Income‑tax‑‑‑

‑‑‑‑Business expenditure‑‑‑Disallowance‑‑‑Payment exceeding prescribed limit other‑than by crossed cheque or crossed Bank draft‑‑‑Exclusion from disallowance‑‑‑Clear finding needed as to clause of R. 6DD under which such exclusion operates‑‑‑Matter remanded‑‑‑Indian Income Tax Act, 1961, S.40A(3)‑‑‑Indian Income Tax Rules, 1962, R.6DD.

The assessee made local purchases of cashew kernels. These purchases included a purchase of cashew kernels worth Rs.50,000 from R. The Assessing Officer discovered that the payment was made through bearer cheque. In order to test the genuineness of the payment, the Assessing Officer issued summons to R, who was never produced for examination before him or before any other authority by the assessee. The Assessing Officer disallowed the deduction and this was confirmed by the Commissioner of Income‑tax (Appeals). The Tribunal, however held that the payment was covered by rule 6DD of the Income‑tax Rules, 1962, and could not be disallowed .On a reference:

Held, that the Tribunal simply observed that the payment made by the bearer cheque to R was covered by rule 6DD. Rule 6DD contains clauses (a) to (j). It was, therefore, the duty of the Tribunal to record a clear finding as to the clause of rule 6DD under which the payment in question fell. If the Tribunal was of the view that cashewnut kernels were covered by rule 6DD(f), then unless a clear finding was recorded that payment by the bearer cheque made to R was in fact made to growers or producers of cashewnuts, the advantage of rule 6DD(f) could not be taken. If the Tribunal was of the view that the payment was covered by rule 6DD(j), then unless a clear finding was recorded regarding the circumstances as stated in clause (j), that clause could not be pressed into service. The question whether the payment to R was deductible could not be answered. [Matter remanded] .

P.K.R. Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

C. Kochunni Nair and S. Vinod Kumar for the Assessee.

JUDGMENT

OM PRAKASH, C.J.‑‑‑As per direction given under section 256(2) of the Income Tax Act, 1961, the Income‑tax Appellate Tribunal referred the following question relating to the assessment year 1978‑79 for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in finding that the assessee was entitled to a deduction of Rs.50,006 paid to Rajan and that the provisions of section 40A(3) do not stand in the way of the payment being allowed?"

The facts as found by the Appellate Tribunal are that the assessee made local purchases of cashew kernels. These purchases include purchase of 1,134 kgs. of cashew kernels worth Rs.50,000 made from one Sri Rajan. The Assessing Officer discovered that the payment was made through the bearer cheque, dated June 10, 1977, drawn on Federal Bank Ltd., Quilon. To test the genuineness of the payment, the Assessing Officer issued summons to Rajan, who was never produced for examination before him or before any other authority by the assessee. The cheque was honoured by the bank. The Assessing Officer, however, held that the payment was not made either by crossed cheque or by a crossed demand draft and the same was not even covered by the provisions of rule 6DD of the Income‑tax Rules, 1962. The Assessing Officer, therefore, applying section 40A(3) of the Act, disallowed deduction of Rs.50,000 and added the same to the returned income of the assessee.

The view taken by the Assessing Officer was accepted by the Commissioner of Income‑tax (Appeals) in this behalf. On further appeal, the Appellate Tribunal found as follows:

"(32)So we should hold that cashewnuts are horticultural produce and, therefore, payment made towards purchase of such cashewnuts is directly covered under the provisions of rule 6DD and comes under one of the exemptions under section 40A(3)."

Subsection (3) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of. which payment is made, after March 31, 1969, in a sum 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. Since payment is said to have been made by the bearer cheque to Rajan, the Assessing Officer took the view that the provisions of subsection (3) were attracted to the case and applying subsection (3) of section 40A he disallowed deduction of Rs.50,000.

In para 29 of its order the Appellate Tribunal also observed that the Assessing Officer .also held that the payment was not covered by the provisions of rule 6DD. The Tribunal, however, held that the payment of Rs.50,000 made to Rajan is covered by rule‑6DD.

