V. Ramkumar, J.
1. In this appeal filed by the assessee under Section 260A of the Income-tax Act, 1961 ('the Act' for short), the appellant challenges the appellate order dated August 16, 2000, passed by the Income-tax Appellate Tribunal, Cochin Bench, in I. T. A. No. 486(Coch.)/92. Notice on the following substantial questions of law has been ordered:
1. Is not the finding of the Tribunal that the assessee is not entitled to get the benefit under Rule 6DD(j) of the Income-tax Rules, 1962, perverse and illegal ?
2. Is the Tribunal justified in allowing the appeal filed by the respondent, holding that the assessee had not filed any confirmation letters from the dealers, in the circumstances of the case, especially when major transactions are with one of the partners of the appellant-assessee ?
3. Is not the decision of the Tribunal rendered without affording the assessee an opportunity to furnish the confirmation letters from the dealers in question illegal and opposed to the principles of natural justice ?
2. The facts leading to the impugned proceedings can be summarised as follows:
3. For the assessment year 1988-89 the assessee filed his return of income on July 17, 1989, declaring a net taxable income of Rs. 3,77,340. The said return was selected for scrutiny and a final assessment order for the assessment year 1988-89 was passed on March 31, 1988, fixing the assessee's total income at Rs. 7,64,722. While completing the said assessment, the Assessing Officer, namely, the Assistant Commissioner of Income-tax, Circle-I, Division II, Ernakulam, inter alia made disallowance of a sum of Rs. 88,209 under Section 40A(3) of the Act being 50 per cent. of the total amount paid otherwise than by cheques. The said disallowance comprised payments made for purchase of high-speed diesel oil (Rs. 88,260) purchase of stores and spares (Rs. 80,832), and purchase of oil (Rs. 7,326) making up a total of Rs. 1,76,418. Accordingly, as per annexure A order dated January 25, 1991, the Assessing Officer disallowed 50 per cent. of the above payments which were made otherwise than by way of cheques and made in violation of Section 40A(3) of the Act. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), Ernakulam. As per annexure C order dated March 6, 1992, the first appellate authority accepting the contentions of the assessee that the payments would fall under Rule 6DD(j) of the Income-tax Rules, 1962, deleted the disallowance. Aggrieved by the order, the Revenue preferred an appeal before the Income-tax Appellate Tribunal, Cochin Bench, Cochin, which as per annexure E order dated August 16, 2000, set aside the order of the first appellate authority and restored that of the assessing authority. It is the said order of the Tribunal which is assailed in this appeal by the assessee.
4. We heard advocate Sri K. M. V. Pandalai, learned Counsel appearing for the assessee, and senior advocate Sri P. K. Raveendranatha Menon, learned Counsel for the Revenue.
5. Assailing the order of the Appellate Tribunal, advocate Sri Pandalai made the following submissions before us:
6. It is true that the purchases were made not by way of cheques or drafts but were made against cash payments. The assessee had incurred substantial loss in the previous years resulting in its creditworthiness going down. Under these circumstances, all its creditors were insisting on cash payments. Moreover, the main bank account of the assessee was at Pallam far away from Moozhiyar where the construction works of the assessee was being done. The purchases were made from Ernakulam and if payments made by way of cheques there would have been delay in getting the cheques cleared. All these aspects have contributed to the creditors insisting on cash payments. Even the Assessing Officer had not doubted the genuineness of the transactions but was merely harping on technicalities. The above circumstances were fully appreciated by the first appellate authority which came to the conclusion that the transactions in question would fall under Rule 6DD(j) of the Income-tax Rules, 1962, and hence no disallowance under Sub-section (3) of Section 40A of the Act should have been made by the Assessing Officer. The Tribunal was clearly in error in insisting on confirmation letters from the sellers for cash payments without affording the assessee an opportunity to produce the same.
7. We are afraid that we find ourselves unable to accept the above submissions. Admittedly, the purchases made by the assessee for a sum of Rs. 88,209 were all by way of cash payments. By making payments for a sum exceeding Rs. 10,000 otherwise than by crossed cheque or crossed bank draft, the assessee incurred the penalty of disallowance of such expenditure as a deduction under Section 40A(3) of the Act. Section 40A(3) together with the two provisos thereto, as was applicable at the relevant time, read as follows:
40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent. of such expenditure shall not be allowed as a deduction:
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Assessing Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of Section 154 shall, so far as may be, apply thereto, the period of four years specified in Sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made:
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.
