Aggrieved by the order dt. 16th March, 1992 of the CIT(A), for the asst. yr. 1989-90, the assessee-company is in appeal on the following grounds of objection : (i) The CIT(A) erred in sustaining the disallowance of Rs. 45,11,000 under S. 40A(3) of the IT Act, 1961.
(ii) The CIT(A) erred in sustaining the disallowance of Rs. 2,14,756 under S. 37(2A) of the Act.
(iii) The CIT(A) erred in sustaining the part of the disallowance out of the disallowance of Rs. 91,302 made by the Assessing Officer.
(iv) The CIT(A) erred in sustaining the disallowance of Rs. 26,926 relating to provident fund penalty.
2. M/s. Madhumilan Syntex Ltd. is the sister concern of the assessee-company, inasmuch as that Shri B. K. Modi is a Director in both the companies. The other directors of the companies or their family members and near relations. The Assessing Officer on the basis of Tax Audit Report found the assessee had made cash payments in excess of Rs. 10,000 totaling to Rs. 45,11,000. It was explained by the assessee that M/s. Madhumilan Syntex Ltd. was in need of money to discharge its statutory and other liabilities like payment of salaries and wages, entry tax and provident fund, etc. It was also explained that the assessee could not make the payments by cheque to the sister concern, because of the condition imposed by the bankers of the assessee-company not to issue cheques to the associate concern, without counter signatures of the concurrent auditors appointed by the bankers.
The assessee also claimed that the payments were made under unavoidable circumstances and as such the said payments have been covered by second proviso to S. 40A(3). The Assessing Officer did not accept the explanation of the assessee. He simply quoted the speech of the then Honble Deputy Prime Minister as to the intent and purpose of insertion of S. 40A(3) and made the addition of Rs. 45,11,000. On appeal, the CIT(A) sustained the said addition. He, however, found some discrepancy in the total sum. According to the Annexure A, it was Rs. 43,86,000, whereas the Assessing Officer made the addition of Rs. 45,11,000. The CIT(A) further observed that according to the Tax Audit Report, it should be Rs. 46,26,000. He therefore, directed the Assessing Officer to verify and reconcile the figure.
3. Learned representative of the parties are heard at length. It is to be seen that there is absolutely no dispute as to the identity of the payee, namely, M/s. Madhumilan Syntax Ltd. There is equally no dispute as to the genuineness of the payments. All cash payments made by the assessee-company to M/s. Madhumilan Syntex Ltd. find place in the latters books of account. Thus, there is no dispute as to the identity of the payee and the genuineness of the payments.
4. The main reason for not making the payments by cheque to M/s.
Madhumilan Syntax Ltd. was that the condition was imposed by the bankers of the assessee-company not to issue cheques to the associate concern without the signature of the concurrent auditor appointed by the bankers and as such the payment was not possible through cheques as the circumstances did not permit the same. This plea was put forth by the assessee before the Assessing Officer in Representative alongwith her written arguments. Even in the assessment order, there is a reference to such explanation of the assessee. The correctness of the explanation was never questioned by the Assessing Officer while framing the assessment order or even in appeal before the CIT(A). The Assessing Officer never required the assessee to substantiate such fact by producing any evidence. In brief the explanation of the assessee was accepted on its face value, but unfortunately was not acted upon by the Assessing Officer and the CIT(A).
"Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding (ten thousand) rupees is made otherwise than by a crossed 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".
6. No bank facility was available to the assessee for making payments to the sister concern and having regard to this nature and extent of the bank facility, the second proviso to S. 40A(3) (reproduced above), is attracted. No addition, therefore, can be made.
7. There are other facts and circumstances, which also justify the act of the assessee in not making payments through bank channels. M/s.
Madhumilan Syntex Ltd. had a factory at Biora, a place nearly 180 kms.
from Indore. It had though bank account at Biora, but the assessee did not have any bank account at Biora. M/s. Madhumilan Syntex Ltd. required money for payment of salary and wages, which was given by the assessee. There is force in the contention of the learned counsel for the assessee that the CIT(A) wrongly observed that it had not made the payment at Biora but at Indore. There appears merit in the stand of the assessee that the amount was required by the sister concern at Biora and was handed over to the sister concern at Biora. It needs to be borne in mind that when the Managing Director of both the companies is the common person and the other directors of the company are his family members and relations, it is not an easy job to find out strictly as to after withdrawal from the bank at Indore, who had taken money from Indore to Biora. All that must have had depended upon convenience and co-operation of the Management and staff of both the companies. The tax authorities below were, thus, not justified in drawing an inference that the cash was handed over by the assessee to the sister concern at Indore and then the latter took it to Biora. The tax authorities below did not pay any attention to these circumstances. The Assessing Officer simply took that the intent and purpose of S. 40A(3) was to plug the mischief of claiming bogus payments or excessive payments as expenses.
