COMMISSIONER OF INCOME-TAX VS G. 'S. AUTO INDUSTRIES (PVT.) LTD, 2000 PTD-PUNJAB-AND-HARYANA-HIGH-COURT-INDIA 2549 (1997)

Income-tax---

----Reference---Question of law--Business expenditure ---Disallowance- Payments exceeding Rs.2,500 to be made by crossed cheque or crossed Bank draft---Conditions to be satisfied for making payment in cash exceeding Rs.2,500---Seller's refusal to accept payment by crossed cheque or draft may permit assessee to make payment in cash---It should be shown that assessee's business interests would suffer due to non-availability of goods otherwise than from particular seller---Both conditions to be satisfied---Tribunal finding that certain payments in cash made by assessee on account of necessity and on insistence of parties---Factum of insistence by recipients alone not sufficient---Question of law arises for, reference---Indian Income Tax Act, 1961, Ss.40A(3) & 256(2).

The assessee-company, which carried on the business of manufacture and trading of auto parts, filed a return for the assessment year 1988-89 declaring an income of Rs.7,660. The Assessing Officer, while making the assessment under section 143(3) of the Income Tax Act, 1961, disallowed expenditure (payments) amounting to Rs.80,421 under section 40A(3) of the Act on the ground that the assessee had made payments

in cash exceeding Rs.2,500 to various persons and firms during the accounting period in question. The Commissioner of Income-tax allowed cash payment of Rs.3,825 on the ground that it was made under exceptional circumstances and made an addition of Rs.5,000 on the ground that one cash payment of Rs.5,000 made by the assessee had not been disallowed by the Assessing Officer. The Tribunal allowed all payments made in cash on the ground that the assessee had made such payments on account of necessity and on insistence byte parties. The Tribunal also observed that the genuineness of the transaction had been established because certificates obtained from the parties concerned had been filed by the assessee. The Tribunal rejected the application of the Revenue under section 2560) to refer a question of law On an application under section 256(2), the Revenue contended that no exceptional circumstances existed so as to permit cash payments exceeding Rs.2,500, that the assessee was having running accounts with several parties to whom cash payments had been made in its books of account and many payments had been made to those parties by cheques, that there was no justification for making cash payments in' those cases and that the genuineness of the party or transaction was not sufficient to exclude the applicability of section 40A(3) of the Act:

Held, that the Tribunal was influenced by more than one factor, viz, that it had referred to the audit report wherein the assessee had declared cash payments and, therefore, it was concluded that the assessee had declared correct facts, that certain payments in cash were made by the assessee on the insistence of the parties, that the genuineness of the expenditure and the identity of the assessee and other parties had been established, that certificates had been filed by certain parties, that certain payments had been made after banking hours and that all these circumstances were treated by the Tribunal to constitute exceptional circumstances permitting cash payments. However, from a perusal of Circular No.220, dated May 31, 1977, issued by the Central Board of Direct Taxes it is clear that the seller's refusal to accept the payment by crossed cheque or crossed bank draft might permit the assessee to make payment in cash. But, at the same time, it should also be shown that the assessee's business interests would have suffered due to non availability of goods otherwise than from that particular seller. Sub -clause (iv) of clause (4) of the circular requires the fulfilment of both the conditions as aforesaid. In this light, the factum of insistence by the recipients might not alone be sufficient to attract clause (4)(iv) of the circular. Therefore, the question of law, namely, whether the Tribunal was right in holding that there were exceptional circumstances for making payments in cash and that the genuineness of transactions was sufficient to take the cash payments out of the purview of section 40A(3) of the Act, arose for reference.

CIT v. Brij Mohan Singh & Co. (1994) 209 ITR 753 (P & H) ref.

B. S. Gupta, Senior Advocate and Sanjay Bansal, for the Commissioner.

N. K. Sud for the Assessee.

JUDGMENT

N. K. AGRAWAL, J. ---This is an application by the Commissioner of the Income-tax under section 256(2) of the Income Tax Act, 1961 (for short the Act), seeking a direction to the Income-tax Appellate Tribunal, Amritsar Bench, to refer the following questions of law to this Court for opinion:

"(1) Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was right in law in deleting the addition of Rs.81,596 made under section 40A(3) of the Income tax Act, 1961, under the non-existent nature of the exceptional circumstances for making the payment in cash?

(2) Whether there can exist any exceptional and unavoidable circumstances for one single unledgerised payment to a party with whom the assessee is having a running account and making all other payments by cheques?

