Income Tax Appellate Tribunal - Pune
T.G. Mutha vs Income-Tax Officer on 21 April, 1995
Equivalent citations: [1995]54ITD460(PUNE)
ORDER
G.K. Israni, Judicial Member
1. This appeal by the assessee is directed against the order of the learned CIT(A) dated 24-2-1994 for the assessment year 1990-91.
2. The appeal raises two substantive grounds, The first ground relates to the addition of a total sum of Rs. 10,97,062 under Section 40A(3). The other ground relates to the addition of a total sum of Rs. 2,01,600 under Section 69 on account of unproved cash credits/unaccounted cash.
3. The assessee is engaged in the wholesale business of trading in edible oils and sugar at Pune. During the course of the assessment proceedings, the Assessing Officer found that the assessee had made cash payments in excess of Rs. 10,000 each for purchase of commodities to 22 parties. On being required to show cause as to why these payments should not be disallowed under Section 40A(3), the assessee replied that the business of edible oil was such that it could be done with cash payments only; the parties from whom these purchases were made were new and that they insisted for cash payment only. It was further stated that most of these purchases were made through agents who insisted for cash payments. Thus, these cash payments were made in exceptional and unavoidable circumstances and were, therefore, covered by Rule 6DD(f) of the Income-tax Rules. This plea did not find favour with the Assessing Officer who made disallowance of the aggregate sum of Rs. 10,97,062.
4. On the matter being taken in appeal, it was pleaded before the learned CIT(A) that since the genuineness of the purchases, genuineness of the payments and the identity of the payees was not in doubt, such payment should have been treated as fully covered by the provisions of Rule 6DD(f) read with CBDT Circular No. 220 dated 31-5-1977. As regards the exceptional and unavoidable circumstances, the assessee had stated that he had started his business after the dissolution of an erstwhile firm. After the dissolution, he got only the shop premises and there was no goodwill or stock available to the assessee. This had brought down the repute of the assessee in the market and, therefore, the sellers were not willing to sell the goods to him on credit. They were insisting on cash payments and, therefore, cash payments were made. The general practice followed was to issue bearer cheques against delivery of the goods. The agents/brokers or the employees of the vendors used to collect the bearer cheques from the assessee which they used to encash after a period of one week or so. When the bearer cheques were issued, the accounting was done in the books of the assessee. When the actual cash was withdrawn from the bank account, the entry was reversed and the payment made in cash. In such circumstances, the Assessing Officer should have exercised his discretion in allowing the expenditure rather than disallowing the same. The learned CIT(A) has discussed the plea of the assessee in its factual and legal aspects, but held the disallowance proper. He, however, at the instance of the assessee, has directed the Assessing Officer to disallow the figure of only Rs. 8,97,062 in case the correct total works out to the figure as furnished on behalf of the assessee.
5. Before us, the same factual background was reiterated. The learned counsel stated that the assessee as a proprietary concern was new in the business. He had to establish the business with limited cash at his disposal. The vendors were not willing to sell the edible oil and sugar on credit to the assessee. He had, therefore, no option but to pass on cash and/or bearer cheques. Those bearer cheques were returned to the assessee after a week or so, when he made cash payments. According to the learned counsel, had the assessee not resorted to this practice, he would not have been able to carry on his business. The commodities were purchased from the sellers or their agents at Pune. Some of the vendors / agents were new parties with whom the assessee had dealings for the first time. Such vendors/agents were not willing to sell on credit. Since the revenue authorities have not doubted the genuineness of the transactions, genuineness of the payments and the identity of the parties, there was no basis for making disallowance under Section 40A(3). That provision, according to the learned counsel, is not intended as a revenue collecting provision, but enacted only with a view to eliminate bogus payments and claims of bogus expenditure. In support of his contention, the learned counsel referred to the aforesaid CBDT circular and following Court decisions:
(1) Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC), (2) Giridharilal Goenka v. CIT[1989] 179 ITR 122 (Cal.), (3) Hasanand Pinjomal v. CIT[1978] 112 ITR 134 (Guj.), (4) Venkata Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253 (AP), (5) Navsari Waste Cotton Products v. CIT[1987] 163 ITR 378 (Guj.), (6) CIT v. Chandmull Radhakishun [1987] 163 ITR 697 (Pat.), (7) PaulBros. v. CIT[1990] 186 ITR 356 (Gau.), (8) CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595 (Punj. & Har.), (9) BadriklPhool ChandRodawatc v. CIT [1987] 167 ITR 404 (Raj.), (10) CIT v. Brij Mohan Singh & Co. [1994] 209 ITR 753 (Punj. & Har.).
