Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs D.D. Hazare on 13 October, 1993
Equivalent citations: [1994]48ITD595(MUM)
ORDER
V.K. Sinha, Accountant Member
1. This Is an appeal filed by the department against the order of the CIT(A) deleting disallowances made under Section 40A(3) of the Income-tax Act, 1961.
2. The disallowances were of two kinds. The first consisted of disallowances totalling Rs. 23,07,483 being cash payments and payments by bearer cheque to sub-contractors and the second consisted of payments totalling Rs. 1,35,127 being purchases made in cash. The individual amounts of payments, in both the cases, was stated to be above Rs. 2,500.
3. The assessee is a registered firm and the business is stated to be road repairing contracts as well as construction of new roads. For part of the work, the assessee sub-contracted the orders received from the Government and semi-Government Corporations whereas the remaining work was executed by the assessee itself.
4. In the course of assessment proceedings, it was noticed that the assessee had made payments in cash of amounts exceeding Rs. 2,500 at a time to sub-contractors as well as some payments by bearer cheques of similar amounts, totalling Rs. 23,07,483, the particulars of which are given below:
Rs. Rs.
1. Shrikripa Construction 13,31,173
2. Shri P.P. Kharpatil:
Cash payments 1,44,000
Bearer cheques 4,51,260 5,95,260
3. M/s. Thakur and Thakur 1,00,000
4. Vanita Construction 62,350
5. Laxmansheth Kukereja 2,18,700
23,07,483
5. When asked to show cause why the amounts should not be disallowed under Section 40A(3) of the Act, it was stated that cash payments had been made due to "urgent requirements for labour payments which are also supported by vouchers". Confirmatory letters were filed from two of the sub-contractors at serial Noe. 1 and 3 above, but no confirmatory letters were filed from the remaining three contractors at serial Nos. 2, 4 and 5.
6. The two confirmatory letters mentioned above were both typed on the letter head of the assessee-firm and besides confirming the total figure of payments, both parties used the same language as under:
We have also received cash payments during the above period on our insisting due to urgent requirements.
7. The Assessing Officer did not find the explanation to be satisfactory. He observed that the assessee's explanation had been given only in general terms. No specific evidence had been produced in support of any single cash payment to show that the payment was made under unavoidable circumstances. The Assessing Officer also observed that except for Shri P.P. Kharpatil, the other four sub-contractors were maintaining bank accounts and there was no reason why Shri P.P. Kharpatil also could not have done the same if the assessee had insisted on making payments by crossed cheques. He, therefore, disallowed the above sum.
8. It was further noticed that payments were made in cash and debited to petty cash book for various purchases from 13 different parties; the particulars of which are available in the assessment order, where individual amounts exceeded Rs. 2,500. The assessee had first gave an explanation by letter dated 19-2-1988, according to which, the payments were required to be made at the site whenever needed and the parties to whom the payments were to be made did not have bank accounts. They also insisted on cash payments. Since the explanation was too vague and general, the assessee was asked to furnish specific explanation stating unavoidable or exceptional circumstances. The assessee filed copies of some bills in respect of some purchases.
9. In the case of one of the parties, Raigad Stone Company, a cash payment of Rs. 10,000 was shown in the petty cash book on 16-2-1985. However, the assessee produced four receipts of Rs. 2,500 each three of which were dated 16-2-1985 and one was dated 15-2-1985. It was claimed that since the individual payments did not exceed Rs. 2,500, the provisions of Section 40A(3) of the Act were not applicable. However, the Assessing Officer did not accept the genuineness of the four separate bills since the amount shown in the assessee's books was a single figure of Rs. 10,000, as was the case also in the statement of the account prepared by the party. Further, he found it unacceptable that the party approached the assessee four times in quick succession for the amount. Lastly, he found it unusual that these four receipts had not been produced earlier on 11 -3-1988 when bills and receipts of other parties had been produced.
10. A similar situation was found in the case of Shri Gajanan Pilaji, where a payment of Rs. 9,000 in cash was shown in assessee's petty cash book on 4-1-1985. In this case, the assessee produced four cash receipts, out of which three were for Rs. 2,500, dated 4-1-1985 and one was for Rs. 1,500 of the same date. These receipts were produced only on 22-3-1985 and not on 11-3-1988. For the same reasons, this explanation was rejected.
11. The Assessing Officer further observed that unavoidable circumstances necessitating cash payments had not been established by evidence despite sufficient opportunity having been allowed. He, therefore, rejected the general explanation and added a further sum of Rs. 1,35,127.