He, thereby forgot that S. 40A(3) is not absolute and there are exceptions thereto. In this connection, the following observation in Attar Singh Gurmukh Singh vs. ITO (1991) 191 ITR 667 (SC) need to be referred : "In our opinion, there is little merit in this contention. Sec. 40A(3) must not be read in isolation or to the exclusion of r. 6DD. The section must be read alongwith the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect or which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of S. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in S.40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of S. 40A(3) and r. 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions." 8. We have ourselves examined the details of the payments and their utilizations by M/s. Madhumilan Syntex Ltd. The entire amount of Rs. 45,11,000 was utilized in payment of salary and wages and loans and advances to the employees and also for payment of entry tax, electricity, telephone bills and provident fund and for repairs and maintenance and mending expenses. Some amount was deposited in cash in the bank. It is pertinent to notice that all these payments were made against the purchases. All the purchases are duly supported by vouchers; they are crossed verifiables; no discrepancy has been found in the books of account of the assessee and M/s. Madhumilan Syntex Ltd. as to the purchase and sale of goods and the job work done. The books of account of both the companies are duly audited. It is not the case of the Revenue, if there was any attempt on behalf of any of the two companies to transfer its profit to the other. Both the companies are income-tax payee. Thus, there is hardly any scope for making claim for bogus or excessive expenditure. Claim of bogus or excessive expenditure by one would necessarily affect the other company. All the transactions are restricted to these two companies and not to a third party. At this juncture, it is advantageous to refer the following observations in the case of Girdharilal vs. CIT (1989) 179 ITR 122 (Cal) : "The object of the provision of S. 40A(3) is to check evasion of taxes so that the payment is made from the disclosed sources. Both the payer and the payee would be showing in the respective account the payments made and received. It presupposes that the transactions must be genuine transactions. In this case, genuineness of the transactions had not been disputed by the Revenue authorities." "The identity of the payee who was an income-tax assessee was established and the genuineness of the transactions was not doubted or disputed. The circular of the Board is not exhaustive but only illustrative. The ITO has to take a pragmatic view of the matter. The ITO should take a practical approach to problems and strike a balance between the direction of law and hardships to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his direction either in favour or against the assessee. There may be an oral agreement between the assessee and the seller for payment in cash. A seller may not be willing to accept cheques; cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances." 9. In view of the above discussion, the addition of Rs. 45,11,000 is deleted.
10. The next ground of objection, as stated above, is relating to disallowance of certain expenses under S. 37(2A). The Assessing Officer observed that the assessee had claimed Rs. 94,413 plus Rs. 1,27,353, total Rs. 2,14,756 as business promotion expenses on account of customers hotelling and travelling expenses. It was explained by the assessee that the expenditure of Rs. 89,989 related to the hotelling and travelling of the customers and the balance of the expenditure was for providing food, etc., to the employees at the office. The Assessing Officer, however, treated that the total expenditure on customers hotelling and travelling was Rs. 2,14,756. He, therefore, disallowed the entire claim. On appeal, the CIT(A) endorsed the order of the Assessing Officer. He held that the entire expenditure was incurred on the customers.
11. Learned representatives of the parties are heard. The details of the expenditure filed at pages 113 to 121 of the paper book have been looked into. It appears therefrom that the total expenditure of Rs. 94,413 was not exclusively for entertainment of the customers. The customers were paid fare for travelling also. According to the learned counsel, in order to promote the business and to encourage the customers, they were invited by the assessee-company for inspection of the goods. The expenditure actually incurred on the travelling of the customers is directed to be sorted out from the total expenditure of Rs. 94,413 and that is directed to be and to be allowed as deduction as business expenditure. The disallowance of balance of the amount is confirmed.
13. The claim of deduction of Rs. 91,302 on account M. P. S. T., Central Sales-tax and entry tax relating to the earlier assessment years was made by the assessee, since after completion of the assessments for those earlier assessment years so much demand was raised in the instant assessment year. The Assessing Officer denied the claim on the reasoning that the assessee should have made a provision for such demand in the respective earlier assessment years. On appeal, the CIT(A) found that Rs. 91,302 included penalty of Rs. 46,900, which the assessee could not claim as a deduction. He further directed the Assessing Officer to verify from the cash records, and in case any of the liabilities were allowed in the past on accrual basis, no claim in respect thereof be allowed and in case no such claim was allowed in the past on accrual basis that much amount be allowed as a deduction.
14. Learned representatives of the parties are heard. We find no flaw in the order of the CIT(A). This ground of objection is dismissed.
15. The last ground of objection as to the disallowance of claim of deduction of Rs. 26,926 being the amount of penalty for delay in payment of provident fund is without merit. This claim of deduction is not allowable. In this connection, reference may be made to Suneet a Laboratories Ltd. vs. CIT (1986) 162 ITR 883 (MP).