Goenka Agencies vs Commissioner Of Income-Tax on 12 May, 2003

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Calcutta High Court
Goenka Agencies vs Commissioner Of Income-Tax on 12 May, 2003
Equivalent citations: (2003) 184 CTR Cal 104, 2003 263 ITR 145 Cal
Author: M Sinha
Bench: D K Seth, M Sinha


JUDGMENT

Maharaj Sinha, J.

1. In this reference under Section 256(2) of the Income-tax Act, 1961, two questions have come up for answer by us at the instance of the assessee for the assessment year 1987-88. The assessee, however, had framed four questions in its reference application under Section 256(1) of the Act. The learned Tribunal, however, rejected the reference application on the ground that no question of law, in fact, arose and the findings of the learned Tribunal were based on findings of facts only.

2. On the application of the assessee under Section 256(2), this court by an order dated November 11, 1997, directed reference observing that the first and the second questions, in fact, covered the case of the assessee.

3. The said two questions are as follows :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that payments in sums exceeding Rs. 2,500 amounting to Rs. 4,83,000 made to Hanuman Sugar and Industries Ltd., made in respect of delivery of cotton yarn are hit by the provisions of Sub-section (3) of Section 40A of the Income-tax Act, and that, therefore, such payments should be added to the total income in terms of the aforesaid section ?

2. Whether, on the facts and in the circumstances of the case and on a proper interpretation of rule 6DD of the Income-tax Rules, 1962, read with Circular No. 220 dated 31 May, 1997 (see [1977] 108 ITR (St.) 8), issued by the Central Board of Direct Taxes, the Tribunal was justified in upholding the disallowance of Rs. 4,83,000, in terms of Sub-section (3) of Section 40A of the Income-tax Act, 1961 ?”

4. The brief facts of this case are as follows :

The assessee is the purchaser of cotton from one Hanuman Sugar and Industries Ltd. for the value of above Rs. 2 crores. All the payments made for such purchases were made by account payee cheque/bank draft except for the payment of Rs. 4,83,000. The payments of Rs. 4,83,000, however, were made in cash.

5. Needless to mention that the said sum of Rs. 4,83,000 is the aggregate of amounts paid in cash on several occasions, to be precise, on seven occasions.

6. It was pointed out that on each of the seven occasions the said Hanuman Sugar and Industries Ltd. asked the assessee in writing to pay the specified sum in cash.

7. It was emphasised that the said Hanuman Sugar and Industries as the supplier issued a certificate to the effect that it had insisted on cash payments since it wanted the money for its business requirements.

8. It was submitted on behalf of the assessee that the assessee, in fact, in order to maintain harmonious relationship with the said supplier made the cash payments. It was submitted that the transaction involving the said cash payments were all genuine business transactions.

9. It was also pointed out that there was and is no dispute about the identity of the payee, namely, the said supplier Hanuman Sugar and Industries Ltd.

10. The order of the Assessing Officer, however, went against the assessee and the assessee being aggrieved thereby preferred an appeal to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), inter alia, held that the genuineness and identity of the payee had not been doubted and the payments had been made by the assessee to keep harmonious relationship with the supplier under unavoidable circumstances.

11. It was held by the Commissioner of Income-tax that the Assessing Officer wrongly invoked the provisions of Section 40A(3), as the cash payments were not made against any specific purchase.

12. The cash payments were, in the opinion of the Commissioner of Income-tax, in the nature of advance on accommodation loan which were to be adjusted against future purchase. The assessee, however, won the battle and the said sum of Rs. 4,83,000 was deleted from the assessee’s income.

13. Being aggrieved by the said order of the Income-tax Commissioner (Appeals), the Department preferred an appeal to the learned Tribunal. The learned Tribunal held that the Commissioner of Income-tax (Appeals), was not correct in deleting the said addition of Rs. 4,83,000 and as such the order of the Commissioner of Income-tax (Appeals) was set aside and the order of the Assessing Officer was restored.

14. Mr. J. P. Khaitan, learned counsel for the assessee, raised a very interesting question as to whether the said cash payments were covered by Rule 6DD(j) of the Income-tax Rules, 1962, and if the answer to this question was in the affirmative, then and in that event, it saved the assessee from the disallowance of the said sum of Rs. 4,83,000, under Section 40A(3) of the 1961 Act.

