payment in the manner prescribed in section 40A(3) was notpracticable or would have caused genuine difficulty to the payee. Itis also open to the assessee to identify the person who has receivedthe cash payment[vide: CIT v. J.Rajmohan Pillai (Ker) (267 ITR 561)]. (vii) Unless the Tribunal had arrived at a finding of fact thatexceptional circumstances existed tow arrant payments in cash or thatpayment by crossed cheque was not practicable or would have causedgenuine difficulty to the payee, the order ought not to have beeninterfered with by the Tribunal. The consideration which weighedwith the Tribunal did not fall within the exceptional or unavoidablecircumstances [vide: CIT v. Himachal Terepene Products Pvt. Ltd.(Cal) (269 ITR 538)]. (viii) The requirement under rule 6DD(j) of the Income-tax Rules,1962, regarding practicability of payment otherwise than in cash andconsideration of business expediency has to be judged from the pointof view of the businessman and not of the revenue authorities [CIT v.P.Pravin and Co. (Guj) (274 ITR 534)]. 8. In the instant case, the assessing officer disallowed 20% of thetotal amount paid in cash merely on the ground that the payments were madeto associate concerns and that the payments were made to meet day-to-dayexpenses like, salary, etc. and also to meet machining charges. However,the Commissioner of Income-tax (Appeals) deleted even the disallowance of20% of amount on the ground that the disallowance of 20% is bad, becausethe payments made to associate concerns were reimbursement expenses andhence, section 40A(3) does not attract, which has been affirmed by theAppellate Tribunal. 8. In the instant case, the assessing officer disallowed 20% of thetotal amount paid in cash merely on the ground that the payments were madeto associate concerns and that the payments were made to meet day-to-dayexpenses like, salary, etc. and also to meet machining charges. However,the Commissioner of Income-tax (Appeals) deleted even the disallowance of20% of amount on the ground that the disallowance of 20% is bad, becausethe payments made to associate concerns were reimbursement expenses andhence, section 40A(3) does not attract, which has been affirmed by theAppellate Tribunal. 9. In our considered opinion, even though section 40A(3) of the Act isnot absolute, payments made in cash cannot automatically be allowed merelyfor the reason that the payments were made to associate concerns and suchreason that weighed the Commissioner of Income-tax (Appeals) is not onlyillogical, but also outside the scope of section 40A(3) of the Act. Ifsuch reason is accepted, the transactions which frustrate section 40A(3)would pave way for evading tax which is contrary to the object of section40A(3). The cumulative effect of Circular of CBDT dated 31.5.1977, Rule6DD(j) and section 40A(3) is that the assessee should satisfy that therewere exceptional and unavoidable circumstances of transactions in whichpayments were made in cash and that payment by way of crossed cheque orcrossed bank draft was not practicable or the same would have causedgenuine difficulty to the payee having regard to the nature of thetransaction or there was necessity for expeditious settlement. Inaddition to that, the assessee should also furnish evidence to thesatisfaction of the assessing officer as to the genuineness of payments aswell as the identity of payee. 10. In the case on hand, we fail to see that the assessee hassatisfactorily explained the exceptional and unavoidable circumstanceswarranting the payment by cash; the payments by way of crossed cheque orcrossed bank draft was not practicable; such payments would have causedgenuine difficulties to the payee; and there was necessity for expeditioussettlement. Even though it is found that the assessee made cash paymentsfor day-to-day affairs of associate concerns, the reason given by theCommissioner of Income-tax (Appeals) for deleting 20% disallowance thatthe payments were made to associate concerns and hence, they wereallowable cannot be a justifiable reason as it is outside the scope ofsection 40A(3) of the Act. We are satisfied that the deletion ofdisallowance of 20% the total amount frustrates section 40A(3) of the Act. Sub Asst. Registrar. To 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "D" Rajaji Bhavan, III Floor, Besant Nagar, Chennai 90. 2.The Commissioner of Income-Tax (Appeals-VI), Chennai 34.Tax (Appeals-VI), Chennai 34. 3.The Addl.Commissioner of 1[st] Spl.R.VIII,Madras. Madras. 4. The Commissioner of Income Tax IV,Chennai. + 1 CC To Mr.Pushya Sitaraman, Advocate SR NO. 50140 + 1 CC To Mr.J.Balachander, Advocate SR NO.49999 tej[co]Gp/4.12. T.C.(A) No.154 of 2003