1. In the above mentioned 5 cases, the hon'ble President, the Income-tax Appellate Tribunal, constituted a Special Bench under Section 255(3) of the Income-tax Act, 1961. The common issue involved in all these appeals is with regard to disallowance under Section 40A(3) of the Act.
Sri S.K. Tulsiyan, advocate, appearing on behalf of (i) M/s. Kenaram Saha & Subhash Saha and (ii) Nadeem Iqbal led the arguments from the assessees' side. He argued the matter at great length. His arguments/submissions can be summarized as follows: 2. That Section 40A(3) was introduced by the Finance Act, 1968, with effect from April 1, 1968. In the memorandum explaining the provisions in the Finance Bill, 1968, it was explained that the purpose behind the enactment of the provisions of Section 40A(3) was to curb wasteful and lavish expenditure and to counter tax evasion. It was felt by the Government that the assessees claim expenditure incurred in cash which frustrate proper investigation by the Department as to identity of payee and reasonableness of payment. Section 40A(3) was designed to counter tax evasion through such claims of expenditure in cash.
3. Therefore, obviously the provisions of Section 40A(3) are attracted only in cases where the genuineness of the expenditure incurred in cash is in doubt. He stated that right at the time of insertion of Section 40A(3) in the Act, there was apprehension that the provisions may cause undue hardship and inconvenience to certain assessees in respect of cases where payment by cheque is not feasible due to some genuine reasons. So powers were given to the Central Board of Direct Taxes to notify in the Income-tax Rules exceptions to the provisions of Section 40A(3) having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. Accordingly, the nature and circumstances under which the provisions of Section 40A(3) will not be operative were specified in the Income-tax Rules vide rule 6DD under Notification No. SO-624 dated February 14, 1969.
4. Apart from the specific exceptions incorporated in the Rules, there was also a residuary exception, i.e., rule 6DD(j), which stated that where the tax payer establishes that the payment could not be made by crossed cheque or draft due to exceptional or unavoidable circumstances, no disallowance under Section 40A(3) was to be made. The Central Board of Direct Taxes also issued Circular No. 220 dated May 31, 1977, [1977] 108 ITR (St.) 8, wherein the Central Board of Direct Taxes spelt out some of the circumstances which meet the requirement of rule 6DD(j). In the said circular itself the Central Board of Direct Taxes has mentioned that all the circumstances in which the conditions laid down in rule 6DD(j) would be applicable, cannot be spelt out. Thus it is clear that the circumstances spelt out in Circular No. 220 were inclusive by way of examples and not exhaustive.
5. That Finance Act, 1995 amended Section 40A(3) with effect from April 1, 1996, by which disallowance under Section 40A(3) was reduced to 20 per cent, of the expenditure claimed. Clause (j) of rule 6DD was also omitted with effect from July 25,1995. The reasons behind these twin changes have been spelt out in the memorandum explaining the provisions in the Finance Bill, 1995 ([1995] 212 ITR (St.) 326, 356). As per the above Explanation, Clause (j) was introduced at a time when banking facilities had yet to take routes in rural areas. Now banks have established themselves in rural areas and a vast branch network is available. Therefore, it was felt that Clause (j) of rule 6DD has outlived its purposes.
6. That the second proviso to Section 40A(3) has directed the rule making authority to provide exception where Section 40A(3) would not be applicable considering (i) banking facilities, (ii) consideration of business expediency and (iii) other relevant factors. Clause (j) of rule 6DD was a residuary clause which took care of all the cases where payment by crossed cheque or bank draft was not practicable considering the banking facilities or business expediency or other relevant factors.
7. The Legislature while deleting rule 6DD(j) has only considered the availability of banking facilities in the rural areas and having satisfied about the banking facilities available in the rural areas, omitted rule 6DD(j). However, no other rule is inserted in place of rule 6DD(j) so as to take care of the cases where the payment by account payee cheque/draft was not practicable due to business expediency and other relevant factors. Therefore, the moot question is whether by omission of rule 6DD(j) the intention of the Legislature is to disallow 20 per cent, of the genuine and legitimate claim of bona fide business expenditure merely because the payment is made in cash exceeding Rs. 20,000 Whether the business necessity or commercial expediency recognized all along for the purpose of allowance of any expenditure now no longer to be a recognized reason while considering the disallowance of such expenditure? 8. He submitted that if the interpretation made by the Assessing Officer is accepted, it would amount that 20 per cent, of the genuine and bona fide expenditure incurred by an honest tax payer would be disallowed merely because the payment was made in cash exceeding Rs. 20,000 even if there was business necessity or commercial expediency making the payment by account payee cheque/draft impracticable. At the same time, 80 per cent, of the bogus expenditure by unscrupulous taxpayer would be allowed because of disallowance of just 20 per cent, provided in Section 40A(3). He, therefore, submitted that Section 40A(3) and rules framed thereunder should be interpreted keeping in view the object of introduction of Section 40A(3). He stated that the hon'ble apex court in the case of Attar Singh Gurmukh Singh v. ITO while considering the constitutional validity of Section 40A(3) has also explained the reasons behind introduction of this provision. Various High Courts in the following cases have also taken the view that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in Section 40A(3):CIT v. Chrome Leather Co. P. Ltd. 9. It is further contended by Sri Tulsiyan, learned Counsel, that under the Income-tax Act, what is chargeable to tax is the "income" of the assessee. Section 2(24) of the Income-tax Act defines the word "income" which includes, inter alia, profits and gains. The word "profit" has not been defined in the Act. But Black's Law Dictionary, Eighth Edition gives the meaning of the word "profit" as under: It is needless to point out that bona fide business expenditure cannot but form part of the profits and gains of business or profession. A legitimate and genuine business expenditure cannot even be deemed to be income which can be said to be received or accrued or arose to the assessee. He further submitted that as per article 265 of the Constitution of India, no tax shall be levied or collected except by authority of law. Such dictum of the Constitution would necessarily exclude any interpretation of the statute that would result in denial of deduction of genuine business expenditure and consequent undue enrichment of the exchequer. He further relied upon the decision of the hon'ble apex court in the case of K.P. Varghese v. ITO in support of his contention that the onus of establishing that the conditions of taxability are fulfilled is always on the Revenue and the statutory provisions must be construed so that absurdity and mischief may be avoided.
10. He fairly pointed out that the hon'ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma v. Union of India and the Kerala High Court in the case of Kamath Marbles v. ITO have upheld the constitutional validity of Section 40A(3) and of rule 6DD after amendment by the Finance Act, 1995 and the Income-tax (Fourth Amendment) Rules, 1995, respectively.
11. He further submitted that while upholding the constitutional validity of amendment in Section 40A(3), the Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma v. Union of India mentioned the exceptions provided in the second proviso of Section 40A(3). Therefore, even after the deletion of Clause (j) of rule 6DD, the exceptions mentioned in the second proviso of Section 40A(3) would still continue to apply in view of the substantive provisions, i.e., the second proviso to Section 40A(3). He also relied upon the decision of the hon'ble apex court in the case of Union of India v. A. Sanyasi Rao in support of his argument that the heads of legislation in the lists should not be construed in a narrow and pedantic sense, but should be given a large and liberal interpretation.
12. He submitted that Section 295 of the Act empowers the Central Board of Direct Taxes to make rules by notification in the Gazette of India for carrying out the purposes of the Income-tax Act, 1961. The rules are the delegated legislation empowering the Government to specify measures for fulfilling the intended purpose of the primary or principal legislation. Therefore, the rules cannot, in any way, restrict the general powers of the substantive legislation. In this view of the matter even after the omission of rule 6DD(j), not only the purpose for which Section 40A(3) was enacted but the principles on which such law is to be administered remained unaltered. The sanctity of the legislation, i.e., Section 40A(3) including the second proviso thereto, has not been affected by the amendment of rule 6DD(j).
