1. The only ground in this appeal relates to deletion by the CIT (Appeals) of the disallowance of Rs. 50,07,304 made by the Assessing Officer (AO) under Section 40A(3) of the Income-tax Act, 1961.
2. The assessee is a public limited company. The share holders are stated to be the farmers of the cotton growing region around Bardoli.
The assessee carries on the business of purchasing raw cotton and sells the pressed cotton bales after carrying out the ginning and pressing process. The company also carries out the activities of ginning and pressing work on job basis. The company, inter alia, made purchases from a partnership firm styled as Patidar Ginning & Pressing Co. Six directors of the assessee-company are partners or otherwise interested in the said partnership firm. The assessee-company made total purchases from the said firm amounting to Rs. 1,22,48,963. The company made cash payments during the period from October 1976 to June 1977 on various dates aggregating to Rs. 44,74,000. The company also received cash on various dates from the said firm aggregating to Rs. 13,85,000. The Assessing Officer treated the balance amount of Rs. 30,89,000 as the aggregate amount of cash payments made for purchase of goods, each exceeding Rs. 2,500 in contravention of the provisions of Section 40A(3). The addition made under Section 40A(3) in respect of other purchases relates to one Deepak Trading Co. to whom an aggregate payment of Rs. 16 lacs in cash was made on various dates during the year under consideration. The third party to whom such cash payments were made for goods purchased is Haldharu Purva Vibhag Kapas Sahakari Mandali Ltd. An aggregate payment of Rs. 3,49,867 was made to this party in cash on various dates. A sum of Rs. 31,563 was received from the said party by cheque. The balance amount of Rs. 3,18,304 was treated as cash payments for purchase in violation of Section 40A(3).
The Assessing Officer thus made an addition of Rs. 50,07,304 in respect of cash payments, each exceeding Rs. 2,500 in violation of Section 40A(3) in relation to payments made to these parties as under : The Assessing Officer has discussed in the assessment order the facts relating to these payments and has also considered the submissions made on behalf of the assessee with a view to examine as to whether such cash payments can be treated as having been made under exceptional or unavoidable circumstances and as to whether such cash payments can be treated as covered by CBDT Circular No. 220 dated 31-5-1977. After considering the entire submissions, he came to the conclusion that provisions of Section 40A(3) are clearly applicable and these payments are not covered by any of the exceptions provided in Rule 6DD(j) or as clarified in the above referred circular. The aforesaid addition under Section 40A(3) was made by him after receiving directions by the IAC under Section 144B.3. The learned CIT (Appeals) thoroughly examined the entire evidence in relation to these cash payments. As regards payments made to Deepak Trading Co. Rs. 16 lacs and Haldharu Sahakari Mandli Rs. 3,18,304, he came to the conclusion that payments made to these two parties essentially consisted of passing on the sale proceeds collected on behalf of those parties and, therefore, it cannot be treated as deemed purchases made from them. The assessee merely realised the sale proceeds on behalf of these two parties and made payments of such proceeds to them which does not attract the provisions of Section 40A(3). In order to arrive at this finding, he perused the necessary entries in the books of account which showed that sale proceeds were credited in the accounts of the said two parties and later on those amounts of sale proceeds were paid to them. He also examined the confirmations submitted by these two parties before coming to the said conclusion that the provisions of Section 40A(3) cannot be applied in relation to payments made to these two parties. As regards payments aggregating to Rs. 30,89,000 made to M/s Patidar Ginning & Pressing Co., he examined the relevant facts, material and evidence in great detail. He required the assessee to submit datewise charts from the books of account of the said partnership firm with a view to examine the correctness of the facts stated by the firm in their confirmation that they insisted for cash payments on those dates because of urgent business necessity for making payments on that very day. After examining all such relevant datewise details from the entries appearing in the books of the partnership firm as well as the assessee's books of account, he came to the conclusion that the assessee's case is clearly covered by the CBDT circular dated 31-5-1977 as well as by Rule 6DD(j).