6. As against the above, it was submitted by the learned departmental representative that the main legislative intent of Section 40A(3) is not only to eliminate bogus claim of expenditure who claim deduction, but also to ensure due accounting of the receipts/incomes by the persons who receive cash payments. The legislative object of this enactment would be frustrated, if a claim of deduction as expenditure is allowed merely on the basis that a transaction was genuine, payment was genuine and the identity of the recipient was known. In all such cases of cash payments, the Assessing Officer would then be required to perform almost an impossible task of verifying not only the expenditure in the hands of the person claiming the deduction, but also of verifying receipt and income in the hands of the recipient who may be stationed in distant places in the country. The assessee in the present case had made all these purchases from the vendors/agents stationed at Pune only. Since such vendors/ agents were satisfied with the bearer cheques and could wait for encashment of the same after 10 days, there was no reason as to why they should not be satisfied with crossed cheques/demand drafts which provided better security of payment. The assessee had already been engaged in this line of business and was known to the most of the parties. There was, therefore, no reason why those parties should now insist on cash payments. In support of his contention, the learned departmental representative relied upon the decision of the Supreme Court in the case of Attar Singh Gurmukh Singh (supra), decision of the Gujarat High Court in the case of Hasanand Pinjomal (supra) and the decision of the Rajas-than High Court in the case of Nahgi Lal v. CIT[1987] 167ITR 139.
7. We have considered the facts and circumstances of the case and studied the Court decisions and the CBDT circular referred to by the parties and have come to the conclusion that there is absolutely no case for our interference in the order of the learned CIT(A). The main plank of the assessee was that after the dissolution of the partnership, he had lost repute and, therefore, had to resort to cash/bearer cheque payments with a view to promote his business. Had he not resorted to such payments for the purchases, he would not have been in a position to carry on the business. We find that there is absolutely no force in this argument of the learned counsel. The trading and profit and loss account of the assessee for the year under appeal shows that its sales aggregated to Rs. 3,19,72,851.73. Now, the disputed payments on account of purchases aggregate only to Rs. 8,97,062. These represent less than 3% of the value of the total sales. Now, had the assessee not resorted to cash/bearer cheque payments for purchases, his business, even on his own showing of the assessee, could not have suffered to the extent of more than 3%. It would, therefore, not be correct to contend that had the assessee not resorted to cash/bearer cheque payments, he would have not been able to carry on the business or would have suffered considerably in the matter of profits from the business. We were informed that after the dissolution of the firm, the accounting year relevant to the assessment year under appeal was the third year in which the assessee, as a propriatary concern, has been carrying on the same business. Major part of his business consisted of dealings with the same parties. There was thus no question of loss of repute etc., and no question of the vendors/ agents distrusting the assessee. We have before us a statement showing classification of the disputed payments. This statement in the paper book has been furnished by the assessee. This statement shows that out of the 22 disputed payments, only 3 cash payments were made to the parties who were new. Similarly, the new parties to whom the bearer cheques were delivered numbered only 7. Rest of the 12 parties were such persons with whom the assessee had already been having dealings. Even these new parties or their agents did belong to Pune. The assessee was carrying on wholesale business. Thus, the transactions were only of bulk purchases. It would, therefore, be difficult to believe that the payments by crossed cheques/demand drafts to the parties at Pune itself were not possible or were inconvenient or that the payees were not willing to accept payments by crossed cheques/demand drafts. We are not prepared to believe that these parties could have insisted on cash payments. Even for argument sake it be accepted that the parties had insisted on cash payments, yet there was absolutely no justification for the assessee to have agreed to such proposition in total and flagrant violation of the provision of Section 40A(3). The assessee is an established man of business and presumably, an intelligent and prudent person. The knowledge of the relevant provisions of Income-tax law, more particularly Section 40A(3) can safely be imputed not only to the assessee, but also to the vendors/agents who received the cash/bearer cheque payments. The provision contained in Section 40A(3) has been enacted with a view not only to eliminate/minimise bogus claim of expenditure and unaccounting of receipts and incomes, but also to facilitate assessments by the department. In that context, it would amount to frustrating/ defeating the legislative object of the enactment, if the claims of deductions as expenditure are allowed merely on the basis that the transaction was genuine, payment was genuine and the identity of the party was not doubted. It is of course true that the provision contained in Section 40A(3) is not essentially a revenue raising one, but then, the impact of that provision cannot be allowed to be diluted/watered down so as to lead to frustrating or defeating of the object underlying the legislation. Unquestionably, the