15. Under Section 40A(3), as the said section stood at the material time, it was provided that the expenditure in respect of which payments were made in a sum exceeding Rs. 2,500, otherwise than by a crossed cheque or by a crossed bank draft, was not allowed as a deduction.

16. The second proviso to the said sub-section, however, contemplated that no disallowance was to be made in such cases and under such circumstances as might be prescribed having regard to the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors. This literal interpretation of the said Section 40A(3), however, was given by the learned advocate, Mr. Khaitan, on behalf of the assessee.

17. Mr. Khaitan, however, submitted that the prescription in terms of the second proviso to Section 40A(3), was made by the Rule 6DD.

18. In terms of Rule 6DD(j), Mr. Khaitan submitted, no disallowance was to be made where the assessee satisfied the Assessing Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft due to certain circumstances which were provided in the said rule, the said circumstances were :

(i) due to exceptional circumstances, or

(ii) due to unavoidable circumstances, or

(iii) because payment in the manner aforesaid was not practicable, or

(iv) because payment in the manner aforesaid would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof.

19. In order to bring himself within one of such circumstances as above, the assessee was required to furnish evidence to the satisfaction of the Assessing Officer as to the genuineness of payments and the identity of the payee.

20. It was pointed out on behalf of the assessee by Mr. Khaitan that it was the case of the assessee that seven payments were, in fact, made in cash in the entire transaction and such payments were made in cash due to unavoidable circumstances and as such the same could or should not have been disallowed under the said Section 40A(3).

21. At this juncture, however it may be pointed out that the transaction which took place between the said Hanuman Sugar and Industries Ltd. and the assessee, was a transaction, the value of which was more than Rs. 2 crores and all the payments were made by the assessee by account payee cheques or bank drafts except the said payments on seven occasions which were payments for the aggregate sum of Rs. 4,83,000 in cash.

22. Thus, according to Mr. Khaitan the identity of the person to whom the cash payments were made was established and was not disputed. The genuineness of the transaction was also an admitted position. The assessee had business transactions with the said Hanuman Sugar and Industries Ltd. was also an admitted fact.

23. In such circumstances, if the cash payments which were made came within the exceptions provided under the second proviso of Section 40A(3), read with Rule 6DD(j), then and in that event, the disallowance could not be made as the assessee was protected by the provisions of the said Rule 6DD(j).

24. It was, however, submitted on behalf of the assessee that the questions raised by the assessee, which were also directed to be referred by this court, were questions of law involving the interpretations of the provisions of Section 40A(3) and its second proviso, the interpretation of Rule 6DD(j) of the rules and Circular No. 220 dated May 31, 1977 (see [1977] 108 ITR (St.) 8), issued by the Central Board of Direct Taxes.

25. Thus, according to Mr. Khaitan the question requiring to be decided herein is as to whether on a proper interpretation of the said Section 40A(3), Rule 6DD(j) and having regard to the facts as found by the Tribunal, the case of the assessee fell within the exceptions provided in Rule 6DD(j) and as such the cash payments made by the assessee could not, therefore, be disallowed under the said Section 40A(3).

26. On behalf of the Revenue, however, it was contended that the questions raised on behalf of the assessee were questions of fact only. The assessee, it was pointed out, had not raised any question of perversity against the Assessing Officer, or, for that matter, against the learned Tribunal.

27. It was contended that since the questions were merely questions of fact this court should not answer the said questions. A few decisions were also relied upon on behalf of the Revenue in support of the above contention.

28. It was, however, submitted on behalf of the assessee that the questions raised by the assessee and directed to be referred by this court were questions of law involving the interpretation of the provisions of Section 40A(3), and its second proviso and the provisions of Rule 6DD(j) of the Income-tax Rules and Circular No. 220 dated May 31, 1977 (see [1977] 108 ITR (St.) 8), issued by the Central Board of Direct Taxes.

29. In the present case, however, the transaction was undertaken by the assessee in its business expediency in order to maintain good business relations.

30. Whether the said transactions, on the basis of the facts and the circumstances of the case and having regard to the relevant provisions of law, namely, Section 40A(3) and Rule 6DD(j), come within the exception, as provided under Rule 6DD(j), is, in my opinion, a question of law that is to be answered in this reference. The cases relied upon on behalf of the Revenue in this regard would be dealt with a little later.

31. Mr. Khaitan, however, submitted that having regard to the facts and the circumstances of the case and having regard to the decided authorities the question raised by the assessee should be answered in the negative and in favour of the assessee.