He thus deleted the entire addition made under Section 40A(3).
4. Before us the learned Sr. D.R. vehemently argued that the major cash payment disallowed under Section 40A(3) has been made to the partnership firm in which the Directors are interested as partners.
Huge amounts of cash payments have been made. Both the partnership firm and the assessee-company had their bank accounts in the same bank and the same branch. The assessee could conveniently make payment by account payee cheque/draft and such payments would have also enabled the partnership firm to meet their urgent business necessity on that very day. The same persons were operating the bank account of the company as Directors and the bank account of the firm as its partners.
This is a case where the provisions of Section 40A(3) have been violated without existence of any unavoidable and exceptional circumstances. The Assessing Officer and the IAC have examined the facts of the case thoroughly and the view taken by the Assessing Officer should have been confirmed. He also placed heavy reliance on the judgment of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 which clearly says that the provisions of Section 40A(3) cannot be considered as placing an unreasonable restriction on the fundamental right to carry on business, the said provisions have been inserted with a view to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. It has further been held that the word 'expenditure' used in Section 40A(3) also includes payments made for stock-in-trade and for purchase of raw material. He, therefore, strongly urged that the addition made by the Assessing Officer should be restored.
5. The learned counsel for the assessee strongly supported the order of the learned CIT (Appeals). He invited our attention towards the confirmations of all the three parties to whom cash payments have been made with a view to support the findings given by the CIT (Appeals).
Our attention was also drawn towards the various details required by the CIT (Appeals) from the books of account of the partnership firm with a view to satisfy himself about the claim of the partnership firm relating to urgent necessity of cash funds on the respective dates when the assessee-company made cash payments to that firm. It was submitted that out of the total amount of purchases made from the firm amounting to Rs. 1.22 crores payments made by the company to the said firm amounting to Rs. 83.70 lacs was made by cheques. The remaining payments had to be made in cash because of the insistence by the payee. The assessee submitted complete datewise details from the books of account of the said firm proving that on that very day the cash payments so made by the company were utilised either for making cash payments for purchases made from various other farmers and others or the amount was deposited in the bank account of the firm to ensure that cheques already issued by the firm, which were going to be presented on that day, are not dishonoured. The ITO, the IAC and the CIT (Appeals) also thoroughly examined the books of account of the partnership firm to whom cash payments have been made and the CIT (Appeals) after being fully satisfied about the urgent necessity of funds by the firm and in view of their insistence confirmed in writing, deleted the said addition made under Section 40A(3). As regards the payments made to Deepak Trading Co. and Haldharu Kapas Mandali he invited our attention towards the letters submitted before the departmental authorities as well as confirmations of both these parties to prove that the title over the goods sold by the assessee on behalf of these two parties at all times remained with those respective parties. The assessee merely carried out the job work of ginning and pressing and sold the finished product on their behalf to the customers, as the two parties did not have the licence to sell the same. The sale proceeds have been credited in their respective accounts. The payments made by the assessee to these parties is merely a payment of such sale proceeds realised on behalf of these two parties and did not in any manner represent purchases made by the assessee. Our attention was also invited towards confirmations of these two parties to show that even if it is assumed that such transactions are covered by Section 40A(3), the cash payments in question are covered by the exemptions contained in Rule 6DD(j) as well as the Circular No. 220 of 31-5-1977. He submitted that no interference would be justified.