The Appellate Tribunal in its order, dated August 18, 1991 Annexure D in the paper book, observed as under:

"(5)????? The next question, to be seen is whether the payment, in the circumstances of the case, would come under rule 6DD(j) of the Income‑tax Rules. It is the Income‑tax Officer's case that the payment is not covered by exceptions provided in the rules. In our considered view though the payment made to a broker is not by way of an account payee cheque, inasmuch as the broker is only a conduit for other suppliers, circumstances might warrant the payment otherwise than by an account payee cheque. In such circumstances, exception is not ruled out under rule 6DD (j) of the Income Tax Rules."

From the perusal of the Tribunal's order it is patent that except the observations made under Annexure D in the paper book, no clear finding is recorded by the Tribunal as to under which clause of rule 6DD the payment made to Rajan by the bearer cheque is covered. The Tribunal simply observed that the payment made by the bearer cheque to Rajan is covered by rule 6DD. This finding of the Tribunal will lead us nowhere, inasmuch as rule 6DD contains clauses (a) to (j). It was, therefore, the duty of the Tribunal to record a clear finding as to under which clause of rule 6DD the payment in question falls. The learned senior standing counsel for the Revenue urges before us that cashewnuts are not the products of horticulture and, therefore, the same is not covered by rule 6DD(f). He further submits that rule 6DD(f) will apply only where the payment is made for the purchase of the products of horticulture to the cultivator, grower or producer of such articles, produce or products. The submission of learned senior standing counsel is that even in the order, dated August 13, 1991, Annexure D which was passed under rectification proceedings by the Tribunal, no finding was recorded that the payment was made by the assessee to growers or producers of the products of horticulture; rather the finding was that the payment was made to Rajan, who was a broker and a conduit for other "suppliers". It is correct that under the order Annexure D, the Tribunal simply held that the payment was made only to the broker, who was only a conduit for other suppliers. It is not elaborated by the Tribunal whether the word "supplier" used by it referred to grower or producer of the products of horticulture. Unless there is a clear finding by the Appellate Tribunal that payment was made to the growers or producers of the products of horticulture, advantage of rule 6DD(f) could not be taken. In so far as the question whether cashewnuts are the products of horticulture is concerned, we do not agree with the submission of learned senior standing counsel that cashew kernels are not the products of horticulture. In Concise Oxford Dictionary, 9th edition, the noun "horticulture" is defined as "the art of garden cultivation". The word "garden" in the same dictionary is defined as a piece of ground adjoining a house, used for growing flowers, fruits or vegetables". Cashewnut tree, in our opinion, is nothing but a fruit‑growing tree and therefore, it is fully covered by the definition of the words "horticulture" and 'garden" as defined in the aforesaid dictionary.

If the Tribunal was of the view that cashewnut kernels are covered by rule 6DD(f), then unless a clear finding is recorded that payment by the bearer cheque made to Rajan was, in fact, made to growers or producers of cashewnuts, advantage of rule 6DD(f) could not be taken.

If the Tribunal was of the view that the payment was covered by rule 6DD(j), then, unless a clear finding is recorded regarding the circumstances as stated in clause (j) that clause could not be pressed into service.

Rule 6DD(f) and rule 6DD(j) are quite different in their scope and nature and, therefore, a precise finding is required as to whether under which clause the case of the assessee falls.

On these facts, we return the above‑mentioned question unanswered to the Appellate Tribunal with the direction that it will record clear findings whether the case falls under rule 6DD(f) or rule 6DD(j). If the Appellate Tribunal comes to the conclusion that the payment in question falls under rule 6DD(f), then a clear finding will be recorded whether payment was made through Rajan, who is said to be a conduit, to the grower or producer of the products of horticulture. If the Tribunal comes to the conclusion that the payment is covered by rule 6DD(j), then for that entirely different considerations will follow and the findings relating to the circumstances as stated under rule 6DD(j) would have to be recorded.

The references are accordingly disposed of.

M.B.A.//342/FC????????????????????????????????????????????????????????????????????????????????? Order accordingly.