ORDER
K.G. Bansal, A.M.
1. This appeal of the assessee arises out of the order of CIT(A)-I, Pune, passed on 18th Feb., 2000. The corresponding order of assessment was made by the Jt. CIT, SR-2, Pune (hereinafter called the AO), on 25th Jan., 1999, under the provisions of Section 143(3).
2.1 Ground Nos. 1 and 2 are against the finding of the learned CIT(A) that provisions of Section 40A(3) of the IT Act, 1961, as amended by the Finance Act, 1995, w.e.f. 1st April, 1996, are applicable to cash payment of Rs. 11,36,990 made to M/s Sanjeev Traders, Panvel. For the sake of ready reference, these grounds are reproduced below:
1. On facts and circumstances prevailing in the case and as per provisions of law it be held that, no disallowance in terms of provision of Section 40A(3) of the Act pertaining to transactions with M/s Sanjeev Traders situated at Panvel (District), Raigut, amounting to Rs. 11,36,990 (Rs. 21,66,680 – 10,29,690) is disallowable. It further be held that disallowance so made by the taxing authorities below are contrary to the provision of the Act and in facts and circumstances prevailing in the case, the 20 per cent disallowance of Rs. 11,36,990 so made be deleted.
2. Without prejudice to ground No. 1 on facts and circumstances prevailing in the case, it be held that, if any disallowance is justified and warranted in terms of provision of Section 40A(3), the disallowance should have been pertaining to the period subsequent to the amendment effected in Rule 6DD(j) and the new amendment is substituted the period in which the new provisions were not applicable should be considered as not qualifying for any disallowance. Just and proper relief be granted to the appellant in this respect.
2.2 In the assessment order, it was pointed out that the assessee had made a total payment of Rs. 21,66,680 in cash exceeding Rs. 10,000 each. The assessee was required to explain why 20 per cent of such expenditure should not be disallowed. The case of the assessee was that he was primarily dealing in Indian made foreign liquor. However, in order to maintain clientele, he was also supplying country liquor to them. The turnover of the country liquor was about 6 per cent of the total turnover. The country liquor was purchased from M/s Sanjeev Traders, Panvel, who demanded payments in cash. Therefore, payments in cash were made to this party due to exceptional and unavoidable circumstances, covered under Rule 6DD(j) of the IT Rules. However, the learned AO did not agree with the aforesaid argument. He disallowed 20 per cent of the expenditure and the disallowance was worked out at Rs. 4,33,336. For the sake of convenience, his findings, furnished in para 6.1 of his order, are reproduced below:
6.1 I have considered the submission of the assessee and found that explanation given is not satisfactory. The provision of Section 40A(3) is applicable even if the purchases are fully recorded and verifiable. The payment in cash is not justified in order to ward off competition and improve clientele. 20 per cent of these expenses i.e. Rs. 4,33,336 is, therefore, not allowed as deduction.
2.3 Aggrieved by this order, the assessee carried the matter in appeal before the learned CIT(A). Before him, it was pointed out that cash payments, caught within the mischief of Section 40A(3), amounting to Rs. 11,36,990 were made to M/s Sanjeev Traders; and such cash payments amounting to Rs. 10,29,690 were made to a party in Village Kolkhe. Before him also, it was agitated that the question of unavoidable circumstances will have to be considered in respect of payments made before 25th July, 1995, when Clause (j) was omitted by the IT (Fourteenth Amendment) Rules, 1995. It may be pointed out that after such omission, Clauses (j), (k) and (1) were inserted in the Rules by IT (Twenty-first Amendment) Rules, 1995, w.e.f. 1st Dec, 1995. The learned CIT(A) did not accept the aforesaid arguments of the assessee.
An alternative plea was also taken that one of the sellers was situated in village where banking facilities were not available. The learned CIT(A) came to the conclusion that insofar as M/s Sanjeev Traders is concerned, 20 per cent of the payments will have to be disallowed under the amended provisions of Section 40A(3). In respect of other party, his finding was that since he was not having any banking facilities in the village, the payments made by the assessee are covered under Rule 6DD(j). Thus, he restricted the disallowance to 20 per cent of the amount of Rs. 11,36,990 paid to M/s Sanjeev Traders. His findings are furnished on pp. 1 and 2 of his order, which for the sake of convenience are reproduced below:
I have considered the submission of the assessee and found that explanation given is not satisfactory. The provision of Section 40A(3) is applicable even if the purchases are fully recorded and verifiable. The payment in cash is not justified in order to ward off competition and improve clientele. 20 per cent of these expenses, i.e. Rs. 4,33,336 is, therefore, not allowed as deduction. The representative of the appellant argues that the said purchases have been made only from two dealers of country liquor. His business is in the Village Kolkhe. In that village, there is no bank giving any service. The total turnover of the appellant from the said dealer is Rs. 10,29,690. According to him, this was covered under j. 6DD(h). Regarding the other dealer situated at Panvel, he admitted that such person had the bank account of Panvel and he was operating such bank account. However, the representative argued that provisions/burden of Rule 6DD(j) came effective from 24th July, 1995 and, therefore, upto this date, whatever transactions made in cash, should be disallowed under Section 40A(3) of the Act.