13. He further submitted that as per the second proviso to Section 40A(3), consideration of business expediency is a necessary consideration. The expression "commercial expediency" has been explained by their Lordships of the hon'ble apex court in the case of S.A. Builders Ltd. v. CIT (Appeals) in which it was held that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business.
14. That the Income-tax Appellate Tribunal, Kolkata "C" Bench in the case "Of Sri Basudev Seth v. ITO vide I.T.A. No. 1460/K/06 for the assessment year 2003-04 has allowed the relief on the considerations of business expediency and the hon'ble jurisdictional High Court has upheld the order of the Income-tax Appellate Tribunal in I. T. A. No.386/K/07 vide order dated June 21, 2007. Copies of the aforesaid orders were furnished before us.
15. Coming to the specific facts of the case, Sri Tulsiyan submitted that the assessee M/s. Kenaram Saha and Subhash Saha is an association of persons. It is appointed by the Government of West Bengal as a big dealer in the public distribution system for distribution of kerosene oil in the State of West Bengal. In the State of West Bengal there is a chain, i.e., agent - big dealer - M.R. dealer for efficient running of public distribution system (PDS) of kerosene oil. The assessee is a big dealer in such chain. The Department of food and supplies issues allotment memo to the assessee for purchase of kerosene oil of a specified quantity from a specified agent. Similarly, allotment memos are issued, to the assessee for supply of kerosene oil to the specified M.R. dealers in specified quantities.
16. The purchase price to be paid to the agent as also the sale price to be charged from M.R. dealer is periodically determined by the Department of food and supplies. As per the allotment memo issued to the assessee by the Department of food and supplies for the purchase of kerosene oil, the assessee is required to make the payment in cash. In support of this contention, he produced before us the copies of allotment letters issued by sub-divisional controller, food and supply, Jangipur. He stated that the assessee has only given a few allotment letters as an example and in all other allotment letters similar directions are given.
17. In the allotment letter, there is clear direction to the agent to deliver the specified quantity of kerosene oil to the assessee on cash payment. He, therefore, stated that, when the assessee is working as a licensee being a part of the public distribution system of the Government of West Bengal, it is bound to make the payment as directed by the Government of West Bengal. The assessee cannot unilaterally decide the mode of payment to the agent. He, therefore, submitted that in the case of the assessee neither the identity of the seller nor the genuineness of the purchase is doubtful. Moreover, the payment has been made as per the rate fixed by the Government of West Bengal. Therefore, in the case of the assessee, the provisions of Section 40A(3) are not applicable. In any case, the assessee's case would squarely fall within the exception provided in the second proviso to Section 40A(3). He further contended that, the assessee's case would also fall under Clauses (b) and (1) of rule 6DD.18. He stated that the agent to whom the payment, was made by the assessee was the agent of the Government of West Bengal and as per the direction of the Government of West Bengal through the office of the sub-divisional controller, food and supplies, Jangipur, the assessee was directed to make the payment in cash to such agent and, therefore, the condition of rule 6DD(b) would be squarely applicable. The payment to the agent of the Government of West Bengal is payment to the Government of West Bengal. He submitted that the rule should be interpreted liberally so as to serve the object of the second proviso to Section 40A(3) and to avoid undue hardship to the bona fide and honest tax payers. In view of the above, it was contended by learned Counsel that the Commissioner of Income-tax (Appeals) has rightly allowed the appeal of the assessee. The order of the Commissioner of Income-tax (Appeals) should, therefore, be sustained.
19. Coming to the facts in the case of Nadeem Iqbal vide I. T. A. No.664(Kol)/07 it is stated by learned Counsel that the assessee is an individual who derives income from trading business in electronic items on whole -sale-cum-retail basis. He carried on the business with a meagre capital. The appellant was new in this line of trade and had a small capital. Therefore he had to employ the services of an agent for the purchases. It is submitted that it is the prevalent practice in Asansol and nearby region that the agents procure orders from traders at Asansol and obtain supplies from sellers in Kolkata. The agents also collect cash from the buyer to make the payments to the sellers at Kolkata. Since the assessee was new to the trade, cash payment was insisted. Moreover, the assessee had a limited capital and if cheque payments had been made, the parties would have received their credit after a substantial period, which would have affected the business of the assessee very badly. He submitted that the Commissioner of Income-tax (Appeals) has rightly appreciated, the facts of the case and allowed relief to the assessee. The order of the Commissioner of Income-tax (Appeals) should be sustained.
20. Sri Tulsiyan speaking on behalf of the assessees who are engaged in the business of manufacture and export of leather goods submitted that such assessees purchase hides from the producers thereof. Hides and skins obtained from slaughtered and dead animals would easily rot and decay unless proper precautions are taken. Tanneries are not often located very near to the source of raw hides and skins. So preservation of these articles assumes great importance. The sellers process these raw hides with wet or dry salting or drying, which process is called "curing". So the sellers actually "cure" the raw hides for converting them into saleable commodities. In that view, the sellers are not mere merchants, but at the same time producers of saleable hides. He referred to the definition of "producer" from the Bakshi's The Law Lexicon, volume 2 and submitted that the word "producer" has a very wide meaning and will include the person who trades or deals in such production. He, therefore, submitted that the purchase of hides and skins is squarely covered under rule 6DD(f)(ii). It is further submitted by him that the sellers produced the hides and skins in a cottage industry and, therefore, payment made to them would also be covered by rule 6DD(g).
21. Shri Gautam Banerjee, C.A., appeared for and on behalf of M/s.
Chong Ming Tannery vide I. T. A. No. 2114/Kol/06 and M/s. LI Chong Tanner)' vide I. T. A. No. 1696/Kol/07. He adopted the arguments advanced by Sri S.K. Tulsiyan, advocate and in addition stated that both the assessees, i.e., M/s. Chong Hing Tannery and M/s. LI Chong Tannery derived income from the business of tanning of hides to finished leather. The assessees purchased hides from the suppliers. The raw hide in its original stage is of perishable nature and cannot be brought to the market. The suppliers of the assessees buy raw hides on piece-meal basis from villagers. Then they carry out various processes upon such raw hides. After those processes, the hides are sorted out according to size and thickness and then sold them in bulk.
22. Since the suppliers' process the raw hides so as to make them fit for the purpose of commercial use, they are the producers of hides within the meaning of rule 6DD(f) of the Income-tax Rules. He also referred to the certificate issued by the Central Leather Research Institute, stating the processes which are earned out by the small suppliers/collectors of raw hides and skins so as to make them marketable. Copy of such certificate is produced before us. On the above basis, it is claimed by him that the suppliers from whom the assessees purchased the hides are the producers of such hides and, therefore, the payment made to them is duly covered by rule 6DD(f). He, therefore, contended that the disallowance made by the Assessing Officer and sustained by the Commissioner of Income-tax (Appeals) under Section 40A(3) was not justified.
23. He also requested for admission of the following additional ground in both the appeals: For that in determining the quantum of deduction under Section 80HHC, the non-inclusion of disallowed business expenses in 'profits of business' (having effect of reducing the deduction) is wrong, arbitrary, erroneous and contradictory.
He stated that this ground is purely a legal ground and, therefore, may kindly be admitted. The learned Departmental representative has no serious objection to the admission of the above additional ground.
After hearing the parties, we agree with the contention of learned Counsel that the ground raised by the assessee is purely a legal ground. Accordingly, we admit the same.