12. When the matter went to the CIT(A), the assessee submitted that payments had been made to the sub- contractors in cash due to exceptional and unavoidable circumstances and were covered by Rule 6DD(j) of the Income-tax Rules, 1962 as well as a circular of the CBDT. It was explained that in order to avoid delay in clearance of cheques, the assessee had to open bank account at the site wherefrom the contract work was carried out, whereas the sub-contractors had bank accounts at Kalyan and Ulhasnagar. In the case of Shri P.P. Kharpatil, he did not have a bank account at all and, therefore, he insisted for cash in order to make payments to labour. The payments were made in villages where the subcontractors and the assessee did not have bank accounts. It was also claimed that payments were made after banking hours and on holidays.
13. Regarding cash payments for purchases of raw materials and expenses, it was claimed that the assessee was new to the sellers and, therefore, they refused to accept cheques. It was also claimed that the payments were individually below Rs. 2,500, as has been discussed earlier. Reliance was placed on the decision of the Tribunal in the case of Patel Bros. & Co. Ltd. v. ITO [1986] 17 ITD 126 (Ahd.), where it was held that where the payees were identifiable and genuineness of the payments to them was accepted in the previous year, there was no reason to make the disallowance. Further, in Badrilal Phool Chand Rodawat v. CIT [1987] 167 ITR 404 (Raj.), it was held that no disallowance could be made where the genuineness of the payment and the identity of the payee were fully established and the payee insisted on cash payment. It was also held in CIT v. Chandmull Radhakishun, that absence of bank account is a crucial circumstance. Finally, it had been held in CIT v. Ahmad Hussain [1984] 150 ITR 373 (All.) that payment to labour contractor could be made in cash when he had to employ a large number of workers and pay their wages in cash and there was an agreement to that effect. The CIT(A) observed that where huge payments are made on site, then cash payments cannot be entirely avoided since the parties are not known to each other and both parties may not have bank account at the place of payment and immediate cash payment had to be made to the labour. According to him, at most of the places involved, both the parties did not have bank accounts and non-local cheques take substantial time in encashment. Further, many payments had to be made after banking hours and on holidays. Similarly, for own-works, some payments for labour and for material are made in cash. He, therefore, held that the cash payments were covered under the exemption of Rule 6DD(j) of the Incometax Rules, 1962, r.w. CBDT circular.
14. Thereafter, the CIT(A) observed that he had "a much stronger reason" to delete the addition under Section 40A(3) of the Act, for both kinds of payments. The Assessing Officer had rejected the book results after invoking the provisions of Section 145 of the Act and adopting a net profit rate for the entire contract work. In such a case, he took a view that it was not proper on the part of the Assessing Officer to again disallow a chunk of the payment by invoking the provisions of Section 40A(3) since "this will go against all principles of accounting estimating rationally appellant's real taxable profits under Section 145 and also the principles of natural justice". His reasoning is reproduced below:
It is of course true that 40A(3) is a provision which comes even after ascertaining that the payments are real and allowable under other provisions of the Act including Section 37. But then Assessing Officer has to go by the books of accounts and its entries to invoke 40A(3) item by item. Once the books are rejected for various defects and 145 is invoked for a blanket estimate of net profits, going back to the books again for the purpose of 40A(3) is unfair, irrational and not justified by any principles of accountancy or interpretation of Income-tax Act, which aims at quantification and assessment of appellant's taxable profits and not an imaginary figure by recourse to provisions of 40A(3) etc. Thus I consider that this addition under Section 40A(3) under two grouping are to be deleted not only on consideration of Rule 6DD(j) (read in terms of the CBDT circular and the ratio of case laws of various High Courts and Tribunals) but much more strongly on the ground that Assessing Officer has resorted to a net estimate of appellant's profits by rejection of appellant's books and invoking of Section 145. Appellant wins this point.
15. The learned Departmental Representative, first made submissions before us regarding the legal proposition accepted by the CIT(A) that the provisions of Section 40A(3) of the Act cannot be applied where the assessment has been framed after applying net profit rate on the receipts, after rejecting the books of account under Section 145 of the Act. According to him Section 40A(3) of the Act was a separate provision which could be applied in such cases also. On the other hand, according to the learned Counsel for the assessee, Section 40A(3) of the Act could no more be applied. Reliance was placed by him on the decision of the Tribunal, Ahmedabad Bench 'A', in the case of New Narayan Builders v. ITO (1992] 43 TTJ (Ahd.) 508.
16. We have considered the rival submissions carefully. The assessee-firm was carrying on business of civil contracts and the income was to be computed under the head "business", as provided in Section 28 of the Act. Such income has to be computed in accordance with the provisions from Sections 30 to 43 of the Act, for the year under consideration, as is evident from Section 29 of the Act. Section 40A is one of the above sections and is concerned with expenses or payments which are not deductible in certain circumstances. It will be useful to reproduce Sub-section (1) of this section, hereunder:
Expenses or payments not deductible in certain circumstances:
40A(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession.
