Commissioner of Income Tax vs Assam Tribune

D.N. Baruah, J.—At the instance of the Revenue, the following two questions have been referred by the Tribunal u/s 256(1) of the Income Tax Act, 1961 (for short, "the Act"), for opinion of this court :

"(1) Whether, under the facts and in the circumstances of the case, the Tribunal was justified in upholding the decision of the Commissioner of Income Tax (Appeals) who deleted the disallowance of Rs. 6,36,979.33 made u/s 40A(3) of the Act ?

(2) Whether, under the facts and in the circumstances of the case, the Tribunal did not err, in facts as well as in law, in impliedly holding that if the transactions are entered in the books of account of the payee then no disallowance is to be made u/s 40A(3) of the Income Tax Act ?"

The respondent is an assessee under the Act. During the course of assessment proceeding, the Assessing Officer observed that the assessee made entries of cash payment exceeding Rs. 2,500 in violation of the provisions of Section 40A(3) of the Act. The Assessing Officer, therefore, asked the assessee to explain the reason for making such cash payment. The assessee could produce confirmation letters from some of the parties only and also explained the exceptional circumstances in which payments exceeding Rs. 2,500 had been made, but in most of the cases, in spite of repeated request made by the Assessing Officer, the assessee could not satisfactorily explain the reason for violation of the provisions of Section 40A(3) of the Act. The Assessing Officer, accordingly, disallowed a sum of Rs. 9,04,553. Being aggrieved, the assessee took up the matter by way of appeal before the Commissioner of Income Tax (Appeals). During pendency of the appeal before the Commissioner of Income Tax (Appeals), the assessee could produce some more confirmatory letters from various parties and was able to prove the genuineness of the transaction as well as the identity of the payee. Out of the total disallowance of Rs. 9,04,553, the Commissioner of Income Tax (Appeals) granted relief to the tune of Rs. 6,36,979.33. However, the Commissioner of Income Tax (Appeals) disallowed a sum of Rs. 2,27,573.60. On further appeal before the Tribunal by the assessee as well as by the Revenue, the Tribunal sustained the order of the Commissioner of Income Tax (Appeals) allowing deletion of Rs. 6,36,979.33. As regards remaining disallowance of Rs. 2,27,573.60, the Tribunal was of the opinion that the assessee could produce three confirmatory letters from three parties from which it appeared that the payments made were duly recorded in their respective books of account which needed verification as those letters were neither produced before the Assessing Officer nor before the Commissioner of Income Tax (Appeals). Accordingly, the matter was sent to the Commissioner of Income Tax (Appeals) with a direction that if after verification, the contents of the letter particularly as to the entry in the books of account were found to be correct, he should grant necessary relief in respect of payment to those parties amounting to Rs. 1,26,111.65 after giving opportunity of hearing to both the parties. However, the Tribunal disallowed a sum of Rs. 1,01,462. Thereafter, at the instance of the Revenue, the Tribunal referred the abovequoted questions for opinion of this court.

We have heard Dr. A.K. Saraf, learned special counsel appearing on behalf of the Revenue, and Mr. R.K. Joshi, learned counsel appearing on behalf of the assessee.

Dr. Saraf submits that genuineness of payment is not the only criterion. The authority has to be satisfied whether the payments in violation of the provisions u/s 40A(3) had to be made under urgent and exceptional circumstances. In this connection, Dr. Saraf has drawn our attention to a decision of this court rendered on June 6, 1996, in Income Tax Reference No. 22 of 1991 Shri Mahabir Industries Vs. Commissioner of Income Tax, In the said case, this court held that exceptional and unavoidable circumstances may vary depending on the facts of each case. Dr. Saraf further submits that the Tribunal committed manifest error in giving a direction to the Commissioner of Income Tax (Appeals) to verify the contents of the confirmatory letters and books of account and grant further relief.

Mr. R.K. Joshi disputes the submission made by Dr. Saraf and submits that the Tribunal which is the last fact-finding authority being satisfied as to the genuineness of the transaction, identity of the parties and also existence of exceptional and unavoidable circumstances, arrived at the findings and these are final.

On hearing learned counsel for the parties and on going through the records we find that the Tribunal came to the conclusion that an amount of Rs. 6,36,979.33 had been paid by the assessee under exceptional circumstances. That being the finding of fact, we also hold that exceptional and unavoidable circumstances did exist. However, in respect of an amount of Rs. 1,26,111.65, the Tribunal just directed the Commissioner of Income Tax (Appeals) to make enquiry whether the payments were entered in the books of account. In our opinion, this was not enough. It was also necessary to enquire whether there existed exceptional and unavoidable circumstances for making such payment. The Tribunal ought to have directed accordingly.

In view of the above, we answer question No. 1 in the affirmative, in favour of the assessee and against the Revenue and question No. 2 in the negative, in favour of the Revenue and against the assessee. A copy of the judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income Tax Appellate Tribunal.

In the facts and circumstances of the case, there will be no direction as to costs.