I have considered rival submissions. I find that the dealer who is situated near Panvel was already operating the bank account and, therefore, there was no hardship caused under Rule 6DD(j) even prior to the amendment. So, the disallowance in respect of that dealer is justified. However, the purchases effected from dealer at Village Kolkhe are totalling to Rs. 10,29,690. The sale is to be covered as per Rule 6DD(h). Therefore, addition relating to such turnover is deleted.
Aggrieved by the aforesaid order, the assessee is in appeal before us. It is his case that the disallowance should have been restricted to the period starting from the date of omission of Rule 6DD(j) and such date is 25th July, 1995.
2.4 Before us, the learned Counsel of the assessee pointed out to the amendment in Section 40A(3). He also referred to two amendments in Rule 6DD(j), first one deleting the provisions w.e.f. 25th July, 1995 and the other inserting a new clause on 1st Dec, 1995. The substituted clause does not deal with the issue at hand. Therefore, the case of the learned Counsel was that the question of unavoidable circumstances should have been addressed to by the learned CIT(A) in respect of payments made between 1st April, 1995 and 24th July, 1995. In support of his arguments, the learned Counsel relied on the decision of Hon’ble Supreme Court in the case of Attar Singh Gurumukh Singh v. ITO . In this case, the Hon’ble Court pointed out that the provisions of Section 40A(3) are not absolute. The assessee can bring on record the consideration of business expediency and other relevant factors, which will have to be considered by the AO. However, genuine and bona fide transactions are not taken out of the sweep of the section. In a nutshell, the argument of the learned Counsel was that the genuine and bona fide reasons for making payment in cash will have to be considered.
2.5 As against the aforesaid, the case of the learned Departmental Representative was that provisions of the aforesaid section are applicable even to genuine transactions. He relied on the decision of Bagman Tea Co. Ltd. v. CIT , in which it was pointed out that CIT(A) as well as Tribunal had found that the assessee had not shown compelling circumstances in which cash payment of Rs. 60,000 was made. Therefore, it was held that the amount had been rightly disallowed. It may be pointed out that even the decision of Hon’ble Supreme Court in the case of Attar Singh (supra) was the same to the effect that the assessee has to show business expediency and other relevant factors. Obviously, in absence of such proof, the amount can be disallowed even in respect of genuine payments.
2.6 We have considered the facts of the case and rival submissions. The case of the assessee seems to be that for a part of the period, he was entitled to benefits of the provision contained in erstwhile Rule 6DD(j), as the same was omitted w.e.f. 25th July, 1995. This issue was discussed at length with both the parties. It has been mentioned earlier, that Section 40A(3) was amended by the Finance Act, 1995, w.e.f. 1st April, 1996. Earlier, all cash payments covered under this section, were liable to be disallowed in toto, subject to the provisions contained in Rule 6DD. However, by this amendment, if the payments were genuine, only 20 per cent thereof can be disallowed. Therefore, this provision necessarily deals with computation of the income of the assessee. The matter of amendment is not with reference to the penal provisions. It is also not with reference to the procedural law. Since the amendment affects the computation of income, the aforesaid amendment made by the Finance Act, 1995, constitutes substantive law. It is an accepted proposition that the introduction of substantive provision or amendment in a substantive provision relates to assessment year and not to the year in which income is earned, which is known as the previous year. Though the issue is very clear on this aspect, yet due to controversy raised by the parties, we may refer to the decision of Hon’ble Bombay High Court in the case of CIT v. Orkay Silk Mills (P) Ltd. , the Hon’ble High Court held that for determining the liability of the assessee company in respect of the income of the amalgamating company for the previous year ended on 30th June, 1975, the law applicable on the first day of the asst. yr. 1976-77, i.e. 1st April, 1976, would apply and not the law applicable during the previous year. From the judgment of the Hon’ble Court, the amendment in Section 40A(3), effective from 1st April, 1996, shall be applicable while computing income for asst. yr. 1996-97. This is also clear from the Notes on Clauses to Finance Bill, 1995, reproduced in (1995) 124 CTR (St) 198 : (1995) 212 ITR (St) 290.
