The Commissioner of Income Tax vs Brij Mohan Singh and Co.

A.L. Bahri, J.—This petition has been filed u/s 256(2) of the Income tax Act, 1961, with a prayer to direct the Income Tax Appellate Tribunal, Amritsar Bench, to draw the statement of the case and refer the following question of law to this Court for adjudication:-

"Whether on the facts and in the circumstances of the case, the ITAT was justified in law in deleting the addition of Rs. 12,70,683/- made u/s 40A(3) of the Income Tax Act by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals) ? "

Earlier the Tribunal declined to refer the aforesaid question to this Court vide order dated July 28, 1992 (Annexure P-l). The assessing authority framed assessment on March 26, 1987, vide order Annexure P-3 and made addition to the tune of Rs. 12,70,683/- as deductions of the aforesaid amount was not allowed u/s 40A of the Act. As such payments were made in cash and not by cheques or drafts, the aforesaid amount was not to be treated as expenditure. Appeal filed by the assessee against the aforesaid order in this respect was dismissed on March 18, 1988 (Annexure P-4). The matter was taken before the Tribunal. Vide order dated October 25, 1991, (Annexure P-5) the Tribunal allowed the deduction of the aforesaid amount as expenditure.

Shri R.P. Sawhney Advocate for the Revenue while referring to the decision of this Court in Commissioner of Income Tax Vs. Surinder Sugar Store, , has argued that the aforesaid question of law should be ordered to be referred to this Court. In that case, the Judges were satisfied that the question of law arose out of order of the Tribunal, to refer such a question. No doubt, framing of the question in that case is similar to the one referred to above. Such a decision could hardly be taken as a precedent, laying down any proposition of law. The contention that in all cases where similar questions are sought to be referred, this Court should exercise jurisdiction u/s 256 of the Act is too wide a proposition to be accepted. The detailed facts of the case of Surinder Sugar Store, referred to above, are not given in the judgment that any opinion could be formed regarding similarity of the facts with the present case.

At the outset, it may be stated that it is the order of the Tribunal, which is to be taken into consideration while disposing of reference u/s 256(2) of the Act to find out if there from any question of law arises or not. If the question arising in the case is only with respect to acceptance of any evidence or material on the basis of which a finding is recorded, the same would be a question of fact and not a question of law, which could be referred u/s 256 of the Act. However, if the question arises about the interpretation of any provisions of the Act or its applicability to the admitted set of facts, question of law may arise. For that this Court is not obliged to refer to either the material produced before the Income Tax Officer (assessing authority) or the orders passed by such authority or by the appellate authority. The Supreme Court in Commissioner of Income Tax, Ernakulam Vs. Managing Trustee, Jalakhabai Trust, while interpreting the scope of Section 66(2) of the Indian Income Tax Act, 1922, observed as follows:-

" The High Court is not called upon to decide whether the question sought to be referred may ultimately be decided in favour of the assessee; the High Court has only to consider whether a question of law which may be supported by reasonable argument arises out of the order of the Tribunal."

The provisions of Section 40A(3) of the Act are to be read alongwith Rule 6 DD of the Rules framed under the Act, dealing with the subject of payments made by the assessee in case and not by cheque or drafts more than the prescribed amount. These provisions are quoted and have been authoritatively commented upon and interpreted by the Supreme Court in Attar Singh Gurmukh Singh v. ITO, (1991) 191 ITR 667 (SC) . After quoting the aforesaid provision, it was held as under:-

" Section 40A(3) must not be read in isolation or to the exclusion of Rule 6 DD. The section must be read alongwith the Rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed-cheque or crossed bank-draft. The payment by crossed cheque or crossed bank-draft is insisted on the enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources, the terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the Section. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40A(3) was not practicable or would have caused genuine difficulties to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6 DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of Section 40A(3) and Rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black-money should not be regarded as curtailing the freedom of trade or business....."

It was further observed as under :-

" It may be stated that the word ''expenditure has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word expenditure for the purpose of the section. The expenditure for purchasing the stock-in-trade is one of such out-goings. The value of the stock-in-trade has to be taken into account, while determining the gross profits u/s 28 on principles of commercial accounting. The payments made for purchases would also be covered by the word ''expenditure'' and made in cash in the sums exceeding the amount specified u/s 40A(3). We have earlier observed that Rule 6 DD has to be read alongwith Section 40A(3). The Rule also contemplates payments made for stock-in-trade and raw materials. This rule is in accordance with the terms of Section 40A(3). The rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials."

It may be stated that the view expressed by the Punjab and Haryana High Court in Commissioner of Income Tax Vs. New Light Tin Manufacturing Company, and Commissioner of Income Tax Vs. Kishan Chand Maheshwari Dass, was approved. The aforesaid decision in M/s Attar Singh''s case was referred to and relied upon by the Gujrat High Court in Nathalal Jethalal Vs. Commissioner of Income Tax, , though earlier view of the Gujrat High Court was contrary as mentioned in the judgment of M/s Attar Singh''s case. Thus, payments made in cash or acquired stock-in-trade or other materials could be exempted from the purview of Section 40A of the Act.