32. It should however be pointed out that Mr. Khaitan during the course of his submissions made it clear that there was no dispute about any of the facts and that it was not necessary for the assessee to challenge any findings of fact as perverse.

33. By now, however, it is well-known that a decision of an authority is called perverse if it appears that no reasonable man could come to such a decision on the basis of the facts and the circumstances of that particular case, as that authority did, then and in that event, such decision is called a perverse decision, because the said decision is reached by the authority concerned, on the basis of a particular set of facts and the circumstances of a case, where no reasonable mind would support such decision having regard to the said facts and the circumstances of that case.

34. The authorities relied upon in support of the case of the assessee are briefly mentioned herein :

(i) In CIT v. Suraj Bhan and Co. ;

(ii) In Sarda Plywood Industries Ltd. v. CIT ;

(iii) In Attar Singh Gurmukh Singh v. ITO ;

(iv) In Giridharilal Goenka v. CIT ;

(v) In CIT v. Ram Agya Shyam Narain ;

(vi) In CIT v. Chaudhary and Co. ;

(vii) In Walford Transport (Eastern India) Ltd. v. CIT [1999] 240 ITR 902 (Gauhati) ; and

(viii) In CIT v. Nikko Auto Ltd. .

35. Suraj Bhan and Co.’s case , was cited for the proposition that the question whether the facts proved constituted exceptional circumstances as provided by Rule 6DD(j), was a question of law.

36. In the case of Sarda Plywood Industries Ltd. , one of the questions for consideration was as to whether the amounts spent for presentation of silver boxes to dealers amounted to advertisements within the meaning of Section 37(2B) and Rule 6B. The Revenue contended that the question, as framed by the learned Tribunal, was a pure question of fact, this court, however, rejected the above contention of the Revenue. It was held that when on admitted facts the inference drawn by the Tribunal is an erroneous one, a mixed question of fact and law would arise and as such a reference under Section 256(2) was maintainable.

37. Thus, citing the above two decisions it was contended that the question whether on the facts found by the Tribunal, the case of the assessee fell within the exceptions laid down in Rule 6DD(j), was a pure question of law. It was also submitted that, in any event, on admitted facts, the inference drawn by the Tribunal that the assessee’s case did not fall within the exceptions provided in Rule 6DD(j), was a mixed question of fact and law.

38. Mr. Khaitan submitted that in any view of the matter, the reference under Section 256(2), was maintainable.

39. In the case of Attar Singh Gurmukh Singh v. ITO , the Supreme Court had the occasion to consider the scope of the provisions under Section 40A(3) and Rule 6DD(j).

40. It was held by the Supreme Court that the provisions were not intended to restrict business activities. It was pointed out by Mr. Khaitan, that in the said case payment by crossed cheque or crossed bank draft was insisted upon to enable the Assessing Officer to ascertain whether it was genuine or out of income from undisclosed sources. The terms of Section 40A(3), as pointed out by Mr. Khaitan, were not absolute as held by the Supreme Court in the said case.

41. Mr. Khaitan emphasised that consideration of business expediency and other relevant factors were not excluded. Under Rule 6DD an assessee is entitled to be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances as specified under the said rule. It was submitted that the said provisions were intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances of using black money for business transactions.

42. In the case of Giridharilal Goenka v. CIT [1989] 179 ITR 122, a Division Bench of this court had the occasion to consider the scope of Section 40A(3), Rule 6DD and the said circular issued by the Board. On the question of the relevant provisions of the Act and rule, the court held that the “Income-tax Officer” should take a practical approach to the problems in hand and strike a balance between the direction of law and the hardship to the assessee.

43. At page 128 of the said judgment it was said :

“There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed ; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances.”

44. The only question raised in the above reference was almost similar to the second question raised in the instant reference. However, the said question was answered by the Division Bench as a question of law.

45. It is true that whether the facts and the circumstances of a particular case satisfy the requirements of Section 40A(3) and Rule 6DD, are matters of fact indeed, but what degree of proof of facts and circumstances of a particular case would satisfy the requirements of the provisions of the said rule is, in my opinion, a question of law to be decided on the basis of the facts and the circumstances of each case. The questions raised herein, therefore, in my opinion, are to be answered by us as questions of law.

