Andhra HC (Pre-Telangana)
Venkatasatyanarayana Timber Depot vs Commissioner Of Income Tax on 20 January, 1987
Equivalent citations: [1987]165ITR253(AP)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT P. Rama Rao, J.
1. Under s. 256(1) of the IT Act, 1961, the ITAT referred the following questions of law :
(1) "Whether, the Appellate Tribunal is justified in holding that s. 40A (3) has got application in the case of payments made for the purpose of stock in trade ?
(2) Whether, the amount paid to sellers amounting to Rs. 27,379 for purchase of timber falls within the purview of the circular of CBDT No. 220 dt. 31-5-1977 ?"
2. The ITO disallowed the expenditure of Rs. 27,379 on the ground that such payments were made in cash in contravention of s. 40A (3) of the IT Act, 1961. The ITO negatived the plea of the assessee that the payments were made due to unavoidable circumstances and further the genuineness of payment and the identity of payee are proved. On appeal, the CIT (A) and on further appeal the ITAT confirmed the order of the ITO.
3. The ld. counsel for the assessee raised two-fold contention : viz., the payments made for the purchase of stock in trade are not covered by s. 40A (3) and in any event the amounts are paid in unavoidable circumstances, and the genuineness of payment and identity of payee are established, and as such, they are exempt from the applicability of s. 40(A) (3) of the Act. On merits we are satisfied that the assessee is entitled to exemption for payments in view of r. 6DD (j) r/w clause 4(ii) of Circular No. 220 dt. 31-5-1977 of the CBDT. Section 40(A) (3) provides that the assessee is not entitled to claim deduction with regard to the payment unless such payment exceeding Rs. 2,500 is made by a crossed cheque drawn on a bank or a crossed bank draft. Therefore, if any payment exceeding Rs. 2,500 is made by cash, it shall not be admissible as deduction and is liable to be added to the income of the assessee. Rule 6 (DD) of the IT Rules r/w Circular No. 220 of the CBDT provides that s. 40A (3) is not applicable if the payment in cash is made due to exceptional or unavoidable circumstances, and the payment by cheque is not practicable, and satisfactory evidence is adduced as to the genuineness of the payment and the identity of the payee.
4. Initially the assessee in their explanation stated that they were obliged to make payments in cash under the threat by dealers that they would not have transactions with the assessee; but, however, in their explanation dt. 20-3-1977 the assessee stated that the cash payments were made as the assessee had no bank accounts at those places viz. Bavarsha and Demenpet, and further the sum of Rs. 3,881 paid to M/s. Abdul Kareem & Co. represented consolidated payment of the small amounts made on different dates. The ITO in the course of the order, stated that the payment and the identity of the parties who sold the goods were established, and the payments were made by Hundis mostly, and the CST number and the ST numbers of the vendors were furnished. It is also further stated by the ITO that the assessee might have paid because he has no bank account in those places; but, however, he did not accept this version as the assessee on other occasions paid to the same persons by demand draft. The explanation with regard to the payment to M/s. Abdul Kareem & Co. is negatived on the ground that the copies of the amount books disclosed credit entries but not debit entries and the account does not show complete transaction. On appeal, the First Appellate Authority held that the parties were prepared to receive the drafts, and as such, there was no occasion for the assessee to pay the amount in cash, and with regard to the payment to M/s. Abdul Kareem & Co. the Appellate Authority found the explanation given by the assessee as not true in view of the inconsistent entries in the account books. On further appeal, the ITAT observed that it might be that the identity of the parties to whom cash payments were made was established by the appellant and this is not sufficient. The assertion of the assessee that it had no bank account at the concerned places is not relied upon and there is no evidence that the assessee was constrained to make cash payment on account of unavoidable circumstances.
5. It must be stated that the assessee has been consistently stating that the assessee had no bank accounts in the places where made. With respect to this assertion the ITO did not make enquiries as to the existence of any bank account. The absence of bank account is a crucial circumstance and should be considered as an exceptional circumstances to avoid exemption provided under r. 6DD. Further, it is also held by the ITO as well as the ITAT that the identity of the persons to whom the payments were made is established, and as a matter of fact, their sales tax registration numbers are also available. In so far as the amounts paid to M/s. Abul Kareem & Co. the First Appellate Authority pointed out certain inconsistent entries, but, however, the ITO found only one infirmity, viz., that credit entries are only found, and as such, the transactions are not correct. Therefore, it is evident that the authorities did not approach the issue from correct perspective and the findings are not supported by rational approach. In the circumstances, we are satisfied that the assessee is entitled to avail the exemption provided under r. 6(DD). In view of this conclusion, we think it is not necessary to consider the contention that s. 40A (3) is not applicable for the payments made for the purchase of stock in trade.
6. In the result, we decline to answer Question No. 1. Question No. 2 is answered in favour of the assessee and against the Revenue. The reference is answered accordingly. No costs.