Delhi High Court
Commissioner Of Income-Tax, Delhi-Vi vs Union Agencies on 8 August, 1986
Equivalent citations: [1987]166ITR529(DELHI)
JUDGMENT Kapur, C.J.
1. These are two petitions under section 256(2) of the Income-tax Act, 1961, before us for the assessment years 1976-77 and 1978-79, concerning the same assessed, M/s. Union Agencies, New Delhi. The appeal relating to the year 1978-79 was decided on August 1, 1983, whereas the appeal for 1976-77 was decided on April 20, 1981. The reference applications were also separately decided, one on September 17, 1981, and the other on January 20, 1984. The two income-tax cases were directed to be listed together because of the admissions order in the second case.
2. This judgment relates to the assessment year 1976-77 (ITC No. 176 of 1982). The question sought to be referred is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that there was no justification for disallowing the payment in cash amounting to Rs. 11,85,653 disallowed by the Income-tax Officer under section 40A(3) of the Income-tax Act, 1961?"
3. It was urged by learned counsel for the Department that there was a clear question of law arising out of the Tribunal's order. But, equally, it was contended for the assessed that it was a pure question of fact. The Tribunal has also refused to make a reference in its order under section 256(1) of the Act on the ground that a pure question of fact was involved.
4. The facts set out in the Tribunal's order show that there were almost daily payments by the assessed to M/s. Om Prakash & Co., which were made in cash. The amounts were well over Rs. 2,500 daily.
5. The assessed was asked to explain why these payments were being made in cash, in answer to which the counsel filed a letter dated January 25, 1979, stating that the cash payments were made due to exigencies created by the principal and a letter of M/s. Om Prakash & Co. was also filed. M/s. Om Parkash & Co. had stated in that letter : (a) that no guarantee had been or avoided regarding the payment and so they had insisted on cash payments against goods, (b) M/s. Om Parkash & Co. had stated that they do not accept cheque before supplies were made. The Income-tax Officer rejected the case of the assessed on the ground that sometimes cheques had been issued and credit granted.
6. It was urged before the Commissioner of Income-tax (Appeals) that the huge addition of Rs. 11,85,653 was not justified in the circumstances. It also appears that the payments were for large quantities of Amul products and the assessed had to make cash payments on account of legitimate consideration of business expediency. The supplier was a well-known firm which had insisted on cash payments. Whenever possible, the assessed had made payments by cheques, otherwise the payments were in cash.
7. The Commissioner of Income-tax (Appeals) accepted the contention of the assessed on the ground that the cash payments satisfied the requirement of rule 6DD (j) of the Income-tax Rules, 1962. That rule can be reproduced here :
"(j) in any other case, where the assessed satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by crossed bank draft -
(1) due to exceptional or unavoidable circumstances, or (2) because the payment in the manner aforesaid was not practice, 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."
8. It was notices in the order that actually M/s. Om Prakash & Co. were the distributors of Amul products for the whole of Delhi and the payments were made at the rates fixed for Amul products. A Board Circular No. 220 dated May, 31, 1977, was also relied upon to protect the assessed. The particular quotation from that Circular as being an instance or example to satisfy the rule was quoted. That provides that if the seller refuses to accept payments by way of crossed cheque/draft and the assessed's business would suffer due to the non-availability of the goods otherwise than from the particular seller, then the payments would be in accordance with the Rules.
9. The fact were that M/s. Om Parkash & Co. had divided the Delhi area into three parts and allotted one sub-area to the assessed as a sub-distributor. M/s. Om Parkash & Co. had demanded a security of Rs. 3,00,000 for credit facility or a bank guarantee, which the assessed could not meet. So the payments were made cash. It was also noticed that similar orders had been passed in different cases by the Income-tax Appellate Tribunal.
10. The departmental appeal to the Income-tax Appellate Tribunal was decided on the basis that the circular and the rule had been correctly applied by the Commissioner of Income-tax (Appeals). The Tribunal held as follows :
"In view of rule 6DD (j), as reproduced above, the Circular of the Board and the circumstances under which payments were made in cash, we hold that there was no justification for disallowing the payments made in cash and the Commissioner of Income-tax was justified in deleting the disallowance. Here we may refer usefully to the case of petrol pumps. If is well known that the owners of the petrol pumps or those who run the management of these petrol pumps have to pay the cost of the tanker full of petrol in cash because the company insists of cash payments as and when the tanker full of petrol reaches the petrol pump. The petrol is not transferred to the tank of the petrol pump unless the payment is made in cash. No where such payments in cash by the petrol pump dealers have been disallowed. The reason is simple. The company insists on cash payments and the petrol pump dealers have perforce to make the payment in the manner as demanded by the principals. Otherwise, they are swept out of business. The case of the assessed is akin to the illustration we have given. We, therefore, seen reason to interfere with the order of the Commissioner of Income-tax."
11. Now, the question we have to consider is whether this is a question of law or a question of fact. The circumstances appear to be quite plain. The assessed is a sub-distributor of Amul products, i.e., the products like butter, cheese and other dairy products. In such a case, the article is liable to deteriorate, so the turnover is very large though the commission may be comparatively small. The question for consideration by the main distributor is very much like the case of the petrol tanker. To give credit for a short time would involve endless accountancy problems : even the time taken in encashing a cheque would involve difficulties in carrying on the business when the turnover is on a very large scale and is a daily matter. We agree that this is a question of fact and does not involve a question of law. As a matter of fact, section 40A(3) of the Income-tax Act, 1961, has been construed by a Division Bench of the Gujarat High Court in Hasanand Pinjomal v. CIT [1978] 112 ITR 134, stating that the rigour of the rule has to be relaxed in the circumstances of the case, consideration of bossiness expediency and other relevant factors being borne in mind while interpreting the rules. It is noteworthy that the High Court held that rule 6DD (j) must be judged from the businessman's point of view and not of the Revenue. If, on the other hand, there are no exceptional and unavoidable circumstances necessitating the payment in cash, then the section has to be applied with full force as held by the Madhya Pradesh High Court in Porwal Udhyog (India) v. CIT [1982] 135 ITR 591. Similarly, in a case decided by the Punjab and Haryana High Court CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595, where payments had to be made in cash due to the nature of the contract, it was held that the disallowance could not be made under section 40A(3).
12. As we see it, the case of the petrol tanker mentioned in the order of the Tribunal where payments is made in cash for the petrol equally applies when large quantities of butter and other dairy products are involved daily. It would be impracticable to carry on such business through cheque payments. In fact, there might be a serious impediment in ensuring proper distribution of butter and other dairy products. The only answer is the credit facility which was not granted by M/s. Om Parkash & Co. in this case except on deposit of Rs. 3,00,000 or a bank guarantee. It is, therefore, a question of fact and not a question of law.
13. We would accordingly dismiss this application leaving the parties to bear their own costs.
14. Petition dismissed.