46. Regarding the case of CIT v. Ram Agya Shyam Narain , it was pointed out by Mr. Khaitan on behalf of the assessee, that the facts of that case were almost similar to the present reference. In that case, it was submitted, the amount paid in cash was quite small compared to the total amount involved in the transaction between the assessee and the supplier. The supplier, in fact, insisted upon payment in cash and the assessee had to oblige the supplier by making cash payment only to maintain good business relations. The Allahabad High Court, however, did not interfere with the order of the learned Tribunal as it was found that the case of the assessee was covered by the provisions of Rule 6DD(j).

47. In the case of CIT v. Chaudhary and Co. , the seller insisted upon payment in cash, the identities of the sellers were disclosed by the assessee. The certificates issued from the sellers stating that they were insisting on cash payments were relied upon by the assessee for establishing the genuineness of payments. The Allahabad High Court did not disturb the view taken by the learned Tribunal that the cash payments were not hit by Section 40A(3) of the 1961 Act.

48. In Walford Transport (Eastern India) Ltd. v. CIT [1999] 240 ITR 902 (Gauhati), in explaining the purpose of Section 40A(3), the Gauhati High Court said that the said section was not to penalise the assessee for making cash payments but the whole object of the said section was to check evasion of tax and flow of unaccounted money or to check transactions which were not genuine.

49. The provisions of Section 40A(3) were to be read with Rule 6DD. The Assessing Officer, according to the said decision, has to take into account the surrounding circumstances, considerations of business expediency and the

facts of each particular case. Exceptional and unavoidable circumstances could vary on the facts of each case.

50. If, however, the transactions are found to be genuine and the identity of the payee is established, a liberal view of compelling and mitigating circumstances should be taken, is the view of the Gauhati High Court.

51. In CIT v. Nikko Auto Ltd. , the observations of the Punjab and Haryana High Court were relied upon by Mr. Khaitan on behalf of the assessee. The following are the said observations (page 479) :

“What constitutes an exceptional and unavoidable circumstance ? This question became a subject-matter of controversy giving rise to protracted litigation. The courts have been consistent in their view that the exceptional circumstances are to be seen from the point of view of a businessman keeping in view the exigencies of business… Section 40A(3) has been enacted to check the flow of black money and is basically directed towards the transactions which cannot be cross checked and cross verified.”

52. Mr. P. K. Mallick, learned senior counsel, appearing on behalf of the Revenue, with learned counsel Mr. Dipak Deb, submitted that the object of the provisions of Section 40A(3) of the Act was to check evasion of taxes and ensure that when payments exceeding Rs. 2,500 were made in a given case by crossed cheque drawn on a bank or by a crossed bank draft it would be easier to ascertain whether the payments were genuine and made out of the income from the disclosed sources.

53. The object of Rule 6DD(j) was to relax the rigour of Section 40A(3), in genuine and bona fide cases in order to avoid hardship and harassment.

54. It was submitted by Mr. Mallick, on behalf of the Revenue, that on the facts and the circumstances of the case and the materials in support thereof, the assessee failed to satisfy the Assessing Officer that the payments could not be made by crossed cheque drawn on a bank, or by a crossed bank draft, as required by the said Rule 6DD, due to exceptional or unavoidable circumstances, because the payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee. Basing the case of the Revenue, on these contentions, it was submitted, that the findings of the learned Tribunal were purely findings of facts and, therefore, no question of law arose in the facts and the circumstances of the case. It was pointed out that the assessee did not contend that the decision of the Tribunal, or for that matter, the decision of the Assessing Officer was perverse or, patently unreasonable.

55. It was contended on behalf of the Revenue that the questions raised by the assessee were merely questions of fact, since the assessee had not raised any question of perversity, this court should not answer the questions since the decision of both the Assessing Officer and the learned Tribunal were based on facts. The assessee could not prove the facts to the satisfaction of the Assessing Officer and the learned Tribunal, as such the decisions of both the Assessing Officer and the Tribunal remained decisions based on proved facts which could and should not be interfered with by this court in this reference.

56. In support of the above contention three decisions were cited. The said decisions are :

(i) CIT v. Cellulose Products of India Ltd. ;

(ii) Shri Radhika Prakashan (Raipur) P. Ltd. v. CIT [2002] 257 ITR 675 (MP); and

(iii) Srinath Bullion Refinery v. CZT .