In another case, similar questions were considered by this Court in Commissioner of Income Tax Vs. Sawaran Singh Balbir Singh, while noticing the facts, it was held that nothing could be pointed out to show that the Tribunal did not take into consideration the relevant evidence or relied upon irrelevant evidence while arriving at the finding. The facts noticed were as under:-

" During the course of the assessment proceedings for the assessment year 1972-73, the ITO found that the assessee, who was engaged in husking of paddy, had made purchases of bardana and gunny bags from a firm with which the assessee had a running account and the dealings were in cash as well as by cheques. The agreement between the assessee and the proprietor of the firm to pay by cash was an oral one. The ITO disallowed u/s 40A(3) of the I.T.Act, 1961, read with Rule 6DD (i) of the I.T. Rules, 1962, certain payments in cash exceeding Rs. 2,500/- made by the assessee, rejecting the contentions of the assessee that the cash payments were made due to exceptional and unavoidable circumstances as it was impracticable to cope with the supply of rice as ordered by the Govt., that the payments were genuine and the identity of the payee could not be doubted. The AAC and, on further appeal, the Tribunal accepted the contentions of the assessee and allowed its appeal."

In Commissioner of Income Tax, Delhi-VI Vs. Union Agencies, , the case of Sawaran Singh Balbir Singh, referred to above, was relied upon and the petition filed u/s 256 (2) of the Act was dismissed, stating that no referable question of law was involved. In the facts of the present case, it was observed that it would be impracticable to carry on such business through cheque payments. Infact, there might be a serious impediment in ensuring proper distribution of butter and other diary products. The only answer is the credit facility which was not granted by M/s. Om Parkash and Co. in this case except on a deposit of Rs. 3,00,000/- or a bank guarantee. It was observed that such was a question of fact and not a question of law.

Guidelines were issued by the Central Board of Direct Taxes on the subject vide circular No. 220 dated May 31,1977. Para 4 of this circular letter provides as under:-

" 4. All the circumstances in which the conditions laid down in Rule 6 DD (j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are;

(i) the purchaser is new to the seller; or

(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account, or

(iii) The transactions add payments are made on a bank holiday, or

(iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser''s business interest would suffer due to non availability of goods otherwise than from this particular seller; or

(v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or

(vi) Specific discount is given by the seller for payment to be made by way of cash."

In para 6, it was further observed that the above circumstances were not exhaustive but were illustrative and there could be cases other than those falling within the above categories, Which would also meet the requirements of Rule 6DD(j).

Reverting to the case in hand, reference to the order of the Tribunal dated October 25,1991. (Annexure P-5) be made and the only conclusion on persual therefrom would be that it is only a question of fact and no question of law arises. In para 10 of the order, it was observed by the Tribunal:-

" We have closely considered the facts prevailing in the year and the relevant provision. The assessee''s assertion that it had no bank account at Hamira has not been even stated to be wrong and, therefore, it is accepted as a fact. The other averment that even Jagatjit Industries Ltd. also had no bank account at Hamira did not come for any adverse comments from the Revenue''s Authorities. Such being the case, second exception spelt out by Circular No. 220 dated 31.5.1977 reported in 108 ITR 9 so clearly came to the assessee''s rescue because transactions were made at a place where the assessee and the seller both did not have bank account. The requirement of exception 2 is that transaction exceeding Rs. 2,500/- would be permissible where either the purchaser or the seller does not have a bank account. Or has not been used as conjunctive but is clearly used as a dis-conjunctive. In other words, absence of bank account by either of the two parties would be sufficient to bring the case within the exception of Clause (j) of Rule 6 DD of the Rules. Therefore, on the facts, the assessee established its case that being within the purview of Rule 6 DD (j) of the Rules no addition u/s 40A(3) of the Act was justified."

The tribunal, as would be seen, accepted the material produced by the assessee in support of its contention while holding that the assessee did not have any bank account at the place where purchases were made. Similar finding was recorded with respect to the seller of liquor. One of the conditions of the circular aforesaid, thus, stood complied with, to enable the assessee to claim deduction of the expenditure. Further the appeal of the assessee was accepted that the actual amount for which purchases of liquor under the permits granted by the Excise and Taxation Department were to be made, were to be known only at the time of actual purchase. Thus, at that relevant time, it was not possible to obtain bank drafts to make the purchases. Furthermore, the present is a case where identity of the payee has been successfully established, i.e. the liquor to be purchased by the assessee, a liquor contract or from the distillery could only be made on issuing of permits, identifying the distillery. As already observed above, the object of provisions of Section 40A is to curb flow of black money and not to put an impediment over the trade and business. The decision of the Tribunal being based entirely on facts, no referable question of law arises. The petition is dismissed.