2.7 In spite of the aforesaid clear proposition of law, the case of the learned Counsel was that the benefit of Rule 6DD(j) will be applicable to the assessee in respect of payment made in the previous year up to 24th July, 1995. In this regard we may refer to the decision of Hon’ble Bombay High Court in the case of Shakti Raj Films Distributors v. CIT . The issue in that case was regarding the applicability of the circular issued by the CBDT, in which all the expenses incurred on production of film were allowed to be deducted in the very first year of the exhibition of the film. It may be pointed out that the rules and circular constitute what is known as subordinate legislation and, therefore, interpretation in regard to the date of applicability of the circulars will also be applicable equally to the rules, which deal with the substantive law. In that decision, the Hon’ble Court, on p. 27, pointed out that the uncontroverted factual position in the present case is that it was on the basis of the above permission of the Board contained in Circular dt. 4th Oct., 1969, which was in operation during the entire accounting year corresponding to the asst. yr. 1972-73 and on the first date of the said assessment year, that the entire cost of acquiring the distribution rights in the accounting year corresponding to the asst. yr. 1972-73 in which the pictures were released had been written off in the books of account. The deduction was also claimed for the entire cost of the said films in the said year. On these facts, the Hon’ble Court at p. 31 held that “now, it is well settled that the IT Act, as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force. In our opinion, this principle would also govern the applicability of the beneficent circulars of the Board which confer some privileges or rights on the assessees.”
2.8 Coming to the facts of the instant case, the substantive rule was omitted on 25th July, 1995. The first assessment year after this date starts on 1st April, 1996, i.e. it is asst. yr. 1996-97. Therefore, the omission will take effect in computation of income for asst. yr. 1996-97 as per law existing on 1st April, 1996.
2.9 This point gets further clarified if we look to the amendment made in Appendix-I by IT (Third Amendment) Rules, 1987, w.e.f. 2nd April, 1987. The import of amending this rule w.e.f. 2nd April, 1987 is that the new Appendix would govern the grant of depreciation for the asst. yr. 1988-89 and subsequent assessment years. It cannot be said that two calculations of depreciation will have to be made in view of the aforesaid amendment, one for 1st April, 1987 and the other for 2nd April, 1987 to 31st March, 1988, representing two broken periods of the previous year in which the amendment was made.
2.10 We may also have regard to the decision of Hon’ble Supreme Court in the case of CIT v. Scindia Steam Navigation Company Ltd . In that case, the 4th proviso to Section 10(2)(vii) of the 1922 Act, came into force on 5th May, 1946, and it was not retrospective. It was held that this proviso was not applicable to asst. yr. 1946-47 for the reason that the law as it stood on 1st April, 1946 will be applicable in making the assessment for asst. yr. 1946-47.
2.11 In view of the aforesaid discussion, we are of the view that Rule 6DD(j) as it stood prior to this omission on 25th July, 1995, is not applicable for making assessment for asst. yr. 1996-97. Accordingly, we are also of the view that the learned CIT(A) was right in coming to the conclusion that 20 per cent of the amount paid in cash to M/s Sanjeev Traders has to be disallowed in computing the income of the assessee for this assessment year. Thus, ground Nos. 1 and 2 are dismissed.
3.1 Ground No. 3 is against the finding of the learned CIT(A) in which the assessee’s claim for deduction of depreciation on dumper was disallowed. In this connection, the AO had pointed out that the dumper was registered with RTO on 29th March, 1996. In the remaining two days of the relevant previous year, the dumper was not given on hire and the dumper was not used for the business of the assessee. Accordingly, the claim of depreciation was disallowed. The learned CIT(A) was of the view that the vehicle was not actually in service and the passive user thereof in the sense that it was ready for use was not enough for allowing depreciation.
3.2 Before us, the learned Counsel of the assessee pointed out that diesel worth Rs. 576 was purchased on 30th Sept., 1996 and filled in the tank on dumper. A copy of the purchase bill was placed in the paper book. Therefore, it was argued that the dumper was ready for use and, therefore, the assessee was entitled to deduct depreciation on the dumper. As against the aforesaid, the learned Departmental Representative referred to the decision of Hon’ble Bombay High Court in the case of Dinesh Kumar Gulabchand Agarwal v. CIT , in which it was held that the language of Section 32 is such that depreciation is admissible only if asset has been actually used in the business. The word ‘use’ means actual user and not ready for use.
3.3 We have considered the facts of the case and rival submissions. In absence of actual user of the dumper, we are of the view that the facts of the instant case are similar to the facts in the case of Dinesh Kumai Gulabchand Agarwal (supra). Therefore, relying on the decision of Hon’ble Bombay High Court, it is held that the learned CIT(A) was right in not allowing depreciation on the dumper. Thus, ground No. 3 of the appeal is dismissed.
4. Ground No. 4 is against the disallowance of Rs. 30,000 out of vehicle expenses. On perusal of the appellate order, we find that the AO had disallowed a sum of Rs. 53,127 out of total expenditure of Rs. 5,31,275. The learned CIT(A) considered the arguments of the assessee that he has to cover vast area in Raigad and Pune Districts for the purpose of his business and in view thereof, he reduced the disallowance to Rs. 30,000. The case of the assessee before us was that the disallowance was excessive. We do not find that the disallowance is excessive considering the overall expenditure of Rs. 5,37,275. Thus, this ground of appeal is also dismissed.
5. In result, the appeal of the assessee is dismissed.