6. We have carefully considered the submissions made by the learned representatives and have also given our thoughtful consideration to the entire submissions and all other documents submitted in the paper book to which our attention was drawn during the course of hearing. There is no dispute about the legal proposition as laid down by the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh (supra) that the provisions of Section 40A(3) are applicable in relation to purchase of raw material by the taxpayers. The Hon'ble Supreme Court in the said judgment has also very clearly observed that the provisions of Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD.Considerations of business expediency and other relevant factors are not excluded. Genuine and bona flde 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 Section 40A(3) was not practicable or would have ceased genuine difficulty to the payee. It has further been observed that it is open to the assessee to identify the person who has received the cash payment. Rule 6DD further provides that an assessee can be exempted from the requirement of payment by a crossed cheque or bank draft in the circumstances specified in Rule 6DD. The Hon'ble Supreme Court thereafter observed that the said provisions of Section 40A(3) read with Rule 6DD were intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. The object of such a requirement is meant for enabling the authorities to examine whether the payment was genuine and whether it was out of income from undisclosed sources. These observations of the Hon'ble Supreme Court provide a valuable guidance and guideline for all the authorities working under the provisions of the Income-tax Act as to how the facts and circumstances of each payment should be examined and considered for the purpose of invoking the provisions of Section 40A(3) and for the purpose of ascertaining as to which type of payments would be covered by the exceptions provided in Rule 6DD(j) read with the Circular No.220 dated 31-5-1977 issued by the Board.
6.1 In Circular No. 220 dated 31-5-1977, published in [1977] 108 ITR 8 (St.) it has been clarified that it would generally satisfy the requirements of Rule 6DD(j) if a latter explaining the exceptional and unavoidable circumstances such as mentioned in para 4 of the said circular is produced in respect of each transaction falling within the categories listed in para 4 of the said circular 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 ITO to satisfy himself about the genuineness of the transaction. One of the illustration of exceptional circumstance given in para 4 of the said circular is that if the seller is refusing to accept payment by way of crossed cheque/draft and the purchasers business interest would suffer due to non-availability of goods otherwise than from this particular seller. The other illustration is that the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he had purchased the goods. Few more instances of exceptional circumstances have been given in the said circular. The Hon'ble Gujarat High Court in the case of Navsari Waste Cotton Products v. CIT [1987] 163 ITR 378 has held that the said circular merely indicate the circumstances in which Rule 6DD(j) would be attracted. The underlying idea is that if the seller's identity can be established, it would be possible for the ITO to cross-check whether the transactions in fact had taken place as stated and was of a genuine nature. The instances given in the said circular are merely illustrative and not exhaustive.
In another case of Hasanand Pinjomal v. CIT [1978] 112 ITR 134, the Gujarat High Court held that where it is not practicable to make payments by crossed cheque or draft, the payments if found genuine would be covered by exceptions provided in Rule 6DD(j). Practicability for the purpose of the said rule must be judged from the point of the businessman and not of the revenue.
6.2 We will examine and consider the evidence and material existing on records in the light of aforesaid observations made by the Hon'ble Supreme Court and the Gujarat High Court, particularly with a view to ascertain as to whether the cash payments made for purchases to the above referred three parties are covered by the exceptions provided in Rule 6DD(j) as clarified by the Board vide its circular No. 220 of 31-5-1977.
6.3 As regards cash payments made to Patidar Ginning & Pressing Co., the assessee produced a letter dated 11-5-1981 before the Assessing Officer. The said firm has given their sales-tax registration number, permanent account number allotted under the IT Act and has also confirmed the correctness of the transactions made with the assessee-company. The firm is an existing assessee. The purchases made by the assessee have duly been shown as sales in the books of the said partnership firm. They have, inter alia, confirmed that sometimes they have to purchase agricultural produce from dealers or from farmers and have to make payments to them urgently. They issued cheques to the dealers and have to ensure that cheques are duly honoured by their bankers and not returned unpaid so as to prejudicially affect their reputation. In view of such urgent business necessity they insisted upon the assessee -company to make payment to them in cash as and when they required cash urgently. Many a times they urgently required cash to make payments to the farmers who have no bank account and to whom the firm has to make immediate cash payments. It has also been stated in the confirmation that they insisted upon the said company to make payments to them in cash whenever their business needs required it and whenever it was not practicable to accept the cheques from the assessee-company. If the assessee-company had insisted upon making the payments only by crossed cheque/draft without any exception, ignoring their insistence for payment being made in cash whenever the firm needed so, they would have refused and stopped the business with the assessee-company. This letter was directly sent by the said partnership firm to the Assessing Officer. Thereafter