57. In the case of CIT v. Cellulose Products of India Ltd. , the Supreme Court held that the High Court while hearing a reference under the Act did not exercise any appellate or revisional or supervisory jurisdiction over the Tribunal and that it acted purely in an advisory capacity. If the Tribunal having considered the evidence produced before it on a question of fact gave its findings, it could not be interfered with in a reference by the High Court unless of course such finding was not supported by any evidence or the same was perverse or patently unreasonable.

58. In reply it was said, on behalf of the assessee by Mr. Khaitan, that this decision had no application to the present case as the assessee had not challenged any finding of fact recorded by the Tribunal and that it was not necessary for the assessee to raise any question of perversity.

59. In Shri Radhika Prakashan (Raipur) P. Ltd. v. CIT [2002] 257 ITR 675, a Division Bench of the Madhya Pradesh High Court held, on the facts of that case that the assessee had failed to furnish any evidence before the Tribunal in support of the explanation that the party had insisted upon payment in cash and expressed unwillingness to render services without cash payment. It was also found on the facts in that case that no exceptional or unavoidable circumstances for making the payment in cash was made out.

60. In reply, it was pointed out on behalf of the assessee, that the facts of that case revealed that the assessee had consciously split up the several payments so that each payment did not exceed the monetary limit provided in Section 40A(3), only to circumvent the provision of law. The following observations were made by the High Court (page 676) :

“The finding recorded is that the assessee had consciously split up the payments in several payments so that each payment does not exceed Rs. 10,000 only to circumvent the provisions of law. Under the circumstances, the addition has been confirmed.”

61. It was submitted on behalf of the assessee that it was in those circumstances, the Madhya Pradesh High Court held that the questions involved in that case were questions of fact based on appreciation of evidence and the findings of the Tribunal were not perverse. In the instant case, however, it was submitted, that there was no lack of evidence nor any dispute on fact.

62. Citing Srinath Bullion Refinery v. CIT , it was contended on behalf of the Revenue that the Madhya Pradesh High Court, on a similar question, was pleased to dismiss the assessee’s appeal because the question involved was essentially a question based on facts.

63. In reply, it was pointed out on behalf of the assessee that in that decision the very genuineness of the transaction was in dispute. The High Court dismissed the appeal since the question of genuineness of transaction was a question of fact. It was submitted on behalf of the assessee that, in the present case, the genuineness of the transaction had not been questioned. The authorities relied upon by the assessee were also dealt with by the Revenue in dealing with the submissions on behalf of the assessee.

64. It was submitted on behalf of the Revenue that in the case of Attar Singh Gurmukh Singh v. ITO , the Supreme Court held that the payments made for purchases would also be covered by the word “expenditure” and as such payments could be disallowed if they were made in cash in the sums exceeding the amount specified under Section 40A(3).

65. The other decisions, cited on behalf of the assessee, were sought to be distinguished on facts and it was submitted that those cases were decided on their own facts and had no application to the facts and the circumstances of the present reference.

66. Dealing with the merits of the case it was contended on behalf of the Revenue that the case of the assessee, that the payments were made at the instance of the party, was not relevant and tenable as the letters and certificates did neither prove that the money was urgently required in cash under any unavoidable circumstances and failure to pay would have caused genuine difficulties or unnecessary hurdle in the business of the payee.

67. It was pointed out on behalf of the Revenue that it was an admitted fact, as would be evident from the confirmatory letter, that the cash payments were made by the assessee against purchase of cotton yarn. According to the learned Tribunal the payments made in cash to keep harmonious relationship, as explained on behalf of the assessee, were not covered either by Rule 6DD of the Income-tax Rules, 1962, or, the circular issued by the Central Board of Direct Taxes, as the terms “harmonious relationship” indicated only general and normal circumstances and not exceptional one as contemplated in rule 6DD(j) of the Rules.

68. Although the learned Commissioner of Income-tax (Appeals), in allowing the appeal of the assessee did not doubt the identity of the payee and the genuineness of the transaction, the learned Tribunal held that in Rule 6DD(j), the said requirements were only subsidiary requirements in addition to the main requirement of proving the exceptional circumstances and genuine difficulties which had not been fulfilled by the assessee in the instant case.

69. Thus, in the facts and the circumstances of the case and having regard to the decisions referred to above, it was submitted on behalf of the Revenue that the answer to both the questions should be in the affirmative and in favour of the Revenue.

