JUDGMENT
G. Sivarajan, J.
The Deputy Commissioner of Income Tax, Central Circle-II, Ernakulam has filed this appeal against the order of the Income Tax Appellate Tribunal, Cochin Bench in IT (S & S) A. No. 57/Coch./97 in respect of the block assessment period from 1-4-1986 to 17-6-1996. The respondent-assessee is a company which is mainly engaged in the business of retreading of rubber. There was a search conducted by the Income-tax department on 17-6-1996 in the business premises of the assessee-company and also the residence of the Director. In response to a notice issued under section 158BC of the Act, the respondent filed a return of income. The assessing authority completed the assessment determining the total undisclosed income of the block period from 1-4-1986 to 17-6-1996 at Rs. 13,96,100. In the present appeal, we are concerned with the disallowance under section 40A(3) of the Act made in the said block assessment for the assessment year 1996-97. The respondent took up the matter in appeal before the Income Tax Appellate Tribunal. In the appeal, there were so many issues such as disallowance of commission payments, disallowance of motor car expenses, etc., besides the issue of disallowance under section 40A(3) of the Act. The Tribunal found that the block assessment for the period was completed by the assessing authority in a hurry without affording a reasonable opportunity to the respondent to adduce evidence regarding the various matters for which clarification was sought for by the officer. The Tribunal has accordingly decided that the matter should go back to the assessing officer for consideration of the entire matter afresh. However, the Tribunal considered the merits of two items. One such matter was regarding the addition of Rs. 10,000 by way of disallowance of car running expenses for the assessment year 1994-95. The Tribunal took the view that the same cannot be done in a proceedings under section 158BC of the Act. Similarly, regarding the disallowance of a sum of Rs. 23,67,570 as payment in cash exceeding Rs. 10,000 under section 40A(3), the Tribunal has taken the view that this is a matter which has to be done in a regular assessment under section 143(3) and that in view of the provisions of explanation below section 158BA(2), it is open to the assessing officer to make a regular assessment even in respect of any assessment year included in the block period and make disallowance under any provisions of the Act. In other words, the Tribunal has taken the view that the disallowance under section 40A(3) cannot be made in a block assessment as in that case, the assessee would be burdened with a higher rate of tax.
2. Shri P.K.R. Menon, learned senior Central Government Standing Counsel for the appellant submits that under the provisions of section 158BC of the Act, the assessing authority has got the power to disallow any expenses which are permissible under the provisions of the Act, particularly, Chapter IV of the Act. The learned counsel for the respondent maintains that such disallowance cannot be made in proceedings under section 158BC of the Act.
3. We have perused the order of the assessing authority. It is seen that the assessing authority had made the disallowance under section 40A(3) of the Act stating that as per the statement accompanying the audit report, the assessee is seen to have made payment exceeding Rs. 10,000 in cash in violation of section 40A(3) of the Act. The total amount paid in cash exceeding Rs. 10,000 during the assessment year is Rs. 23,67,570 and, therefore, 20 per cent of this amount is disallowed under the provisions of section 40A(3). The provisions of section 40A(3) of the Act as it stood during the assessment year 1996-97 reads as follows :
“40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31-3-1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent, of such expenditure shall not be allowed as a deduction :
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1-4-1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the assessing officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far. as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made :
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.”
The main part of sub-section (3) provided that where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 10,000 otherwise than by a crossed cheque drawn on a bank or by a crossed bank Draft, 20 per cent of such expenditure shall not be given as a deduction. However, the second proviso thereof provides that no disallowance under this sub-section shall be made where any payment of a sum exceeding Rs. 10,000 is made otherwise than by a crossed cheque or crossed Bank Draft in such cases and in such circumstances, as may be prescribed having regard to the nature and extent of banking facilities available, consideration of business expedition and other relevant factors. From the above, it would appear that when it is seen from the audit report or books of account that the assessee had made payments exceeding Rs. 10,000 otherwise than by a crossed cheque drawn or a crossed Bank Draft, before making the disallowance under the main part of sub-section (3), the assessee should be given an opportunity to explain the circumstances under which the payments exceeding Rs. 10,000 happened to be made, so that the assessing authority has to consider the same as provided under the second proviso thereto. In a case where the assessing authority is satisfied that the assessee had made payments exceeding Rs. 10,000 in the circumstances provided in the Rules, certainly the assessing authority has to allow the deduction without any disallowance. On the other hand, if the assessing authority is not satisfied about the explanation offered regarding the circumstances under which the payments in excess of Rs. 10,000 happened to be made in cash, then only the question of disallowance of 20 per cent of the payments made in cash under the main part of sub-section (3) arises. This would show that a disallowance under section 40A(3) can be made only after notice and after giving opportunity to the assessee.
4. In the instant case, as already noted, the assessing authority, in the block assessment for the period in question, had made the disallowance of 20 per cent contemplated under the main part of sub-section (3) without affording any opportunity to the assessee to explain the circumstances contemplated under rule 6(dd). As we have already noted, the Tribunal had held that the disallowance under section 40A(3) of the Act is not a matter for the assessing authority to make in a block assessment under section 158BC of the Act, and that this is a matter to be considered only in an assessment under section 143(3) of the Act.
5. We have already noted that the Tribunal had decided to remit the assessment order back to the assessing authority for the purpose of affording a reasonable opportunity to the assessee to adduce evidence with regard to various other matters, such as, disallowance of the cash credit, etc. In these circumstances, we are also of the view that the question regarding the disallowance under section 40A(3) of the Act shall also go back to the assessing authority for consideration with reference to the provisions of section 40A(3) which we have already referred. In the above circumstances, without further going into the merits of the contention regarding the scope of section 158BB of the Act canvassed by the appellant, we are inclined to vacate the findings of the Income Tax Tribunal on this question as well as with reference to the observation made by the Tribunal that the same principle will apply to the disallowance of commission payment also. We do so. We direct the assessing authority to issue a pre-assessment notice to the respondent-assessee in regard to the various disallowances proposed before passing fresh orders pursuant to the remand. It is open to the respondent-assessee to, inter alia, explain the circumstances under which the payments in excess of Rs. 10,000 happened to be made otherwise than by way of a cheque, bank draft, etc., as contemplated under the second proviso to section 40A(3). It is also open to the respondent-assessee to raise the objection that the disallowance under section 40A(3) of the Act, is not a matter for an assessment under section 158BC of the Act. The assessing authority while completing the assessment will take into account all those circumstances and complete the assessment in accordance with law and in the light of the observations made in the order of the Tribunal as well as in this Appeal.
6. The I.T. Appeal is disposed of as above.