The non obstante clause in Section 40A(1) makes it clear that it has an overriding effect in the computation of income.
17. Thereafter, it is laid down in Sub-section (3) of Section 40A, that where the assessee incurs any expenditure 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 a deduction. It is evident that these provisions are subject to the non obstante clause in Section 40A(1), reproduced above.
18. With this background, the decision of the Tribunal in the case of New Narayan Builders (supra) may now be seen. It was held that where the provisions of Section 145(2) of the Act are invoked and the income of the assessee is estimated by applying a flat rate of net profit, no separate addition by resorting to Section 40A(3) can be validly made. The reasons for this conclusion have been summarised in the head note as under:
This is a case where the method of accounting as well as the account books have been rejected and the profits have been computed by applying a flat rate of net profit on the declared amount of contract receipts. Provisions of Section 145(2) have, therefore, been clearly invoked. The provisions of Section 40A enumerate exceptions of payments not deductible in certain circumstances. Sub-section (3) of Section 40A provides for disallowance out of expenditure claimed by the assessee in respect of those expenditure the payment of which is made otherwise than by a crossed cheque of a sum exceeding Rs. 2,500. Since the entire amount of expenditure claimed by the assessee as per the books of account have been totally ignored and the profits have been estimated by applying a flat net profit rate before depreciation, the provisions of Section 40A(3) would not be applicable. The restrictions contained in Section 40A(3) relating to allowability of any expenditure would come into play only when such expenditure is otherwise treated as allowable under Sections 30 to 37. If the income of the assessee is determined by applying a flat net profit rate the question of considering the allowability of different items of expenses claimed by the assesse does not arise at all. Therefore, in cases where the provisions of Section 145(2) are invoked and the income of the assessee is estimated by applying a flat rate of net profit no separate addition by resorting to Section 40A can be validly made.
19. It will be seen that the provisions of Section 40A(3) of the Act were brought to the notice of the Tribunal in isolation in the above case without considering the effect of Section 40A(1), which is applicable to the entire Section 40A of the Act. This position was brought to the notice of the learned Counsel for the assessee during the hearing before us but he had nothing further to add in regard to the legal proposition under consideration, though he submitted that the assessee had a claim for exemption Under Rule 6DD(j) of the Income-tax Rules also.
20. After considering the non obstante clause in Section 40A(1), we hold that certain payments and expenses which would be otherwise deductible under Sections 28 to 43, would not be deductible if the condilions of Section 40A(3) of the Act, are satisfied. Thus, we reverse the conclusion of the CIT(A) on this legal proposition and hold that a disallowance under Section 40A(3) is permitted even in a case where the net profit has been estimated at a flat rate on the receipts.
21. We may mention here that our above decision is fortified by the observations of the Gujarat High Court in the case of CIT v. Bharat Vijay Mills Ltd. [ 1981 ] 128ITR 633 at page 638, and the decision of the Supreme Court in the case of Shree Sqjjan Mills Ltd. v. CIT [1985] 156 ITR 585 at page 597.
22. Having come to the above conclusion, we would like to add that although a disallowance is permissible under Section 40A(3) of the Act, some adjustments may be necessary for the amount of additional net profit estimated by applying a flat rate of net profit to the receipts. For instance, in the present case, the additional net profit estimated in own-contracts of the firm by the Assessing Officer was Rs. 2,65,492 and the additional net profit estimated in sub-contracted works was Rs. 90,620.
23. Now, in the trading accounts, the receipts have not been distributed since they are not in dispute and are duly certified by the Government and Public Sector Corporations. The addition to net profit has, thererfore, been made only by disallowing the expenses. When a certain expense has already been disallowed as not deductible under Sections 28 to 43 of the Act, except Section 40A then a further disallowance under Section 40A(3) will amount to a double disallowance. Of course, it is not possible to identify whether the disallowances in the trading account have been made out of those expenses which were incurred in cash or by bearer cheques or they were incurred by crossed cheque or crossed bank draft or, they were incurred out of those amounts which were individually below Rs. 2,500. However, in our opinion, a benefit of doubt can be given to the assessee by presuming that the disallowances on account of which addition to net profit has been made were those to which Section 40A(3) also applies. In this view of the matter, the disallowance under Section 40A(3) of the Act will be reduced by the amount of addition to net profit made as above. The quantum of net profit addition has yet to be ascertained since by our separate order, we have set aside the addition with certain directions to the file of the Assessing Officer for being examined afresh. However we direct that when the matter is ascertained, the quantum of addition under Section 40A(3) of the Act. should be reduced by that amount for the above reasons.