8. The assessee would contend that he has not incurred any disallowance in view of Clause (j) to Rule 6DD of the Income-tax Rules, 1962, made by virtue of the second proviso to Section 40A(3) of the Act. Rule 6DD reads as follows:
6DD. Cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.-No disallowance under Sub-section (3) of Section 40A 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 the cases and circumstances specified hereunder, namely:
(a) where the payment is made to-
(i) the Reserve Bank of India or any banking company as defined in Clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949) ;
(ii) the State Bank of India or any subsidiary bank as defined in Section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(iii) any co-operative bank or land mortgage bank ;
(iv) any primary agricultural credit society as defined in Clause (cii) of Section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or any primary credit society as defined in Clause (civ) of that section ;
(v) the Life Insurance Corporation of India established under Section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956) ;
(vi) the Industrial Finance Corporation of India established under Section 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948) ;
(vii) the Industrial Credit and Investment Corporation of India Ltd.;
(viii) the Industrial Development Bank of India established under Section 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964) ;
(ix) the Unit Trust of India established under Section 3 of the Unit Trust of India Act, 1963 (52 of 1963) ;
(x) the Madras Industrial Investment Corporation Ltd., Madras ;
(xi) the Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad ;
(xii) the Kerala State Industrial Development Corporation Ltd., Trivandrum ;
(xiii) the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay ;
(xiv) the Punjab State Industrial Development Corporation Ltd., Chandigarh ;
(xv) the National Industrial Development Corporation Ltd., New Delhi ;
(xvi) the Mysore State Industrial Investment and Development Corporation Ltd., Bangalore ;
(xvii) the Haryana State Industrial Development Corporation Ltd., Chandigarh ;
(xviii) any State Financial Corporation established under Section 3 of the State Financial Corporations Act, 1951 (63 of 1951) ;
(b) where the payment is made to Government and, under the rules framed by it, such payment is required to be made in legal tender ;
(c) where under any contract entered into by the assessee before the 1st day of April, 1969, the payment is required to be made in legal tender;
(d) where the payment is made by-
(i) any letter of credit arrangements through a bank ;
(ii) a mail or telegraphic transfer through a bank ;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank ;
(iv) a bill of exchange made payable only to a bank.
Explanation.-For the purposes of this clause and Clause (h), the term 'bank' means any bank, banking company or society referred to in Sub-clauses (i) to (iv) of Clause (a) and includes any bank [not being a banking company as defined in Clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949)], whether incorporated or not, which is established outside India ;
(e) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee ;
(f) where the payment is made for the purchase of-
(i) agricultural or forest produce ; or
(ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming ; or
(iii) fish or fish products ; or
(iv) the products of horticulture or apiculture ;
to the cultivator, grower or producer of such articles, produce or products ;
(g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products ;
(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town ;
(i) where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or the heirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head 'Salaries' of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs. 7,500 ;
(j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft-
(1) due to exceptional or unavoidable circumstances, or
(2) because payment in the manner aforesaid was not practicable, 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.
9. Thus, under the second proviso to Section 40A(3) of the Act regard should be had to the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors. It also envisages such other cases and circumstances as may be prescribed. It was for specifying these cases and circumstances that the aforesaid Rule 6DD has been framed. Under Clause (j) of the said Rule 6DD, it is for the assessee to satisfy the Income-tax Officer that payment could not be made by a crossed cheque or a crossed bank draft due to any of the following circumstances:
(i) There were exceptional or unavoidable circumstances and the payment and the identity of the payee were genuine.
or
(ii) payment by way of crossed cheque or crossed bank draft was not practicable 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 the payment and the identity of the payee were genuine.
10. Besides satisfying the Income-tax Officer about the existence of any one of the above circumstances, the above provision also insists that the assessee should furnish evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee. No doubt, a reading of the Assessing Officer's order would show that he was convinced about the genuineness of the payment and the identity of the payee. But that will only satisfy one of the two ingredients of the above provision. With regard to the other ingredients there was absolutely no material furnished by the assessee so as to satisfy the Income-tax Officer. Without producing the necessary material to enable the Income-tax Officer to arrive at the requisite satisfaction, it is not open to the assessee to claim the benefit of Clause (j) of Rule 6DD. When it is for the assessee to satisfy the Income-tax Officer about the existence of the circumstances which would entitle him to claim deduction for a particular expenditure, he cannot, without producing any material, simply accuse the assessing authority of not having given him any opportunity to produce confirmation letters from the dealers, etc. The first appellate authority was in error in merely accepting the argument on behalf of the assessee without any material in support of the same and deleting the disallowance of the deduction. The Income-tax Appellate Tribunal was fully justified in interfering with the order of the appellate authority and restoring the order of the assessing authority. We see no merit in this appeal. The questions of law are accordingly answered against the assessee and in favour of the Revenue. Consequently, this appeal fails and is accordingly dismissed.