the Assessing Officer and the IAC examined the books of account. The Assessing Officer has observed that (para 6 of the assessment order) scrutiny of the books of account reveal that almost every time when the assessee-company has made payments to the firm in cash, the assessee has withdrawn cash from the bank on the same day. It is further stated in para 9 of the assessment order that the assessee-company drew cash from Dena Bank, Bardoli on the strength of the pay-in-slip in respect of cheques deposited with Dena Bank at Surat in order to pay the amount to the firm on the same day. The assessee-company had submitted that the assessee had to pay the amount by withdrawing cash from the bank which help the firm in meeting the liability on the same day. Likewise the IAC's directions under Section 144B in para 17 reveals that the bank balances of the assessee-company and that of the firm was scrutinised, test checked by him and he has observed that the partnership firm was having over-draft facilities with Dena Bank and also had arrangement with other parties for providing short-term loans. The correctness of the urgent necessity of funds by the firm has not been disputed by the Assessing Officer or by the IAC but they have come to the conclusion that since the company and the firm both had bank account at the same bank and at the same branch such urgent business necessity could have been met even if the assessee would have made payments by crossed cheque. The assessee explained the peculiar circumstances before the authorities concerned and stated that the urgent necessity of making the payments by the firm could not have been met by issuing crossed cheque/draft for payment for purchases on those dates when cash was paid. Such peculiar features of the case have been explained in the statement submitted at pages 85 to 87 of the paper book. The learned CIT (Appeals) after perusing the entire evidence submitted before the Assessing Officer and before the IAC gave a very deep and thoughtful consideration to the matter. He was conscious of the fact that such a confirmation could be conveniently obtained by the assessee-company from a sister concern, namely, the partnership firm, to bring their case within the exceptions clarified in the CBDT circular. In order to verify the fact of urgent necessity of cash funds on respective dates when cash payments were made, the CIT (Appeals) obtained a reconfirmation from the said firm. The firm had submitted a letter dated 17-3-1982 to the CIT (Appeals) in which they have once again confirmed that they insisted upon the assessee-company to make payment in cash whenever their business needs required it and whenever it was not practicable to accept the cheques from the assessee-company. In this confirmation they have confirmed the cash payments received from the assessee-company. The CIT (Appeals) thereafter scrutinised the datewise details about the real utilisation of the cash payments received by the firm from the assessee-company on the different dates with a view to ensure that such cash payments received were utilised on that very day for making cash payments to other creditors or for depositing the same in the bank account by the firm with a view to ensuring the honouring of the cheques already issued by the said firm. A chart from different angle was also produced before the CIT (Appeals) (pp. 79 to 81 of the paper book) which gave the position of bank balances on the respective dates in the bank account of the firm. After completely satisfying himself, the CIT (Appeals) came to the conclusion that the facts stated in the confirmation by the firm are verifiable from the books of account and records maintained by the firm. In para 17 of the appellate order, he has recorded a finding that on going through the particulars furnished for all the 38 days, he feels that there is much substance in the claim that the firm did need cash on certain dates and, therefore, it is possible that the firm may have insisted upon cash payments on those dates. The firm has stated categorically in the confirmations filed before the Assessing Officer as well as the CIT (Appeals) that they insisted for such cash payments. In para 19, he has further observed that in view of the close relationship between the firm and the assessee-company, the assertion of insistence upon cash payment by the payee has to be examined critically. He, therefore, scrutinised the details at considerable length and thereafter came to the conclusion that the confirmation submitted by the firm has to be taken at its face value and, therefore, the payments made by the assessee-company to the firm in cash has to be allowed the benefit of Rule 6DD(j) as clarified by the circular dated 31-5-1977. The aforesaid facts, material and evidence existing on records have been carefully examined by us and we find that the identity of the payee is well established. The firm is an existing assessee, its P.A. No., Sales-tax Regn. No. etc. have been furnished. The genuineness of the transaction cannot be validly suspected as the purchase price recorded in the books of account of the assessee-company is same which has been shown as sales in the books of account of the firm. There is no material or evidence on record that the purchase price paid by the assessee-company to the firm is excessive or unreasonable. There is no material on record to prove that the assessee has used unaccounted money or black money for making the cash payments in question. On the other hand, the Assessing Officer as well as the IAC, after verification of the books of account have given a definite and positive finding that on each day when cash payments have been made by the company to the firm the amount has been withdrawn by the company from their bank account with Dena Bank at Bardoli. This leaves no valid scope to even suspect that payments might have been made out of unaccounted money. The assessee has elaborately explained the exceptional and unavoidable circumstances under which such cash payments had to be made in deference to the insistence by the payee.