24. We will now come to the merits of the case, with reference to Rule 6DD(j) of the Income-tax Rules, 1962, and the circular of the CBDT. The learned Departmental Respresentative submitted before us that the explanation given by the assessee was a general one and no confirmatory letters had been given by the sub-contractors, except two. According to him, exemption could not be allowed to the assessee from the provisions of Section 40A(3). Reliance was placed on the following cases:
(i) Narayan Bijoy Kumar v. CIT [1987] 163 ITR 695 (Pat);
(ii) Nahgi Lal v. CIT [1987] 167 ITR 139 (Raj.);
(iii) Late Smt Jyothi Chellaram v. CIT [1988] 173 ITR 358 (AP);
(iv) Bhilai Motors v. CIT [1987] 167 ITR 147 (MP).
25. The learned Counsel for the assessee, on the other hand, while relying on the order of the CIT(A), emphasised that the assessee's work was being carried on at far away places and even on the Bombay-Goa Highway. The labour engaged by the sub-contractors at these far away places was required to be paid on daily basis by the sub-contractors and, therefore, according to him, these were exceptional circumstances under which cash payments were made and exemption should be allowed under Rule 6DD(j) of the Income-tax Rules, 1962, r.w. CBDT circular.
26. We have considered the rival submissions carefully. Rule 6DD(j) of the Income-tax Rules, 1962 provides that no disallowance under Section 40A(3) shall be made where the assessee satisfies the Assessing Officer that the payment could not be made by way of a crossed cheque or by a crossed bank draft:
(1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner 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 Assessing Officer as to the genuineness of the payment and the identity of the payee.
27. The CBDT have issued Circular No. 220, dated 31st May, 1977, where it is mentioned that all the circumstances in which the conditions laid down in Rule 6DD(j) of the Income-tax Rules, 1962, would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule have been listed therein. It is further stated that it would generally satisfy the requirements of Rule 6DD(j) is a letter to the above effect is produced in respect of each transaction falling within the categories listed therein 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 Assessing Officer to satisfy himself about the genuineness of the transaction. It has further been clarified that the circumstances described therein were not exhaustive but only illustrative.
28. It is clear that on account of the wide variety of differing circumstances that may prevail from case to case, it will be necessary to decide each case on merits in the light of general guidelines and it is not possible to match the colour of one case with another. In the present case, it is significant that the assessee changed its explanation from time to time. At the assessment stage, in the case of sub-contractors, the solitary plea that was given, was that there was urgent requirement for labour payments. The assessee did not specifically seek support of Rule 6DD(j) of the Income tax Rules, 1962, or the circular of the CBDT but sought their support before the CIT(A) for the first time. At that stage, another factor was brought in that some payments may have to be made after banking hours and on holidays. It was .emphasised that sub-contractors and the assessee were not holding any bank account in village sites. It is also significant that confirmatory letters were filed only from two out of the five sub-contractors and those two were in general terms. We do not think that any general proposition can be laid down that in the case of labour intensive contracts, the provisions of Section 40A(3) will not be applied. On the other hand, no general proposition can be laid down either that no consideration will be shown to the fact that labour demands immediate payment. However, in the present case, the labour was to be paid not by the assessee but by the sub-contractor. Someone had to carry the cash from the place of bank to the site and no explanation is available before us why the cash had to be necessarily carried by the assessee and not the sub-contractor. This is particularly so, since the sub-contractors, except Shri P.P. Kharpatil, were having bank accounts, though not at the site. In view of these significant factors and looking to the entire facts and circumstances of the case, we are of the opinion that the assessee has not been able to establish that exemption should be given under Rule 6DD(j) of the Income-tax Rules and the CBDT circular. We, therefore, hold that Section 40A(3) is applicable to the payments under consideration to the sub-contractors.
29. Regarding the payments for own-works for purchases, we are unable to accept the belated explanation in two instances that payments of Rs. 10,000 and Rs. 9,000 were really made up of separate amounts not exceeding Rs. 2,500. If that had been the case, then there would have been corresponding entries in the books of the assessee and the statement of account of the parties, and the explanation would have been given in the first instance itself. Further, no confirmatory letters were filed from the parties and only some general explanation has been given. We, therefore, hold that the assessee has not been able to establish that exemption should be given under rule 6DD(j) of the Income-tax Rules and CBDT circular in this case either and, therefore, hold that the provisions of Section 40A(3) should be applied in this case also.
30. The cases cited by both the sides are found to have facts which are distinguishable from the facts of the present case.
31. In the result, the appeal is allowed.