provision has been enacted for strict enforcement which may tantamount to its being rigorous in certain cases, but then, this rigour of the provision is to a very great extent mitigated by Rule 6DD, more particularly Sub-rule (i) thereof. In the present case, we find that the assessee has not been able to make out a case of exceptional or unavoidable circumstances so as to claim a benefit of Sub-rule (i) or any other Sub-rule of Rule 6DD. The provision contained in Section 40A(3) is essentially of preventive nature and, therefore, it should be construed and applied in a manner as to promote the object for which it has been enacted by the Legislature. The courts / revenue authorities should not be party to the frustration/defeating of the object of the law as handed down by the Legislature. So far as the decisions are concerned, the judgment of the Supreme Court reported in Attar Singh Gurmukh Singh's case (supra) is the case on which both the authorities have placed their reliance. Now, it would be seen from this judgment that what was in challenge before the Supreme Court was the constitutional validity of the provision and the applicability of the provision to payments made for acquiring stock-in-trade. The Supreme Court in this judgment was not dealing with the question as to whether claim of deductions on account of cash payments in given cases should or should not be allowed. The Supreme Court has upheld the vires of this provision. This judgment thus does not offer any material assistance to the assessee in the case before us. The next judgment is in the case decided by the Gujarat High Court in HasanandPinjomal(supra). Here-again, both the parties before us have sought assistance from this decision. It would be useful to reproduce the following portion from this judgment:
Practicability for the purposes of Rule 6DD(;)(2) must be judged from the point of view of the businessman and not of the revenue. For the purposes of carrying on his business, a businessman may have to make payment otherwise than by crossed cheque or draft in certain circumstances voluntarily and not out of sheer necessity. The Legislature, therefore, prescribed in the second proviso to Section 40A(3) business expediency as one of the relevant factors. Therefore, practicability has to be judged from the angle of the businessman and not of the revenue.
8. Now, the assessee in the present case had not shown that payments by crossed cheques /demand draft were not practicable or that they were made out of sheer necessity. The assessee had made purchases exceeding more than Rs. 3 crores by crossed cheques/drafts. The offending purchases were made from the vendors/agents stationed at Pune itself. The transactions were of wholesale nature. We do not understand that how payments by crossed cheques / demand drafts can in such circumstances be held to be impracticable or out of sheer necessity. One of the facts stated before us was that the recipients were short of cash on those dates and therefore insisted on cash payments. But no material has been brought before any of the authorities at any level of the proceedings to show that the recipients were short of liquid funds and, therefore, insisted on cash payments. Looking to the facts brought on the record and the surrounding circumstances, we are not prepared to believe that the parties insisted on cash payments on the ground of distrust in the assessee or on account of their being new to the assessee. The assessee had successfully carried on the business involving sales exceeding Rs. 3 crores. He had known the provisions of Section 40A(3). Had he therefore not resorted to this method of payments, his business would not have suffered to any substantial extent. The assessment order shows that the total income, even after the inclusion of the two disputed amounts of Rs. 10,97,062 and Rs. 2,01,600 has been assessed at Rs. 14,04,155. If these two disputed amounts are excluded from the total assessed income, it will reduce the total income only to about Rs. 1,08,000. This assessed income on a turnover of about Rs. 3.20 crores does not give a very high gross profit rate so as to justify an inference to the effect that the assessed income has been unreasonably or unjustifiably inflated by the Deptt. Rather, the converse may be true. We would like to note down, at this stage, that by referring to the assessed income we are making only a passing reference to it and have not allowed this fact to influence our decison on the merits of the issue. Even this passing reference has been necessitated because of the arguments advanced on behalf of the assessee to the effect that had the assessee not resorted to cash/bearer cheque payments, he would not have been in a position to carry on his business or his business would have suffered considerably. After inclusion of these two disputed amounts, the total assessed income would work out only to around 0.30% of the total turnover. In this connection, we may also refer to the decision of the Rajasthan High Court in Nahgi Lal's case (supra) wherein it has been held that where no evidence of exceptional or unavoidable circumstances in making payments by cross cheques has been produced, the deduction of such payments cannot be allowed. Summing up, we hold that there was no case of exceptional or unavoidable circumstances in the present case which rendered making of payments by crossed cheques/demand drafts impracticable or rendered cash payments unavoidable or out of sheer necessity. The case does not fall within the ambit of Rule 6DD(f) read with the CBDT circular and, therefore, the two revenue authorities were justified in making and sustaining the disallowance under Section 40A(3). This issue shall, therefore, stand decided against the assessee.
9. to 12. [ These paras are not reproduced here as they involve minor issues.]