Commissioner of Income Tax vs DEVANS MODERN BREWERIES LTD.

Doabia, J.

An application preferred by the revenue in which prayer was made that questions of law as formulated by the revenue be referred to this court

stands rejected. It is in these circumstances a petition has been preferred in terms of section 256(2) of the Income Tax Act, 1961.

The revenue wants the following questions of law to be referred to this court :

Whether, on the facts and in the circumstances of case, the Tribunal was justified in law in confirming the deletion of addition of Rs. 8,93,827

made by the assessing officer u/s 40A(3) of the Income Tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that there existed exceptional and

unavoidable circumstances necessitating the payment in cash, the fact it is a practice with the assessee to make payment in cash to the sellers of

empty bottles with whom the assessee has a long business dealing?

Whether, on the facts and in the circumstances of the case, the Tribunal has not failed to appreciate that the assessee has never proved before

the assessing officer that the payments in cash were made due to unavoidable and exceptional circumstances ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the deletion of addition of Rs. 61,431

made by the assessing officer u/s 37(3A) of the Income Tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal has not failed to appreciate that the expenses which were restricted u/s

37(3A)of the Income Tax Act, 1961,wereof such a nature as could help to promote the sales of the assessee and, thus, fall within the meaning and

scope of section 37(3A) of the Income Tax Act, 1961 ?

A perusal of the questions of law which have been formulated and which have been quoted above makes it apparent that the determination of

the questions of law depends upon the appreciation of factual position. Therefore, to say that the question of law would arise may not be correct

appreciation of the legal position. This is one aspect of the matter.

The other aspect of the matter on merits be examined.

The Tribunal while deciding the matter before it has confirmed the deletion of an amount of Rs. 8,93,827 from the income of the assessee. This

amount was included in the assessable income on account of the provisions of section 40A(3) of the Act. The assessing officer had expressed an

opinion that a payment exceeding Rs. 2,500 was made on a single day, therefore, these were required to be added in the assessable income. It

was observed that these payments were made in breach of section 40A(3) of the Act. This view expressed by the assessing authority was

reversed by the appellate authority. Resort was had to rule 6DD of the rules. It was held that taking into consideration the nature of the business of

the assessee, the payments beyond Rs. 2,500 could be made in cash and these were held protected by the provisions of rule referred to above.

The other dispute was with regard to the deletion of Rs. 61,431. The assessing officer has invoked the provisions of section 37(3A) of the Act.

The assessee had claimed the following expenses :

Rs.

(i) Rebate on sales 1,30,354

(ii) Sales commission & fees 51,930

(iii) Car hire expenses paid to M/s. Devsons Pvt. Ltd. 12,000

(iv) Business promotion 8,007

2,02,291

These were disallowed and additions were made accordingly. The appellate authority came to the conclusion that these amounts can be allowed as

rebate on sale by way of commission on sales. This view has been upheld by the Tribunal.

As indicated above both these questions basically depend upon the determination of facts. On facts, findings have been recorded in favour of

the assessee, therefore, on the face of it the question of law would not arise.

The scope of section 40A(3) and (4), of the Act be examined. These provisions provide for the disallowance of any expenditure in respect of

which payment in a sum exceeding the specified limit is made otherwise than by a crossed cheque or a crossed bank draft, unless the case falls

within the exceptions specified in rule 6DD. The limit was raised from Rs. 2,500 to Rs. 10,000 from the assessment year 1989-90. The section

applies to illegal business also. In the cases to which sub-section (3) applies, sub-section (4) authorises payment by cheque or bank draft, instead

of payment in cash or in any other manner, notwithstanding anything contained in any other law or in any contract. Sub-sections (3) and (4) and

rule 6DD are constitutional. A reading of sub-sections (3) and (4) makes it clear that disallowance under sub-section (3) is incurred only where

actual payment is made otherwise than by a crossed cheque or bank draft.

The scope of section 40A(3) was considered by a Division Bench of Punjab and Haryana High Court in the case of Attar Singh Gurmukh Singh

Vs. Income Tax Officer, In the above case, the provisions of section 40A(3) were challenged as ultra vires of the Constitution. The Division Bench

has observed as under :

. . . It has been contended that the assessee is engaged in the business of buying and selling electroplating material. In the course of business he

has to purchase certain material. The income of the assessee will be the difference between the price of the purchased material and the price at

which the same is sold. It has been contended that if the price of the purchased material is not adjusted as against the sale price of the material so

sold, in that case the Income Tax levied will not be on the income, rather it will be arbitrarily levied on an assumed income. We are unable to agree

with this contention of the learned counsel. Taking into consideration the language of section 40A(3) of the Act and rule 6DD of the rules, we are

of the opinion that the said provision is more a rule of procedure, rather than creating any substantial hindrance in the way of an assessee who

wants to have deduction on the genuine purchase transactions. The provisions of sub-rule (1) of rule 6DD of the rules may specially be referred to

in this regard. The said rule, in fact, provides for all eventualities which may occur due to exceptional or unavoidable circumstances, or because

payment in the manner as provided in section 40A(3) of the Act was not practicable or would have caused genuine difficulty to the payee having

regard to the nature of the transaction and the necessity of expeditious settlement thereof.

The said provision has been made to safeguard the revenue of the state and if the measures are taken to check the evasion of Income Tax, it

cannot be said that the said measure taken is ultra vires on the ground of arbitrariness and violative of article 14 of the Constitution. The said

provision, in our view has been introduced only to regulate the business activities and prevent unaccounted money being used for clandestine

transactions and it was in the interest of revenue and national economy, that the restriction imposed in this provision has been enacted. This

provision in no way can beheld to curtail the freedom of trade or business. As already observed, the said provision is more of a procedure than to

be of taking away any right of an assessee and the said procedure has been prescribed with a view to avoid evasion of tax to which the revenue

legitimately is entitled. The provision, therefore, cannot be in any manner termed to be arbitrary. The vires of this provision were upheld by the

Mudiam Oil Co. and Others Vs. Income Tax Officer and Others, . No other ground has been pressed. For the reasons recorded above, we are

clearly of the opinion that the provisions of section 40A(3) of the Act are not ultra vires.

After upholding the validity of the provisions vis-a-vis the factual determination, the matter was left to be decided by the assessing authority by

making the following observations :

As regards the notice dated 7-3-1974, it is for the assessee to go and satisfy the authority concerned that he is entitled to claim any of the

exceptions as provided for in rule 6DD of the rules referred to above. It, of course goes without saying that the assessee will be afforded an

opportunity as has also been stated in the notice to satisfy the authority, concerned that he is entitled to the deduction of the expenditure claimed in

view of the provisions of the rule referred to above. The concerned authority being satisfied, the assessee will be entitled to the relief.

Therefore, if the assessee is able to explain the circumstances in which the payment beyond Rs. 2,500 (or now Rs. 10,000 after the

amendment) were made, then these are not required to be added in the assessable income. This is precisely what has happened in this case. The

assessee has been able to explain that the payment could not be made by way of cheque as the nature of the business so required. These

exceptional circumstances were taken into consideration and it was observed that the case is covered by rule 6DD of the rules. Therefore, the

opinion expressed by the Tribunal on merits of the controversy cannot be said to be such which requires to be given a fresh look by giving a

direction to the Tribunal to formulate the questions of law as brought and referred to this court. Same is the position vis-a-vis the additions made in

terms of section 37(3A).

We do not find any merit in this reference and the same is declined.