70. It appears from the order of the Assessing Officer that the return was accompanied with tax audit report which showed that the assessee had made considerable cash payments in excess of Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or crossed demand draft.

71. The assessee contended on the basis of a letter dated March 26, 1990, that most of the payments were made on account of delivery charges and freight expenditure which needed immediate payment for smooth running of business. The genuineness of payments and the identity of the payee were also established.

72. The Assessing Officer, however, found that the stand of the assessee was not totally acceptable “as a few payments, in respect of delivery of cotton yarn to Hanuman Sugar and Industries Ltd., could have been made according to provision of Section 40A(3) without hampering assessee’s business.” Hence, payments to the tune of Rs. 4,83,000 made in cash was disallowed. In disallowing the said amount of Rs. 4,83,000, the Assessing Officer however never doubted the genuineness of the transaction in question.

73. When the matter reached the learned Commissioner of Income-tax (Appeals), found that the assessee “had made a total transaction with the said Hanuman Sugar and Industries for over Rs. 2 crores and all the payments were made by account payee cheques. It was only on a few occasions and at the instance of the principal the appellant had to pay cash which on verification was found to be not against their goods purchased but paid as advance money as accommodation loan to be adjusted against future purchases if any, and therefore, could not be brought within the mischief of the provisions of Section 40A(3) of the Act.”

74. As and when payments were made the request letter was first received which did not reflect any request for payment in cash adjustable against any purchase. The assessee also obtained a certificate from Hanuman Sugar Industries Ltd., which indicated that the payments as and when made were at their instance and not as per convenience of the assessee. When the cash payments were made, it was found by the learned Commissioner, the assessee had a huge credit balance lying with the company and therefore, it could not be said that the cash payments was made against the goods purchased. Hence, there was no application of Section 40A(3) of the Act.

75. So far as the evidence and the identity of the payee were concerned, it had not been doubted that the payments had been made to keep a harmonious relationship with the principal under unavoidable circumstances.

76. From the details of accounts of Shri Hanuman Sugar and Industries Ltd., it was found that the assessee had a credit balance, as on June 30, 1986, to the tune of Rs. 3,51,527. The whole essence of the order of the learned Commissioner, it appears, was that the learned Commissioner did not question the genuineness of the transaction and was satisfied that the payments were made to the payee to keep a harmonious relationship under unavoidable circumstances.

77. The learned Tribunal, however, found that the Commissioner of Income-tax (Appeals), had allowed the appeal on the ground that the identity of the payee and the genuineness of the transaction were not in doubt. According to the learned Tribunal, however, these are only subsidiary requirements in Rule 6DD(j), in addition to the main requirement of proving the exceptional circumstances and genuine difficulties, which in the opinion of the Tribunal, had not been fulfilled by the assessee.

78. In my opinion, however, the assessee has to establish only one of the requirements as provided in Rule 6DD(j)(1) and (2), namely, that payment was made in exceptional or unavoidable circumstances or payment by cheque or bank draft was not practicable or payment by cheque or draft would have caused genuine difficulty.

79. If the assessee can satisfy the existence of one of the requirements as provided in Rule 6DD(j), then, he is entitled to the protection provided in Rule 6DD(j). One interesting feature of this case is that the genuineness of the transaction was not doubted by the Assessing Officer and by the learned Tribunal as well. The identity of the payee was also not questioned by the Assessing Officer and the learned Tribunal either.

80. The learned Commissioner found that the payments were made to keep a harmonious relationship with the principal under unavoidable circumstances. The unavoidable circumstances is one of the conditions an assessee must satisfy in order to bring itself or himself within the exemption, or, exception as provided in Rule 6DD(j).

81. The Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO , said that the said provisions were not intended, to restrict business activities, payment by crossed cheque or crossed bank draft was insisted upon to enable the Assessing Officer to ascertain whether it was genuine or out of income from undisclosed sources.

82. The learned Tribunal found that the identity of the payee and the genuineness of the transactions were subsidiary requirements of the rule in question and the main requirements were :

(i) Exceptional or unavoidable circumstances,

(ii) Causing genuine difficulties (see pages 6 and 7 of the paper book).

83. In my opinion, however, the identity of the payee and the genuineness of the transaction have a close connection with the other requirements, such as

exceptional or unavoidable circumstances or causing genuine difficulties. In the instant case, the total value of the transaction in question was over Rs. 2 crores and all the payments were made by account payee cheques except the payments to the tune of Rs. 4,83,000, which payments are the subject-matter of this reference. The case of the assessee was and is that it is to maintain this business relationship that payments were made in cash under the circumstances as explained by the assessee before the Assessing Officer, the learned Commissioner of Income-tax (Appeals) and the learned Tribunal.

