JUDGMENT
Raghuvir, C.J.
1. This reference is made under Sub-section (1) of Section 256 of the Income-tax Act, 1961, at the instance of the assessee pertaining to two assessment orders of 1978-79 and 1979-80. The question referred reads as under : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in reversing the finding of the Commissioner of Income-tax (Appeals) deleting the disallowance for the two assessment years and restoring the orders of the Income-tax Officer in this behalf ?”
2. The assessee is a business firm at Tezpur in Assam. The assessee paid to Eastern Hardware Co. (India) the sum of Rs. 9,600, to Assam Asbestos Limited the sum of Rs. 16,000 and to Shew Prasad Mohanlal the sum of Rs. 24,959. The total of these three amounts is Rs. 50,559 which was paid in cash to the three firms at Tezpur. Similarly, relevant to the assessment year 1979-80, the assessee paid to Steel Stores Rs. 19,030 and to Bajaj Engineering Co. Rs. 17,500. The total of these two amounts is Rs. 36,530. These amounts were also paid in cash at Tezpur. The payments were made to the five firms who have their principal seat at Gauhati.
3. The assessee tendered proof before the Income-tax Officer showing that the amounts were paid and the Income-tax Officer was satisfied that the payments were true. Since the amounts were not paid by crossed cheques or by bank drafts, the payments were not allowed to be deducted. On appeal, the Commissioner of Income-tax allowed the appeal. But, on a further appeal, the Appellate Tribunal restored the order of the Income-tax Officer on the basis of Section 40A(3) of the Act.
4. Pursuant to the provision in Sub-section (3) of Section 40A, Rule 6DD was promulgated and Circular No. 220 was issued by the Central Board of Direct Taxes on May 31, 1977. Section 40A, Rule 6DD and the Circular No. 220 recite that after March 31, 1969, any payments on account of expenditure of more than Rs. 2,500 will have to be made by a crossed
cheque or by a crossed bank draft unless exempted by the Revenue authorities. These provisions were considered times out of number by the High Courts and, therefore, it is not necessary to delve into the legislative history of these provisions in detail.
5. The Indian Parliament incorporated the above provisions to check evasion of taxes. Even in genuine cases where payments are shown to have been made in cash, the assessee is put to the necessity to prove that in the area of business, banking facilities are not adequate. Therefore, impelled by genuine difficulty, the assessee had to make payment in cash. The same idea is writ large in the Rules. The assessee will have to show that there was no way left for the assessee except to pay in cash. In the nature of things whether in the statute, rules or circulars, all the contingencies cannot be enumerated exhaustively. Parliament referred to the inadequacy of facilities in Section 40A. The rule-making authorities illustrated some of the circumstances in the Rules. The Revenue supplemented the further circumstances when exemptions can be claimed and allowed.
6. The circular recited that if a seller does not have a bank account and payments are made at a place where either the purchaser or the seller does not have a bank account or payments are made on a bank holiday or the seller is refusing to accept payment by cheque or draft or the purchaser’s business interest is shown to suffer due to the non-availability of goods, the purchaser may pay in cash and claim exemption. The cases decided by the courts show in what circumstances exemptions can be accorded. In Mudiam Oil Co. v. ITO [1973] 92 ITR 519, the Andhra Pradesh High Court considered the vires of Section 40A and held that Parliament had power to incorporate Section 40A(3) in the Act. There is another Andhra Pradesh High Court decision in Jyothi Chellaram (Smt.) (Late) v. CIT [1988] 173 ITR 358, where a transaction was held not proved, and, therefore, exemption was not accorded. The Gujarat High Court in Hasanand Pinjomal v. CIT [1978] 112 ITR 134 considered the statement of objectives for incorporation of this provision in the Act and held that the statute and rules were promulgated to check tax evasion. In another case of the same High Court in Navsari Waste Cotton Products v. CIT [1987] 163 ITR 378, that court remanded the subject-matter for consideration under Rule 6DD as, in that case, when the transaction was entered into, the rules were not promulgated. In Kanti Lal Purshottam and Co. v. CIT [1985] 155 ITR 519, the Rajasthan High Court held that the transaction in the case was genuine and the default made by the assessee was “technical” and further held that the Income-tax Officer in his discretion could exempt the transaction. In CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595, the Punjab and Haryana High Court held that, in exceptional circumstances, exemptions can be recognised. In Giridharilal Goenka v. CIT [1989] 179 ITR 122, of the Calcutta High Court, payment
made was shown to have been made in unavoidable circumstances and, therefore, was exempted. The Kerala High Court in Rajarajeswari Weaving Mills v. ITO [1978] 113 ITR 405, held that payment was made on the “insistence” of the customer and, therefore, payment was allowed. In Narayan Bijoy Kumar v. CIT [1987] 163 ITR 695, CIT v. Chandmull Radhakishan [1987] 163 ITR 697 the High Court of Patna found that circumstances were “unavoidable” and, therefore, exemption was granted. In Bhilai Motors v. CIT [1987] 167 ITR 147, the Madhya Pradesh High Court held that the findings reached by the Tribunal were findings of fact and, therefore, for that reason, did not call for interference. In U. P. Hardware Store v. CIT [1976] 104 ITR 664, the Allahabad High Court did not accept the explanation of the assessee and exemption was not ordered. In another case in Ideal Tannery v. CIT [1979] 117 ITR 34, the same court held that the transactions were not proved. In a third case, the same High Court in CIT v. Satish Chandra [1983] 143 ITR 330 did not accord exemption (sic).
7. In the instant case, the five firms to whom payments were made, were all based at Gauhati. The assessee-firm is at Tezpur. Normally, the transactions are made “through accounts”. But, in the above five instances, the representatives of the Gauhati firms “came to Tezpur” and “insisted” on cash payment (as in the Calcutta case). The assessee, therefore, had to pay in cash. This explanation was accepted by the Commissioner of Income-tax (Appeals) but not by the Income-tax Officer and the Tribunal. None of the three authorities have doubted the genuineness of these payments. Once the transactions are genuine, what is to be considered is only the explanation offered by the assessee.
8. We may now refer to the unconscionable delays that occur in the banking system of the country as often it is seen that cheques do not bring forth cash for months, sometimes the delay is of three or four months. That explains why cheques and drafts are not popular with the Indian businessmen. In the instant case, the assessee tendered the evidence that the representatives of the five firms at Tezpur insisted on cash payments and, for the facility of the suppliers or vendors, the assessee paid in cash. The Tribunal, therefore, was not justified in rejecting the explanation. To obviate any misunderstanding, we may add that the acceptance or rejection of the explanation under the statute, rules or under the Circulars is an inference and, therefore, a question of law arises though the inference may have to be drawn on bare facts.
9. A word more may be stated here. One of the arguments advanced before us on behalf of the assessee was that payments made for goods purchased are not to be construed as expenditure. On this question, we keep the matter open to be decided in a more appropriate case.
10. We answer the referred question in the negative, in favour of the assessee and against the Revenue. No costs.