24. Coming to the merits of the additional ground it is stated by learned Counsel that the Assessing Officer has computed the income of the assessee on the basis of the returned income by making certain disallowances under Section 40A(3) and other expenses. He has not recomputed the deduction under Section 80HHC on the basis of business income determined by him. The assessee has computed the deduction under Section 80HHC on the basis of profits and gains disclosed by the assessee. However, due to disallowances made by the Assessing Officer when the income assessed under the head "Profits and gains of business" has increased, the Assessing Officer should have recomputed deduction under Section 80HHC on the basis of income assessed under the head "Profits and gains of business". He, therefore, requested that a suitable direction may be given to the Assessing Officer for recomputation of deduction under Section 80HHC.25. In the case of Sri Shyamal Kr. Dey vide I. T. A. No. 1772 (Kol)/07, Sri S.C. Sarkar, the advocate appeared and he stated that the assessee is a contractor and in his case the Assessing Officer has determined the income by applying a net profit rate of the turnover. However, in addition to the determination of net profit as a percentage of turnover, the Assessing Officer further made disallowance under Section 40A(3). He submitted that when the net profit rate is applied in the case of an assessee, all the deductions, expenditures, disallowances etc., are already deemed to be considered therein and thereafter no further disallowance can be made by the Assessing Officer. In support of this contention he has relied upon the following decisions: 26. In view of the above, he submitted that the order of the Commissioner of Income-tax (Appeals) is quite justified. The same should be sustained.
Sri S. Bandyopadhyay, the advocate, appeared as an intervener in the case of Paramount Leathers vide I. T. A. No. 826 (Kol)/07. He relied upon the arguments advanced by Sri S.K. Tulsiyan, the advocate and stated that the producer can be a small concern, it can be a big concern also which may engage in the business of producing as well as trading of hides and skins. He submitted that considering the facts of the assessee's case, rule 6DD(f) as well as rule 6DD(g) both would be applicable in the case of the assessee.
27. Sri Somnath Ghosh, the advocate appeared as an intervener in the case of Mrinal Ghosh vide I. T. A No. 2375 (Kol)/07. His arguments were of two folds. Firstly, that out of the two payments disallowed by the Assessing Officer, one payment was made on Sunday and, therefore, the same would be squarely covered by rule 6DD(k). Secondly, that the other payment was made to the decorator, who did not have the bank account at the relevant time and therefore, payment is made to a person who did not have the banking facility at the relevant time. Therefore, his case would be covered under rule 6DD(h). He further submitted that even otherwise the decorators do not accept the cheque and they insist on cash payment as soon as their work as a decorator is over. Therefore, the assessee's case would also fall within the second proviso to Section 40A(3) itself. In view of the above, it is submitted by learned Counsel that the disallowance made by the Assessing Officer may be directed to be deleted.
28. The learned Departmental representative, on the other hand, stated that Section 40A(3) is a computation provision for determination of profits and gains of business. Section 40A overrides the other provisions for computing the profits and gains of business. Therefore, Sub-section (3) of Section 40A would also be applicable while determining profits and gains of business in supersession to other provisions. The constitutional validity of Section 40A(3) has been upheld by the hon'ble apex court in the case of Attar Singh Gurmukh Singh v. ITO . After the amendment by the Finance Act, 1995, again the validity of Section 40A(3) was challenged and the hon'ble High Courts have upheld its constitutional validity in the following cases: 29. He also stated that the Income-tax Appellate Tribunal cannot adjudicate upon the constitutional validity of any provisions of the Income-tax Act or the Rules.
As per the second proviso to Section 40A(3), the exception has been provided in such cases and under such circumstances as may be prescribed. Section 295 of the Income-tax Act empowers the Central Board of Direct Taxes subject to control of the Central Government, to make rules for carrying out the purpose of the Income-tax Act.
Sub-section (2) of Section 295 provides for the specific matters in which the rules can be framed by the Central Government. Clause (p) of Section 295 is a residuary clause which provides as under: 30. Thus, in view of Section 295(2)(p), the Central Board of Direct Taxes is the rule-making authority which has to prescribe the cases and the circumstances under which the provisions of Section 40A(3) would not be applicable. The Central Board of Direct Taxes has already prescribed rule 6DD in pursuance of the powers conferred upon it by the second proviso to Section 40A(3). These rules are part and parcel of the statute and Section 40A(3) cannot be read in isolation of Section 40A(3) and rule 6DD should be read together. He contended that once the rules are framed by the Government through the Central Board of Direct Taxes, the authorities are bound to follow such rules. In support of this contention, he relied upon the decision of the hon'ble apex court in the case of Bharat Hari Singhania v. CWT .
31. It is contended by the learned Departmental representative that there is no equity in the income-tax. No relief can be given which is not permissible as per law/rules under the garb of substantial justice.
When the language of statute is clear and unambiguous, there is no necessity to go into the intention of the Legislature for which the provision was introduced. The intention of the Legislature is to be gathered from the language of the statute. He submitted that the language of Section 40A(3) is clear and unambiguous and, therefore, the full effect is to be given to the language used in Section 40A(3) without going into the object behind the introduction of Section 40A(3). In support of this contention, he has relied upon the decision of the hon'ble apex court in the case of CIT v. Tara Agencies [2007] 292 ITR 444.
32. Coming to the various provisions of the Income-tax Rules, he stated that the Rules are to be strictly interpreted and the burden is upon the assessee to prove in which particular sub-rule his case falls.
Referring to the facts in the case of Kenaram Saha and Subhash Saha, he submitted that the contention of learned Counsel that his case falls under rule 6DD(1) is not correct, because the assessee has made the payment to the person who is not his agent he may be an agent of the Government of West Bengal, but rule 6DD(1) would be applicable where the assessee makes payment to his agent who is required to make payment in cash for goods or services rendered, on behalf of the assessee. The assessee has not proved that the person to whom the payment is made is the assessee's agent and he has also note proved that such person in turn is required to make the payment in cash.
33. With regard to the assessee's claim that its case also falls under rule 6DD(b), he stated that this claim was not made earlier and the relevant facts are also not on record. He also referred to the copies of allotment memos issued by the sub-divisional controller, food and supplies, Government of West Bengal, which is enclosed by the assessee's learned Counsel with his written submission, and contended that such allotment letters are of 2007 and, therefore, not relevant to the year under appeal. In view of the above, it is submitted by the learned Departmental representative that the order of the Commissioner of Income-tax (Appeals) should be reversed and that of the Assessing Officer should be restored.
34. Coming to the cases where the assessee derives income from tanning of leather and manufacturing of leather goods, it is submitted by the learned Departmental representative that rule 6DD(f)(ii) would be applicable only when the assessee made purchases from the producer and not from the merchant or trader of hides and skins. From the copies of the bills produced in the case of Chong Hing Tannery, it is apparent that the sellers of hides and skins to the assessee are the merchants and commission agents and not the producers thereof. He contended that a person who rears the animal or person who purchases animal and slaughter them to take out hide and skin is the producer thereof.
35. In support of his contention, he relied upon the decision of the hon'ble apex court in the case of CIT v. Tara Agencies [2007] 292 ITR 444. He contended that the producers and the traders are two different persons. With regard to the assessee's contention that its case also falls under rule 6DD(g), it was submitted at the out set that all the relevant facts in this regard are not available on record and the assessee never claimed before the lower authorities that in its case rule 6DD(g) is applicable. He, however, submitted that in the following cases the concept of "cottage industry" was considered by the hon'ble courts: (b) Addl. CIT v. Indian Co-operative Union Ltd. ; and (c) Addl. CIT v. Chichli Brass Metal Workers Co-op. Society Ltd. .
36. He submitted that from the above decisions it would be apparent that if -any person hired labourers for the purpose of manufacturing or production of any goods or article, it cannot be said that such person was running a cottage industry. Moreover, as per rule 6DD(g), the production should be obtained without the aid of power. The assessee has no where proved that his suppliers were carrying on the activity of production of hides and skins themselves without hiring any labourers.