84. If the identity of the transaction is found to be not genuine then whether a payment is made under unavoidable circumstances or due to exceptional circumstances becomes secondary altogether as the transaction in question is found to be not genuine and in that event the whole exercise under these provisions falls through.

85. The learned Tribunal, however, found that these two circumstances were not proved that is to say that the payments were made due to exceptional or unavoidable circumstances. The provisions of the rule or the conditions laid down in the said circular do not provide as to what degree of factual proof is required to satisfy the requirements under Rule 6DD(j) read with the said circular in question. The factual proof of each case has to be taken into account for the purpose of finding out whether the requirements under the said rule are or are not satisfied. As aforesaid if the assessee satisfies one of such requirements as provided in Rule 6DD(j), he is entitled to seek protection under the said rule.

86. In the case of Giridharilal Goenka v. CIT , the identity of the payee who was an income-tax assessee was established and the genuineness of the transactions was not doubted or disputed. It was held that the circular of the Board was not exhaustive but only illustrative. It was further held that the Income-tax Officer had to take a pragmatic view of the matter (page 128) : “The Income-tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive ; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee.”

87. I have not been able to find any decision which has said anything contrary to the above observations. Needless to mention again the Gauhati High Court also in Walford Transport (Eastern India) Ltd. v. CIT [1999] 240 ITR 902, found

that the purpose of Section 40A(3) was not to penalise the assessee for making cash payment but only to check evasion of tax and flow of unaccounted money or to check transactions which were not genuine. It was also found that exceptional and unavoidable circumstances might vary depending on the facts of each case, where the transactions were found to be genuine and identity of the payee was established, a liberal view of compelling and mitigating circumstances should be taken.

88. In Walford Transport v. CIT their Lordships Justice V. N. Khare (as his Lordship then was) and Justice M. Katju, said the following : “as has already been observed above, in the present case the totality of circumstances shows that the transactions were genuine for the reasons already mentioned above. In fact, the amount said to have been paid in cash by the assessee to certain parties has been verified by the certificates of those parties. Hence, the interest of the Department is protected because the Department can assess those amounts in the hands of the payee and it is not that these amounts will not be assessed at all. Thus, the Department will not suffer in any way.”

89. Lastly, the observations of the learned Income-tax Commissioner (Appeals), that the payments had been made to keep harmonious relationship with the principal under unavoidable circumstances, in my opinion, clearly satisfies the requirement under the provisions of Rule 6DD(j)(1).

90. Thus, it can be said that the payments were made under unavoidable circumstances only to keep harmonious business relationship with the payee. The genuineness of the business relationship between the payee and the assessee, in the instant case, had or has not been doubted by any authority namely, the Assessing Officer, the learned Commissioner (Appeals) and the learned Tribunal.

91. Lastly, it was pointed out on behalf of the assessee that the amount paid in cash was Rs. 4,83,000, which was quite small compared to the total amount involved in the entire transaction which was over Rs. 2 crores.

92. It was submitted on behalf of the assessee that the supplier on each of the seven occasions had insisted, in writing, on the cash payments for its own busi’ness requirement and also issued a certificate to that effect. The assessee made payments in cash in order to maintain, as I have said above, harmonious relationship as otherwise its business could have been adversely affected. There was no dispute about the genuineness of the transaction or the identity of the payee.

93. Having considered the provisions under Section 40A(3), Rule 6DD(j) and the said circular and having considered the facts and the circumstances of the case and the admitted documents of the present reference I am of the opinion that the assessee made the said payments other than by crossed cheque drawn

on a bank or by a crossed bank draft due to unavoidable circumstances which in the words of the learned Commissioner “with a view to keep the harmonious relationship with the payee”.

94. Thus, the case of the assessee came within the exceptions as provided in Rule 6DD(j)(1) of the Rules and as such the disallowance made under Section 40A(3) by the learned Tribunal is erroneous.

95. Thus, the two questions raised on behalf of the assessee are answered in the negative and in favour of the assessee.

96. All parties to act on a xeroxed signed copy of this judgment and order on the usual undertakings.

Dilip Kumar Seth, J.

97. I agree.

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