(3) Whether mere genuineness of payment is enough to take the case out of the purview of section 40A(3).; and

(4) Whether the Income-tax Appellate Tribunal can substitute its own satisfaction, when the law requires the satisfaction of the Assessing Officer for allowing the amounts exceeding Rs.2,500?"

The assessee, a private limited company, carried on the business of manufacture and trading of auto parts and hardware fittings. The assessee filed a return for the assessment year 1988-89, declaring an income of Rs.7,660. The Assessing Officer, while making the assessment under section 143(3) of the Act, disallowed expenditure (payments) amounting to Rs.80,421 under section 40A(3) of the Act. He noticed that the assessee had made payments in cash exceeding Rs.2,500 to various persons and firms during the accounting period ending on March 31, 1988, relevant to the assessment year 1988-89.

Section 40A(3) required all payments exceeding Rs.2,500 by crossed cheques and bank drafts. Since the assessee had not made certain payments in accordance with the provisions of section 40A(3), those payments were disallowed and addition was accordingly made.

In appeal, the Commissioner of Income-tax allowed cash payment of Rs.3,825, after holding that it was made under exceptional circumstances. He made an addition of Rs.5,000 also finding that one cash payment of Rs.5,000 made by the assessee to .N. K. Sales Agencies had not been disallowed by the Assessing Officer.

In the assessee's second appeal, the Tribunal allowed all payments made in cash holding that the assessee had made such payments on account of necessity and on insistence by the patties. The Tribunal also observed that the genuineness of the transactions has been established because certificates obtained from the parties concerned had been filed by the assessee.

Shri B. S. Gupta, learned senior counsel for the Department, has argued that referable questions of law do arise from the controversy in hand and from the order of the Tribunal. He has argued that no exceptional circumstances existed, so as to permit cash payments exceeding Rs.2,500. It is pointed out that the assessee was having running accounts of several parties, to whom cash payments had been made, in its books of account and many payments had been made to those parties by cheques. Therefore, there was no justification in making cash payments in those cases. His further plea is that the genuineness of the party or transaction was not sufficient to exclude the applicability of section 40A(3) of the Act.

Shri N. K. Sud, learned counsel for the assessee, has argued that payments made in cash have been allowed by the Tribunal, looking to the facts and the nature of the transactions. He has opposed the plea of the Department that questions of law arose from the order of the Tribunal, placing reliance on a decision of this Court in CIT v. Brij Mohan Singh & Co. (1994) 209 ITR 753. In that case, a Division Bench of this Court declined to call for the statement of the case from the Tribunal after noticing that the assessee as well as the recipients of the cash payments had no bank account at the place where payments were. made and since such a situation was covered by the Board's Circular No.220 (see (1977) 108 ITR (ST.) 8), dated May 31, 1977; no questions of law arose Shri Sud has also argued that all the transactions in question are covered by the aforesaid circular reproduced in (1977) 108 ITR (St.) 8.

From the order of the Tribunal, it transpires that the Tribunal was influenced by more than one factor. The Tribunal has referred to the audit report, wherein the assessee had declared the cash payments. Therefore, it was concluded that the assessee had declared correct facts. It was also noticed by the Tribunal that certain payments in cash were made by the assessee on the insistence of the parties. It was further held that the genuineness of the expenditure and the identity of the assessee and other parties had been established. Since certain certificates had been filed by certain parties, that was also a factor which weighed with the Tribunal. Certain payments were made after bank hours also. All these circumstances were treated to constitute exceptional circumstances permitting cash payments.

It would appear from a perusal of the Board's circular referred to above that the seller's refusal to accept the payment by crossed cheque or draft may permit the assessee to make payment in cash. But, at the same time, it should also be shown that the assessee's business interest would have suffered due to non-availability of goods otherwise than from that particular seller. Sub-clause (iv) of clause (4) of the circular requires the fulfilment of both the conditions as aforesaid. In this light, the factum of insistence by the recipients may not alone be sufficient to attract clause (4)(iv) of the circular.

Keeping in view the entire facts and circumstances of the case, the following question of law is found to arise from the Tribunal's order and the Tribunal is directed to draw up the statement of the case and to refer the following question to this Court:

"Whether, on (he facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that there existed exceptional circumstances for making payments in cash and that the genuineness of transactions was sufficient to take the cash payments out of the purview of section 40A(3) of the Income Tax Act, 1961?"

Ordered accordingly.

No coats.

M.B.A./4118/FCOrder accordingly.