He, therefore, submitted that the disallowance made by the Assessing Officer and sustained by the learned Commissioner of Income-tax (Appeals) under Section 40A(3) is quite justified. The same should be upheld. In support of this contention, he relied upon the following decisions:Nahgi Lal v. CIT 37. He also referred to the order of the Commissioner of Income-tax (Appeals) in the case of LI Chong Tannery vide I. T. A. No. 1696 (Kol)/07 and pointed out that the Commissioner of Income-tax (Appeals) at page 4 of the order has recorded the finding that the assessee had regular dealing with the suppliers. The materials were purchased in credit and the payment was made after a long gap from the purchase of material. Therefore, the assessee had enough time to make the payment by cheque/draft. He, therefore, submitted that the assessee not only was unable to prove that its case falls within any particular clause of rule 6DD but also could not prove the business expediency for his inability to make the payment by account payee cheque/draft.
38. Referring to the facts of Nadeem Iqbal vide I. T. A. No. 664 (Kol)/07, it is stated by the learned Departmental representative that the Commissioner of Income-tax (Appeals) has allowed relief to the assessee based upon extraneous considerations. The Commissioner of Income-tax (Appeals) has allowed relief considering the fact that the addition made by the Assessing Officer is more than 300 per cent, of the returned income and several times more than the assessee's capital.
He submitted that these are irrelevant considerations while deciding the disallowability of an expenditure under Section 40A(3) where the payment is made in cash exceeding Rs. 20,000. He, therefore, submitted that the order of the Commissioner of Income-tax (Appeals) in the case of Nadeem Iqbal should be reversed and that of the Assessing Officer be restored.
39. It is further contended by the learned Departmental representative that by making disallowance under Section 40A(3), there is no double taxation. The double taxation arises only when the income is taxed twice in the hands of same person. In support of his contention, he relied upon the decision of the hon'ble apex court in the case of ITO v. S. Radha Krishnan .
40. In the rejoinder, it is stated by Sri S.K. Tulsiyan, the advocate that as per the second proviso to Section 40A(3), the exceptions are to be provided, which will exempt the applicability of Section 40A(3), considering the (i) banking facility ; (ii) business expediency ; and (iii) other relevant factors. Rule 6DD takes care of banking facility only and no specific rule remains on statute book after deletion of rule 6DD(j) so as to take care of business expediency and other relevant factors. In such circumstances, the courts have power to interpret Section 40A(3) in a manner so as to allow the deduction for genuine business expenditure where the identity of the payee is not in dispute and the payment by crossed cheque/bank draft could not be made due to business expediency or other relevant factors.
The courts should do justice considering the substantive provisions of the Act which include the proviso to Section 40A(3). He also stated that if there are two opinions about the interpretation of a particular provision, the interpretation which is favourable to the assessee should be adopted. In support of this contention, he relied upon the decision of the hon'ble apex .court in the case of Vegetable Products ltd. [1973] 88 ITR 192.
41. He referred to the case of Kenaram Saha and Subhash Saha and stated that the assessee is a dealer in the chain of public distribution system of the Government of West Bengal. He made the cash payment as per the order of the Government of West Bengal. The payee is the agent of the Government of West Bengal and his identity is not in dispute.
The purchase price paid by the assessee is also not in dispute, because the rate is fixed by the Government of West Bengal. Can on such facts, Section 40A(3) should be applied merely because the assessee made the payment in cash in obedience to the orders of the State Government In view of the above, it is reiterated by him that the provisions of Section 40A(3) and rule 6DD should be interpreted in a manner so as to fulfil the objects for which Section 40A(3) was introduced in the year 1968.
42. Sri S. Bandyopadhyay, the advocate, in the rejoinder also stated that the rule should be liberally construed. A common parlance meaning should be given to the word "producer" and not a very narrow meaning be given to it, as given by the Revenue.
Sri Gautam Banerjee in the rejoinder stated that the Assessing Officer has raised the issue of applicability of Section 40A(3) at the fag end of March when the assessment was becoming barred by limitation.
Therefore, there was no time left so as to bring on record the material to prove that the suppliers are producers. He, therefore, stated that if the assessee's legal submissions, are not accepted, then in alternate the matter can be set aside to the file of the Assessing Officer for examining afresh whether the suppliers of the hides and skins to the assessee are producers or not.
43. We have carefully considered the arguments of both the sides and ; perused the material placed before us. First we will deal with the arguments of Sri S.K. Tulsiyan, the advocate with regard to general applicability and scope of Section 40A(3). At the out set we agree with the contention of Mr. Tulsiyan that income-tax is a charge on the "income" as defined under Section 2(24) of the Income-tax Act. The definition of "income" under the Income-tax Act is an inclusive definition, Clause (i) of Sub-section (24) of Section 2 is "profits and gains". Thus, income includes profits and gains, Section 28 of the Income-tax Act provides various types of income which are chargeable to income-tax under the head "Profits and gains of business or profession". It is not in dispute that all the assessees in the appeals under consideration before us have income which is chargeable under the head "Profits and gains of business or profession". Section 29 of the Income-tax Act provides how the income under the head "Profits and gains of business or profession" is to be computed. It reads as under: 29. The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D.44. From the above it is evident that the income under the head "Profits and gains of business or profession" is to be computed in accordance with the provisions contained in Sections 30 to 43D of the Income-tax Act. Section 40A of the Act provides expenses or payments which are not deductible in computing the profits and gains of business or profession. Sub-section (1) of Section 40A reads as under: (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession'.
45. Thus provision of Section 40A has been given overriding effect upon the other provisions of this Act relating to the computation of income under the head "Profits and gains of business or profession".
Sub-section (3) of Section 40A, with which we are directly concerned in these appeals, reads as under: (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 twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee 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 twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee 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 twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee 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.
46. Thus, Sub-section (3) of Section 40A is a part of the computation provision while determining the profits and gains of business or profession. In view of the above, we are unable to accept the contention of learned Counsel for the assessee that disallowance of expenditure under Section 40A(3) would be in violation of article 265 of the Constitution of India which states "no tax shall be levied or collected except by authority of law". Admittedly, the Central Government enjoys the constitutional right to levy tax on income. The Income-tax Act also provides the levy of tax upon the income of the assessee. However, such income has to be computed in accordance with the provisions prescribed under the Income-tax Act which includes the disallowance under certain circumstances. The issue of constitutional validity of Section 40A(3) has been settled long back by the hon'ble apex court in the case of Attar Singh Gurmukh Singh v. ITO . In this case, their Lordships held as under Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs. 2,500 (Rs. 10,000 after the 1987 amendment) would be allowed to be deducted only if made by a cross cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of Section 40A(3) are not absolute. Consideration 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 Section 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 Section 40A(3) and rule 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.
47. After the amendment in Section 40A(3) by the Finance Act, 1995 with effect from April 1, 1996, and the amendment in rule 6DD of the Income-tax Rules by the Income-tax (Fourteenth Amendment) Rules, 1995, again the constitutional validity of Section 40A(3) was challenged.
However, the hon'ble Andhra Pradesh High Court in the case of Smt. Ch.
Mangayamma v. UOI upheld the constitutional validity of Section 4()A(3) and held as under (headnote): The main object of Section 40A(3) of the Income-tax Act, 1961, is to regulate financial transactions and to prevent the use of unaccounted money or reduce the chances of use of black money for business transactions. Under rule 6DD(j) of the Income-tax Rules, 1962, prior to its amendment, the rule- making authority by virtue of the powers conferred, made provision for unavoidable circumstances and genuine difficulties as permissible grounds for waiving the requirement. The said rule was in force for quite some time and it was left to the discretion of the assessing authorities to test such transactions on the touchstone of the said limitations.
The rule-making authority, in the light of experience and in its wisdom, sought to take away the said permissible factors. It is not as if the section itself does not provide for exceptions to be prescribed by the rule-making authority in appropriate cases having due regard to the factors set out in the proviso to Sub-section (3).
