Income-tax---

----Business expenditure---Disallowance---Payment otherwise than by crossed cheque or crossed bank draft---Exceptions to disallowance---Exceptional and unavoidable circumstances---Seller insisting on payment in cash owing to some of assessee's cheques being dishonoured---Business would have otherwise suffered---Transaction genuine---Cash payment, not to be disallowed---Indian Income Tax Act, 1961, S.40-A(3)---Central Board Circular No.222 dated May 31,1977---Indian Income Tax Rules, 1962, R.6D-D(j).

The assessee a registered firm, was dealing in products manufactured of a company. During the accounting period relevant to the assessment year 1972-73, the assessee made payments in cash to the extent of Rs. 2,11,800, which was sought to be disavowed by the Income-tax Officer. Before the Appellate Assistant Commissioner, the assessee explained that the payments had to be made in cash because the company had insisted on cash payment and threatened to stop further transactions as some of the earlier payments made by the assessee by cheques were dishonoured for want of funds, that the company was also an assessee and all the transactions were fully accounted for by the company, and that the assessee apprehended that, in the event of the company's threat being carried out, its business would be seriously affected. The Appellate Assistant Commissioner held that the assessee's case fell within the scope of rule 6-DD(j) of the Income-tax Rules, 1962, and directed the Income-tax Officer to allow the claim. On appeal, the Appellate Tribunal held that the genuineness of the transactions was not in dispute and that the assessee had placed sufficient material before the lower authorities to show that it had made the cash payments under exceptional and unavoidable circumstances. The Tribunal also held that the case was fully covered by Circular No. 220, dated May 31, 1977 (see (1977) 108 ITR (ST) 8), and confirmed the order of the Appellate Assistant Commissioner. On a reference:

Held affirming the decision of the Appellate Tribunal, that the Tribunal had found as a fact that the cash payments were made under exceptional and unavoidable circumstances, and this conclusion had been arrived at after examining the entire material placed before it. The Tribunal had further found that the genuineness of the transactions was not in dispute. Therefore, not only did the case fall within the provisions of rule 6-DD(j), but the assessee was also entitled to claim the benefit of Circular No. 220, dated May 31, 1977 (see(1977)108 ITR (St.) 8), which provided that, if a seller refused to accept payment-by way of crossed cheque or crossed draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from the particular seller then, even if the payment was made by cash, the same would be allowable as a deduction

B. Gupta and R.N. Verma for the Commissioner.

P.N. Manga and Gogan Nephray for the Assessee.

JUDGMENT

B.N. KIRPAL, J: ---In respect of the assessment year 1972-73, the Income-tax Tribunal, pursuant to an order passed by this Court under section 256(2) has stated the case and referred the following question to this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 40-A(3) read with rule 6, were applicable to the circumstances of this case particularly in view of the circular of the Central Board of Direct Taxes, dated May 31,1977, referred to in the order of the Tribunal?"

The facts which are relevant for this reference are as follows: The assessee is a registered firm. The assessment year involved is 1972-73, for which the previous year of the assessee ended on March 31, 1972. During the material accounting periods, the assessee was dealing in products manufactured by M/s. Meghdoot Pistons (P) Ltd. The accounts of the year of account revealed that the assessee had made payments to M/s. Meghdoot Pistons (P.) Ltd. to the extent of Rs. 2,11,800 in cash. The Income-tax Officer disallowed the said payments on the ground that they contravened the provisions of section 40-A(3) of the Income-tax Act, according to which payment exceeding Rs.2,500 should be made either by crossed cheques or by crossed bank drafts.

Against such disallowance, the assessee filed an appeal before the Appellate Assistant Commissioner and contended that the payments in question had to be made in cash as M/s. Meghdoot Pistons (P.) Ltd. had insisted on cash payments as some of the earlier payments made by the assessee, by cheques, were unfortunately dishonoured for. want of funds. Thus; the payee did not have sufficient confidence in cheque payments made by the assessee and it was for this reason that the payee insisted on payment in cash.

It was also submitted that the payee, namely, M/s. Meghdoot Pistons (P.) Ltd. was also an assessee and all the transactions were fully accounted for by that company. Further, it was contended that M/s. Meghdoot Pistons (P.) Ltd. had threatened to stop all further transactions with the assessee in the event of its failure to make such payments in cash. The assessee apprehended that, in the event of that threat being carried out, its business would have been seriously affected. Taking into account these submissions made by the assessee, the Appellate Assistant Commissioner held that the assessee's case fell within the scope of rule 6-DD(j) of the Income-tax Rules. Accordingly, he directed the Income-tax Officer to allow the assessee's claim for deduction of the said payment of Rs.2,11,800.

Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue filed an appear before the Tribunal. After considering the facts, as stated above, the Tribunal observed that the assessee had placed sufficient material before the lower authorities to show that it made the cash payments under exceptional and unavoidable circumstances. The Tribunal also observed that the genuineness of the transactions was also not in dispute. In the circumstances, the Tribunal observed that the assessee's case was fully covered by Circular No. 220, dated May 31,1977 [see (1977) 108 TTR (St.) 8], issued by the Central Board of Direct Taxes, which was binding on the Income-tax Officer. Accordingly, the Tribunal confirmed the order of the Appellate Assistant Commissioner and dismissed the Revenue's appeal.

In our opinion, the answer to the said question which has been referred is self-evident. The Income-tax Tribunal has found as a fact that cash payments were made only under exceptional and unavoidable circumstances. This conclusion has been arrived at by the Tribunal after examining the entire material which was placed before it. It has further observed that the genuineness of the transaction was not in dispute. This being so, on the facts found by the Tribunal, the case not only fell within the provisions of rule 6-DD(j), but the assessee was also entitled to claim the benefit of Circular No. 220, dated May 31, 1977, issued by the Central Board of Direct Taxes [see (1977) 108 ITR (ST.) 8]. In the said circular, it is, inter alia, stated that if a seller refuses to accept payment by way of crossed cheque or crossed draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from the particular seller, then even if the payment is made by cash, the same would be allowable as a deduction.

The conclusion of the Tribunal is based on sound reasoning and the aforesaid question is answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

M.BA/2393/T????????????????????????????????????????????????????????????????????????????????????? Question answered.