Navsari Waste Cotton Products vs Commissioner of Income Tax

A.M. Ahmadi, J.—The assessee, a registered firm, is engaged in manufacturing and selling cotton yarn prepared from cotton waste. In the assessment year 1970-71 it paid an amount of Rs. 37,328, each payment exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or a crossed bank draft contrary to sub-section (3) of section 40A of the income tax Act, 1961 (''the Act'') to Manubhai & Company, Bombay, towards the price of cotton waste purchased from that company. The ITO for reasons stated in paragraphs 5A to 5E of his order came to the conclusion that these payments fell within the mischief of sub-section (3) of section 40A. On appeal the AAC confirmed the view of the ITO so far as this question is concerned for reasons stated in paragraphs 4 to 6 of his order. The matter was carried in appeal to the Tribunal but in vain. Thereupon the assessee sought a reference under sub-section (1) of section 256 of the Act on four questions. The Tribunal by its order dated 29-7-1978 referred the following questions for this Court''s opinion:

Whether, the Tribunal was right in law in interpreting section 40A(3) to the effect that the same applies to stock-in-trade also ?

Whether, the Tribunal was right in law in rejecting the submission of the assessee that if purchases are to be taken out of accounts, the corresponding sales also must be taken out for the computation of income?

Whether, the Tribunal was justified in adding Rs. 37,328 u/s 40A(3) ?"

At the hearing of this reference, Mr. J.P. Shah, the learned advocate for the assessee, at whose instance the aforesaid three questions came to be referred to this Court for opinion, stated that he did not press question Nos. 1 and 2. In view of this concession made at the Bar, we do not feel called upon to state our opinion, so far as these two questions are concerned. The third question bears on the interpretation of sub-section (3) of section 40A read with the second proviso thereto and rule 6DD(j) of the income tax Rules, 1962 framed under the Act. It may at this stage be mentioned that subsequently the Board of Direct Taxes issued a Circular No. 220 dated 31-5-1977, See Taxman''s Direct Taxes Circulars, Vol. 1,1985 edn. page 404 which illustrates certain cases to which rule 6DD(j) could be stated to be applicable. Sub-section(3) of section 40A, insofar as it is relevant for our purpose, provides that where the assessee incurs any. expenditure in respect of which payment is made in a sum exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as deduction. The second proviso to that sub-section lays down that no disallowance shall be made where any payment in a sum exceeding 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. ''Prescribed'' means, prescribed by Rules made under the Act, vide section 2(33) of the Act. In pursuance of the provision in the said second proviso, rule 6DD came to be introduced to deal with case of payment made otherwise than as provided by section 40A(3). We are concerned with clause (j) of the said Rule which reads as under:

6DD. No disallowance under, sub-section (3) of section 40A shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank. or by a crossed bank draft in the cases and circumstances specified hereunder, namely:

( a ) to ( i )

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(j) in any other case, where the assessee satisfies the income tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft-

(1) due to exceptional or unavoidable circumstances, or

(2) because payment in the matter aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the income tax Officer as to the genuineness of the payment and the identity of the payee.

The CBDT by Circular No. 220 addressed to all the Commissioners stated that it is not possible to indicate all the circumstances which would attract rule 6DD(j). However, some of them were indicated in clauses (j) to (v) of paragraph 4 thereof. It would appear from the cases cited in these clauses that if the identity of the seller is known it would be possible for the department to cross-check if the payment in question was actually made in cash to the seller from whom goods were purchased. In paragraph 5 of the circular it is stated that the requirements of rule 6DD(j) would stand satisfied if a letter is produced in respect of each transaction falling within the categories illustrated in paragraph 4 from the seller giving full particulars of his address, sales tax number, permanent account number, if any, for the purpose of proper identification to enable the ITO to satisfy himself about the genuineness of the transaction. The cases indicated in paragraph 4 are merely illustrations and not exhaustive but the underlying idea is that if the seller''s identity can be established, it would be possible for the ITO to cross-check whether the transaction in fact had taken place as stated and was of a genuine nature. Even though this circular came to be issued in May 1977, the assessee is justified in pressing it into aid as the circular merely indicates the circumstances in which rule 6DD(j) would be attracted. In CIT v. Trinity Traders [IT Reference Nos. 102 and 103 of 1975] a Division Bench comprising B.J. Divan, CJ., (as he then was) and B.K. Mehta, J. invoked this circular in favour of the assessee with reference to the assessment year 1970-71 and observed that when the ITO passed the assessment order in question, the circular was not available and hence the cases which according to the CBTD would stand covered under the relevant rule could not be considered by the authorities right up to the Tribunal level. Invoking the formula adopted by the Supreme Court in COMMISSIONER OF Income Tax, WEST BENGAL I Vs. INDIAN MOLASSES CO. P. LTD., at page 482, the Division Bench felt that it would be just and fair if the assessee as well as the revenue were given an opportunity to lead evidence on the point of applicability of rule 6DD(j) as explained by the relevant circular. It accordingly refrained from answering the questions on which this Court''s opinion was sought and directed that the matter should go back for a decision as to the applicability of rule 6DD(j) as explained by the circular after both the sides have been given an opportunity to lead further evidence, if so advised. We adopt the same formula. It will be open to the Tribunal to dispose of the appeal in the light of the observations made by us after determining the question on the basis of fresh evidence, if any, in the light of the CBDT''s Circular No. 220. There will be no order as to costs. Reference disposed of accordingly.