The mere fact that the rule-making authority did not retain the old rule, does not make the main section itself unconstitutional. Any changes made in the subordinate legislation would not in any way affect the substantive provision.
48. The hon'ble Kerala High Court in the case of Kamath Marbles v. ITO also upheld the constitutional validity of Section 40A(3) after the amendment therein in the year 1995 and held as under (head-note): Parliament is absolutely competent to fix ceiling on expenditure and lay down conditions for allowance. In Attar Singh Gurmukh Singh v. ITO , the Supreme Court upheld the constitutional validity of Section 40A(3) of the Income-tax Act, 1961. The Supreme Court was dealing with Section 40A(3) prior to its amendment by Finance (No. 2) Act, 1996, wherein the provision was for complete disallowance of expenditure if the same was in excess of the limit provided then under Section 40A(3) which was Rs. 10,000. While considering the validity of Section 40A(3), the Supreme Court has also strongly relied on rule 6DD(j) of the Income-tax Rules, 1962, as it stood then. In principle, the Supreme Court held that Section 40A(3) does not violate articles 14 and 19(1)(g) of the Constitution. Any restriction in the Income-tax Act on expenditure cannot be said to be violative of the right to carry on business and therefore, there is no violation of articles 14 and 19(1) (g) of the Constitution. Even after the amendment there is a provision for complete deduction of expenditure over Rs. 20,000 incurred in cash.
Clause (h) of rule 6DD read with Clause (k) itself provides sufficient liberalisation of the rigor of Section 40A(3) which entitles the parties to claim full deduction on cash payments over Rs. 20,000 where banking services are not available in the place where the expenditure is incurred or on the day the expenditure is incurred. In other words, the statute and the rules insist on payment through account payee cheques or demand drafts only in cases where banking services are available to the parties. It cannot be said that insistence on money transactions being carried out through the bank where the facilities are available which is to ensure transparency in transactions any way affects the rights of the parties to carry on any trade or business. The amendment to the rule does not affect the validity of the statute sustained by the Supreme Court.
49. No contrary decision is brought to our knowledge. In view of the above, we reject the first limb of the arguments of learned Counsel for the asses-sees that disallowance of expenditure under Section 40A(3) would amount to violation of article 265 of the Constitution of India.
Now we come to interpretation of Section 40A(3). It has been contended by learned Counsel Sri S.K. Tulsiyan that Section 40A(3) was introduced by the Finance Act, 1968 with effect from April 1, 1968. He referred to the memorandum explaining the provisions in the Finance Bill, 1968 and pointed out that the purpose of introduction of Section 40A(3) was to curb wasteful or lavish expenditure in the business or profession and to counter tax evasion. He also referred to Circular No. 6P dated July 6, 1968 and specifically drew our attention to the following portion of the said circular: This provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the Department as to the ^ identity of the payee and reasonableness of the payment.
50. In the light of above submission it was claimed by him that section should be interpreted in a manner which fulfils the object for which Section 40A(3) was introduced and should not be interpreted in a manner by which a genuine business expenditure, where the identity of the payee is also established, can be disallowed. In contrast, it was claimed by the Revenue that the language of Section 40A(3) is clear and unambiguous and, therefore, the same should be interpreted literally.
We have carefully considered the rival submissions of the parties. We find the hon'ble apex court in the case of CIT v. Tara Agencies [2007] 292 ITR 444 relied upon by the learned Departmental representative, has laid down the rules of interpretation. Their Lordships held as under (head-note): The intention of the Legislature has to be gathered from the language used in the statute, which means that attention should be paid to what has been said as also to what has not been said.
It is the bounden duty and obligation of the court to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the Legislature in its wisdom has deliberately not incorporated.
51. Similarly, their Lordships of the hon'ble apex court in the case of CIT v. Anjum M.H. Ghaswala held as under (headnote): The exercise of purposive interpretation by looking into the object and scheme of the Act and legislative intendment would arise only if the language of the statute is either ambiguous or conflicting or gives a meaning leading to absurdity.
In the light of the above guidelines laid down by the hon'ble apex court, let us examine the provisions of Section 40A(3). From the plain reading of the section itself it is evident that it would be applicable where the assessee incurs any expenditure exceeding Rs. 20,000 otherwise than by a cross cheque or by a crossed bank draft. In such circumstances, 20 per cent, of such expenditure shall be disallowed. In our opinion, there is no ambiguity in the language of Section 40A(3) and, therefore, relying upon the above referred decisions of the hon'ble apex court in the cases of Tarn Agencies [2007] 292 ITR 444 and Anjum M. H. Ghaszvala , we hold that the section is to be interpreted by giving literal meaning to the language used in the section itself.
52. In view of the above, the purpose behind the enactment of Section 40A(3) is not relevant. What is relevant is the enactment itself, i.e., Section 40A(3). The income-tax authorities have to give effect to the section as enacted by Parliament.
Both the parties have relied upon catena of judgments in support of their respective claims. It would be relevant to refer to those decisions. Sri S.K. Tulsiyan, advocate has relied upon the following decisions.
Dismissing the appeal, that, in the present case, the Tribunal was of the opinion that the payee insisted on cash payment as observed by the Commissioner (Appeals) and further that the transactions were found to be genuine. The Tribunal was justified in allowing the expenditure. No substantial question of law arose from its order.
53. We have gone through the entire decision and we find that the assessment year for which the above decision has been delivered has not been given. However, we find that in the first part of the decision of the hon'ble High Court, there is reference to rule 6DD(j) and the Board's circular. From the above it appears that this decision is relevant to the period when rule 6DD(j) was applicable. We may point out that before its omission by the Income-tax (Fourteenth Amendment) Rules, 1995 with effect from July 25, 1995, rule 6DD(j) reads as under: (i) in any other case, where the assessee satisfies the Assessing Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft: (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 Assessing Officer as to the genuineness of the payment and the identity of the payee.
54. The Central Board of Direct Taxes had also issued a circular i.e., Circular No. 220 dated May 31, 1977 ([1977] 108 ITR (St.) 8), in which the circumstances are spelt out in which rule 6DD(j) would be said to be applicable. However, in the appeals for consideration before us, the assessment years involved are the assessment years 2002-03 to 2004-05.
All these assessment years are after the omission of rule 6DD(j).
Therefore, the above decision of the hon'ble Delhi High Court will not be applicable.CIT v. K.S.S.K. Leather Processor P. Ltd. [2007] 292 ITR 669 (Mad).
That the assessee had produced necessary grounds for making cash payment. The Tribunal noted that these payments were made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power.
The Tribunal also noted from the order of the Commissioner, that considering the fact that the purchases were made from the unorganized sector, cash payments were indispensable. The order of the Tribunal with regard to the cash payments was justified.
56. In that case the assessment year involved was the assessment year 2001-02 and, therefore, the ratio of the above decision would be applicable to the appeals under consideration before us. However, we find that in the above case, the Income-tax Appellate Tribunal has found as a matter of fact that the above payments were made to small time vendors who came from the surrounding villages and carried out the process of dressing of skin without the aid of power. The hon'ble High Court taking note of the above mentioned finding of fact by the Income-tax Appellate Tribunal dismissed the Revenue's appeal in limini.
Therefore, it would be necessary to examine the facts of the case under consideration before us whether they are identical to the facts before the hon'ble High Court. We will revert to the facts of the case subsequently after considering all the decisions relied upon by the parties.
That the Tribunal had found that the seller had been insisting on cash payment. The identity of the seller had been disclosed by the assessee. The assessee had furnished the certificates from the sellers stating that they had insisted on cash payment and as to the genuineness of the payments. Hence, the Tribunal was justified in holding that the payments in question were not hit by Section 40A(3) and in deleting the addition of Rs. 65,537.