The fact of insistence by the payee and the threat of stopping the business in the event of not making cash payments at the time of such urgent business necessity has duly been confirmed by the payee and such insistence and urgent business necessity of cash funds on the respective dates has been thoroughly scrutinised and examined by the Assessing Officer as well as by the CIT (Appeals). We are, therefore, of the considered opinion that the ld. CIT (Appeals) has rightly held that payments made to the partnership firm Patidar Ginning & Pressing Co. in cash on various dates are clearly covered by the exceptions provided in Rule 6DD(j) read with Board's circular dated 31-5-1977.
6.4 As regards cash payments made to the remaining two parties, Deepak Trading Co. vide their letter dated 11-4-1989 submitted to the ITO had clearly confirmed that they have not sold raw cotton (kapas) to the assessee-company and title in raw cotton did not pass in favour of the said company. The company ginned and pressed raw cotton into cotton for and on their behalf and sold the same on their behalf. The company merely charged ginning charges and other expenses. They have also confirmed that the entire sale proceeds after deducting therefrom the expenses incurred by the assessee-company on their behalf was credited to their account and the same has been paid by the assessee-company to the said concern. They have also confirmed vide para 3 of the confirmation that they insisted upon the company to pay the amount in cash in view of their business needs. It has been further stated in the said confirmation that they refused to accept the payment by crossed cheque or draft because it was not practicable from their view point of commercial expediency to accept the payments by crossed cheque or draft. The learned Sr. D.R. had pointed out that in para 13 of the assessment order, the Assessing Officer has observed that these two parties have shown in their books as sales to the assessee. The Bench required the Sr. D.R. to show the basis of such observations made in para 13 of the assessment order. He could not produce any such material on the basis of which such an observation could be made by the Assessing Officer. On the other hand, the confirmations of Deepak Trading Co. as well as the confirmation of the other party Haldharu Kapas Mandali clearly shows that the sale of cotton was made by the assessee on their behalf. They never sold raw cotton to the assessee-company but it was merely given for carrying out the process of ginning and pressing and thereafter the cotton bales were sold by the assessee-company on behalf of these two parties. The CIT (Appeals) in para 7 of the order has observed that the assessee credited the sale proceeds to the accounts of the two parties and later made payments of those amounts to them. This fact is also verifiable from details submitted at page 60 of the compilation which shows that cotton bales were sold by the assessee-company on behalf of these two parties and sale proceeds after deducting expenses on their behalf were credited in the accounts of these two respective parties. In view of these facts the CIT (Appeals) has rightly come to the conclusion that the provisions of Section 40A(3) do not apply to payments made to these two parties. Even otherwise the identity of these two parties is not in dispute. The genuineness of the transaction has also been well proved and the confirmation letters of these two parties clearly prove that cash payments were made to them pursuant to insistence for cash payments and both the parties have also confirmed that they refused to accept payments on the respective dates by crossed cheques/drafts. The matter would even otherwise be covered by the exceptions in Rule 6DD(j) read with Board Circular dated 31-5-1977. We, therefore, do not find any justification in interfering with the order of the learned CIT (Appeals).