58. However, we find that the assessment year involved in the above case was the assessment year 1972-73, i.e., prior to omission of rule 6DD(j). Therefore, the above decision would not be applicable to the appeal under consideration before us.
59. In this case, their Lordships of the hon'ble Gauhati High Court held as under (headnote): The Income-tax Officer and the Commissioner of Income-tax (Appeals) had not taken into consideration the Circular No. 220, dated May 31,1977 ([1977] 108 ITR (St.) 8). The Tribunal reached the conclusion without giving any reason whatsoever as to the non-existence of exceptional and unavoidable circumstances. The Tribunal was not justified in law in holding that the disallowances by the Income-tax Officer in respect of cash payment of Rs. 61,200 made on various dates to S was proper.
60. This decision is also for the assessment year 1985-86, i.e., prior to omission of rule 6DD(j).CIT v. Chrome Leather Co. P. Ltd. That the Tribunal took into account the commercial need in keeping cash and referred to the need for keeping cash for making purchases of raw skins from shandies. The Tribunal found that the issue of crossed cheque was not practicable and having regard to the nature of the transaction and necessity for expeditious settlement and nature of the relationship between the payer and payee, it found that the issue of payment by crossed cheque would have caused genuine difficulty to the payee. The Tribunal also found that the identity of the payee was established and the genuineness of the payment was established beyond doubt. The payments made by the assessee were not liable to be disallowed while computing its business income.
61. This decision is for the assessment year 1974-75, i.e., prior to omission of rule 6DD(j) and hence not applicable to the assessment years under appeal before us.
In this case their Lordships of the hon'ble Gujarat High Court held as under (headnote): Held, that the assessee had adopted a peculiar method of maintaining her books of account and having her business transactions and the entire work with regard to payment and collection of money was entrusted to the firm. In such a set of circumstances the firm made payment on behalf of the assessee by account payee cheques. Hence it could not be said that there was any cash transaction or there was any possibility of having chances and opportunities to use or create black money. The amount, which was paid on behalf of the assessee by the firm, was not paid in cash but was paid by way of account payee cheques. This factual position could not be denied on behalf of the Revenue. Such transactions could not be hit by the provisions of Section 40A(3) of the Act. The Income-tax Officer made a mistake in understanding the term 'pay order' and the manner in which the payments were made on behalf of the assessee by the firm. It was nothing but an instruction by the assessee to the firm with regard to making payment on behalf of the assessee. Therefore, the Tribunal was justified in confirming the order passed by the Commissioner (Appeals), whereby the disallowance made by the Income-tax Officer had been deleted.
62. From the above it is evident that in this case the payment was actually made by account payee cheque, though by the firm on behalf of the assessee. Thus in this case no cash payment was involved.
Therefore, this decision was on altogether different facts than the facts in the cases under appeal before us. In none of the cases before us it was claimed by the assessee that the payment was made by cheque.
63. In this case, their Lordships of the hon'ble Gauhati High Court held as under (headnote): Held, that the reason indicated by the assessee regarding its financial stringency compelling it to make payment in cash, was accepted. The majority of the transactions in which payments were made for more than Rs. 2,500 was accepted. The circumstances in respect of the transactions were obviously the same except the distinction which had been indicated by the Assessing Officer to the effect that in some of the transactions the name of the payee was not indicated in the vouchers. The Commissioner of Income-tax (Appeals) held in his appellate order that he had examined each and every voucher submitted by the assessee and it was found that each voucher disclosed the name of the payee. The Tribunal had not upset the finding of the Commissioner of Income-tax (Appeals). Hence the payments made by the assessee in cash exceeding Rs. 2,500 could not be disallowed.
64. This decision is for the assessment years 1987-88 and 1988-89, i.e., prior to omission of rule 6DD(j) and hence not applicable to the assessment years under appeal before us.
The object of Section 40A(3) is to check evasion of tax and 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 Central Board of Direct Taxes (No. 220, dated May 31,1977 ([1977] 108 ITR (St.) 8)) is illustrative and not exhaustive 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 discretion either in favour or against the assessee.
Where the Tribunal had found that the assessee's business was new and the transactions were genuine but there was a time-lag between the dates of the bills and the dates of the payments: Held, that the disallowance of the payments in terms of Section 40A(3) of the Income-tax Act, 1961, was not justified.
65. This decision of the hon'ble Calcutta High Court is also for the assessment year 1975-76, i.e., prior to omission of rule 6DD(j) and, therefore, the same is not applicable to the assessment years involved in the appeals before us.
In this case, their Lordships of the hon'ble Calcutta High Court held as under: We have heard learned Counsel for the appellant. Perused the order passed by the Tribunal. We find, that no substantial question of law is involved in this matter. Hence this appeal being I. T. A. No. 386 of 2007 is dismissed.
66. Thus the hon'ble jurisdictional High Court has approved the order of the Income-tax Appellate Tribunal by dismissing the Revenue's appeal, holding that no substantial question of law arises. Therefore, it would be relevant to refer the decision of the Income-tax Appellate Tribunal, which is approved by their Lordships. The Income-tax Appellate Tribunal in the said case, i.e., Sri Basudev Seth v. ITO vide I.T.A. No. 1460 (Kol)/2006 held as under: Heard both the parties, perused the record and find force in the contention of the assessee that he has to make this cash payment to M/s. B.S.K.F3.S Ltd. out of business expediency in view of the fact that there was no branch of United Bank of India at the place where the business of the assessee is located. The assessee's case also finds support from the above mentioned decision in the case of ITO v. Shri Binod Kr. Aganuala decided by the hon'ble Income-tax Appellate Tribunal, Kolkata. We are therefore, of the opinion that the addition made by the Assessing Officer under Section 40A(3) of the Income-tax Act 1961 was not justified in the instant case.
67. From the above it is evident that the Income-tax Appellate Tribunal arrived at the conclusion that Section 40A(3) is not applicable because there was no branch of the United Bank of India at the place where the business of the assessee is located. Though in the order it is not mentioned which specific clause of rule 6DD was applicable, yet inference to Clause (h) which still exempt cash payment at a place not served by a bank can explain the decision. Rule 6DD(h) provides: (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; 68. Moreover in the abovementioned decision the Income-tax Appellate Tribunal has not held that the assessee would be entitled to relief even if the assessee's case does not fall in any of the clauses of rule 6DD by virtue of the second proviso to Section 40A(3). On the facts of the particular case, the Income-tax Appellate Tribunal held that Section 40A(3) is not applicable. The facts in all the cases under appeal before us are different, because the payment is made in Kolkata where there are sufficient banking facilities. Therefore, the above decision of the Income-tax Appellate Tribunal, Kolkata "C" Bench, which is approved by the hon'ble jurisdictional High Court, would not be applicable to the facts of the cases under appeal before us.
The cases relied upon by the learned Departmental representative before us are as under: Their Lordships of the hon'ble Calcutta High Court in the aforesaid case held as under (headnote): That cash payment of Rs. 65,000 had been made. The Commissioner of Income-tax (Appeals) as well as the Tribunal had found that the assessee had not shown compelling circumstances under which he had made the payment in cash. Therefore, the amount had been rightly disallowed.
70. In this case, it has been held by their Lordships of the hon'ble Kerala High Court as under (headnote): Dismissing the appeal, that the order of the Assessing Officer and the appellate authorities showed that in many cases details of payees and transactions were not furnished and in cases where payees' addresses were furnished, notices were sent by the Department. But the notices were returned by the postal authorities stating that such parties did not exist or with endorsement that the addressees were not known. In fact there was no necessity for the Department to try to trace the addresses of the suppliers to whom payments were made. It was for the assessee to produce evidence including the addresses of the suppliers and to establish that the case fell under the exception clause. The findings by the authorities were purely on the facts. The claim of exception under rule 6DD(j) was not applicable as the suppliers to whom payments were made were well established business concerns and the payments were worth lakhs of rupees. Therefore, the assessee was not entitled to benefit under rule 6DD(j).Nahgi Lal v. CIT 71. Their Lordships of the Rajasthan High Court in the said case held as under (headnote): That the facts showed that the payments had been made six or seven days after the transactions. There was no evidence of any exceptional or unavoidable circumstance necessitating payments otherwise than by crossed cheque. The case of the assessee was not also covered by any of the circulars issued by the Central Board of Direct Taxes. Hence, the payments in sums exceeding Rs. 2,500 made for the purchases were hit by the provisions of Sub-section (3) of Section 40A of the Act and, as such, such amounts were rightly added to the total income of the assessee in terms of the said section.
That since the assessee had ample opportunity to make payment by crossed cheque or crossed bank draft and need not have waited till the demand was made for payment, there was no exceptional or unavoidable circumstance which justified a non-compliance with the provisions of Section 40A(3) and the disallowance of the sum of Rs. 28,231 was justified.
73. We find that all the above four decisions relied upon by the learned Departmental representative were prior to omission of rule 6DD(j). However, despite the existence of rule 6DD(j), their Lordships of the various High Courts after considering the facts of the case in appeal before them have come to the conclusion that the conditions specified in rule 6DD(j) have not been satisfied. However, in the appeals under consideration before us, the assessment years involved are after the omission of rule 6DD(j). Therefore, these decisions cannot be said to be applicable. (v) CIT v. Pehlaj Rai Daryanmal .
74. In this case, their Lordships of the Allahabad High Court held as under (headnote): The idea in enacting Clause (f) of rule 6DD of the Income-tax Rules, 1962, was that since the cultivators, growers or producers of agricultural or forest produce, produce of animal husbandry, fish or fish products are mostly residents of rural areas not used to banking systems or not having bank accounts, the requirement of Sub-section (3) of Section 40A would be impracticable and would lead to difficulties in its application. The idea could never have been to exempt all payments in respect of purchase of forest or other produce and products mentioned in Sub-clauses (i) to (iii) of Clause (f) of rule 6DD from whomsoever they are purchased. The words 'cultivator, grower or producer', occurring at the end of rule 6DD(f) qualify the words occurring in all the preceding four sub-clauses and not only subclause (iv). The exemption is confined to payment to grower or producer of forest produce.
75. Though this decision is also for the assessment year 1970-71, however, in this case, their Lordships of the hon'ble Allahabad High Court has considered the applicability of rule 6DD(f) which still exists and in some of the cases before us the parties have claimed that rule 6DD(f) is squarely applicable. Therefore, this decision would be directly applicable while dealing with the cases wherein rule 6DD(f) is claimed to be applicable. We will revert back to this decision when we discuss the facts of the cases wherein applicability of rule 6DD(f) is claimed.
76. While referring to the second proviso to Section 40A(3), it has been claimed by learned Counsel that this proviso provides certain exceptions where Section 40A(3) is not applicable. The exemption from applicability of Section 40A(3) is to be allowed having regard to the (i) nature and extent of banking facilities available, (ii) consideration of business expediency, and (iii) other relevant factors.
He stated that the second proviso to Section 40A(3) is a substantive provision of the law, full effect to which should be given.
77. Therefore, even if the facts of the case of an assessee are not squardly covered by any of the clauses of rule 6DD, still the exemption from the rigor of Section 40A(3) can be allowed in view of the provisions of the second proviso to Section 40A(3). We are unable to agree with the contention of learned Counsel. At the cost of repetition we reproduce the second proviso to Section 40A(3) hereinunder Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee 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.
78. From the above, it is evident that no disallowance under this sub-section shall be made where any payment in a sum exceeding Rs. 20,000 is made otherwise than by a crossed cheque/crossed bank draft in such cases and under such circumstances as may be prescribed. Thus, the mandate of the proviso is to exempt the payment in violation of provisions of Section 40A(3) in such cases and under such circumstances as may be prescribed. The last sentence of the proviso, i.e., "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors", is the guideline for the authority who has to prescribe the cases and circumstances under which the disallowance under Section 40A(3) will not be made despite the payment exceeding Rs. 20,000 other than by cross cheque/bank draft.
79. In pursuance to this proviso, rule 6DD has been brought into the statute vide the Income-tax (Amendment) Rules, 1969 with effect from April 1, 1969. Rule 6DD prescribes the cases and the circumstances in which payment in a sum exceeding Rs. 20,000 may be made otherwise than by crossed cheque drawn on a bank or a crossed bank draft. Thereafter this rule has been amended from time to time. Rule 6DD, as applicable to the assessment years involved in the appeals before us, reads as under: 6DD. Cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by 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 twenty 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: (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) ; (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) ; (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 ; (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 ; (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming ; or 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) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of Section 192 of the Act, and when such employee: (A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship ; and (B) does not maintain any account in any bank at such place or ship ; (k) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike ; (l) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.
(m) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.
Explanation.-For the purpose of this clause, the expression authorised dealer' or 'money changer' means a person authorised as an authorised dealer or money changer to deal in foreign currency or foreign exchange under any law for the time being in force.
80. In view of the above, in our opinion, the assessee will get the exemption from the rigours of Section 40A(3) if he is able to establish that his case falls within any of the clauses of (a) to (m) of rule 6DD. The burden would be upon the assessee to establish under which particular clause his case falls.
Now we revert back to the facts of each case. First we will take up I.T. A. No. 1545 (Kol)/2007. i.e., ITO v. Kenaram Saha & Subhash Saha.
The assessee is an AOP which is a big dealer in the chain of agents involved in the public distribution system for supply of kerosene oil within the State of West Bengal. During the year under consideration the assessee made the payment of Rs. 1,34,58,430 for purchase of kerosene oil in cash exceeding Rs. 20,000. As per the Assessing Officer, the payment was in violation of the provisions of Section 40A(3). He, therefore, disallowed 20 per cent, of the payment made by the assesse.
81. Accordingly, the disallowance was worked out at Rs. 26,91,680. On appeal, the Commissioner of Income-tax (Appeals) deleted the disallowance holding that the assessee's case is covered under rule 6DD(k) as well as rule 6DD(1) of the Income-tax Rules. Before us the assessee's learned Counsel further claimed that the case of the assessee is also covered by rule 6DD(b). However, on perusal of the orders of the authorities below we find that before the Assessing Officer the assessee did not make a specific claim under which clause of rule 6DD its case falls. The claim was that the purchase was made from the Government. The assessee's explanation before the Assessing Officer was of general nature explaining the manner in which the business is being carried on by it.
82. The Commissioner of Income-tax (Appeals) has mentioned that the assessee's case falls within rule 6DD(k) and also alternatively under rule 6DD(1). We find that rule 6DD(k) would be applicable where the payment was required to be made on a date on which the banks were closed either on account of holiday or strike. Therefore, it would be a matter of factual verification with reference to each payment whether the payment was made on bank holiday or not. The date-wise details of the payments and whether on those dates it was bank holiday or not has not been placed before us. Therefore, we are unable to give any finding whether rule 6DD(k) is applicable in the case of the assessee.
83. Rule 6DD(1) would be applicable where the payment is made by any person to his agent, who is required to make the payment in cash for goods or services on behalf of such person. Whereas rule 6DD(b) would be applicable "where the payment is made to Government and, under the rules framed by it, such payment is required to be made in legal tender." It was claimed by the assessee that as per the public distribution system in the State of West Bengal, there is a chain of persons as follows-"agent - big dealer - M.R. dealers.
84. The assessee purchases kerosene oil from the agent appointed by the Government of West Bengal and the assessee supplies kerosene oil to the M.R. dealers. However, whether the "agent" to whom the payment is made by the assessee can be said to be agent of the assessee within the meaning of Clause (1) of rule 6DD is an important question, because rule 6DD0) would be applicable only where the payment is made by the assessee to his agent. While claiming exemption under rule 6DD(b), it was claimed by the assessee that the agent is the representative of the Government of West Bengal and, therefore, payment made to the agent being representative of the Government of West Bengal is a payment to the Government of West Bengal.
85. However, as we have noted, no such claim was made by the assessee before the Assessing Officer. It was also stated by the learned Departmental representative that the necessary facts are not available on record to examine the contention of the assessee that its case falls within Clauses (k), (1) or (b) of rule 6DD. We agree with the learned Departmental representative. The claim of the assessee would require examination of the facts with reference to the books of account so as to ascertain on which particular date payment was made and whether such date was bank holiday or not so as to ascertain the applicability of rule 6DD(k). With regard to applicability of rule 6DD(1) and rule 6DD(b) also further facts are required to be examined .
86. Learned Counsel for the assessee has given the copy of the supply order issued by the sub-divisional controller, food and supplies, Jangipur giving direction to the assessee to make the payment in cash.
However, it was pointed out by the learned Departmental representative that these supply orders are dated 2007 and, therefore, will not be applicable to the year under consideration. What was the exact direction of the supply order in the accounting year relevant to/the"-, assessment year under consideration would require to be examined.
87. In view of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer with the direction that he will examine the facts of the case afresh and will adjudicate upon the assessee's contention that its case falls under Clauses (b), (k) and (1) of rule 6DD. Needless to mention that he will allow adequate opportunity of being heard to the assessee.
The cross objection, i.e., CO. No. 58/Kol/07 filed by the assessee is only in support of the order of the Commissioner of Income-tax (Appeals). In view of our finding: while disposing of the Revenue's appeal, the cross objection filed by the assessee is also simultaneously disposed of.
88. Now we will take up I. T. A. No. 664 (Kol)/07, i.e., ITO v. Nadeem Iqbal. The assessee is an individual who derives income from trading business in electronic items on wholesale-cum-retail basis. During the accounting year relevant to the assessment year under consideration, the assessee made total cash payment of Rs. 1,09,56,190 exceeding Rs. 20,000. The Assessing Officer applying the provisions of Section 40A(3) disallowed 20 per cent, of the cash payment. Accordingly, the Assessing Officer disallowed the expenditure of Rs. 21,91,238 under Section 40A(3). On appeal, the Commissioner of Income-tax (Appeals) deleted the same. Hence this appeal by the Revenue.
89. We have considered the rival submissions and perused the material placed before us. After hearing both the parties and perusing the order of the Commissioner of Income-tax (Appeals), we find that the Commissioner of Income-tax (Appeals) deleted the disallowance without giving any finding with regard to any specific clause of rule 6DD in which the assessee's case falls. As we have already discussed that once there is payment of any expenditure in violation of Section 40A(3), the assessee can escape the disallowance under the said section only if the assessee's case falls within the ambit of any of the clauses of rule 6DD. The matter was required to be examined whether the assessee's case falls under any specific clause. In this case we find that neither the assessee properly claimed not the Assessing Officer examined the case with reference to the relevant rule.
90. Even before the Commissioner of Income-tax (Appeals) the position did not change. But the arguments of the assessee's counsel were having regard to business expediency, smallness of the assessee's capital, assessee being new to the business, etc. payment in cash was made. At the time of hearing before us, the assessee made a specific claim that the cash payment was made to the agent who in turn was required to make the payment in cash to the seller of such goods. Therefore, the assessee's case falls within the ambit of Clause (1) of rule 6DD and this was the claim before the Revenue authorities. However, this claim has to be examined in accordance with law. In the above circumstances, in our opinion it would meet the ends of justice if the orders of the authorities below on this point are set aside and the matter is restored back to the file of the Assessing Officer with the direction that he will allow adequate opportunity to the assessee to produce the necessary evidence in support of his claim. Thereafter the Assessing Officer will readjudicate the matter in accordance with law and in the light of our observations/findings in this order.
91. The facts of the case and the arguments of the parties in both these cases were identical and, therefore, they are being considered together. Both these assessees derived income from the business of tanning of raw hides to finished leather. During the accounting year relevant to the assessment year under consideration, the assessees made the payments for purchase of raw hides by bearer cheques. Since as per Section 40A(3) payment is required to be made by account payee cheque or account payee bank draft, the Assessing Officer treated the payment by bearer cheques to be in violation of Section 40A(3) and disallowed 20 per cent, of such payment. On appeal, the Commissioner of Income-tax (Appeals) sustained the same. Hence these two appeals by the assessees.
92. At the time of hearing before us, it was claimed by learned Counsels that the payments made by the assessees are covered by rule 6DD(f) as well as by rule 6DD(g). Rule 6DD(f) reads as under: (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; 93. The payment for purchase of hides and skins would be covered by subclause (ii) of Clause (f) being the produce of animal husbandry.
However, as per Clause (f), the payment is to be made to the producer.
At this juncture it would be relevant to again refer the decision of the hon'ble Allahabad High Court in the case of CIT v. Pehlaj Rai Daryanmal relied upon by the learned Departmental representative. In the said case, the hon'ble High Court has considered the applicability of Clause (f) of rule 6DD and held that the words "cultivator, grower or producer", occurring at the end of rule 6DD(f) qualify the words occurring in all the preceding subclauses and not only Sub-clause (iv). In view of this decision of the hon'ble Allahabad High Court, to satisfy the test of rule 6DD(f), not only the payment should be made for purchase of produce of animal husbandry but payment is to be made to the producer of such produce. Though it has been claimed by learned Counsel that the payment has been made to the producer, but no evidence in support of such claim has been brought on record by the assessees.
94. On the other hand, the learned Departmental representative referred to the copy of the sale bills issued by the sellers and pointed out that from the sale bill it is evident that all the sellers are the merchants, i.e., the traders. However, in our opinion, merely because the sellers are the traders or the merchants of hides and skins, that does not mean that they cannot be producer thereof. A person may produce the hide and skin and sell the same. Thus he can have the twin capacities of producer as well as trader thereof. There can be another situation that a person purchases hide and skin produced by others and trade those items, then he will be a trader of hide and skin and will not be covered within rule 6DD(f)(ii). It was contended by learned Counsel for the assessee that as per the meaning of the term "producer" in Bakshi's The Law Lexicon, Volume-2, the word "producer" includes any person who trades or deals in such production. We are unable to accept this contention of learned Counsel.
95. If the word "producer" is to be given such a wide meaning, then there was no necessity of providing the words "to the producer of such article" after rule 6DD(f), because when the payment is made for purchase of an article, the seller is necessarily trader thereof. He may or may not be a producer. Therefore by providing the words "producer of such articles" in rule 6DD(f), the application of rule is being restricted. In respect of payments made only to producer and not to any other person .
96. The learned Departmental representative has relied upon the decision of the hon'ble apex court in the case of CIT v. Tara Agencies [2007] 292 ITR 444 wherein their Lordships considered the meaning of the words "manufacture", "production", "process", etc. In that case the assessee derived income from the business of export of tea. It purchased tea of diverse grades and brands and blended the same by mixing different kinds of tea.
97. The assessee was having a small scale industrial undertaking for the above process of tea. It claimed weighted deduction under Section 35B of the Income-tax Act, 1961. As per Section 35B, weighted deduction was available to a small scale exporter who exports goods manufactured or produced in any small scale industrial undertaking. In this context their Lordships of the apex court examined the meaning of the word "produce". At page 451 of [2007] 292 ITR, their Lordships referred the dictionary meaning of the word "produce" which is as under: In Black's Law Dictionary (5th Edition), the term 'production' has been defined as under: Production. Process or act of producing. That which is produced or made; i.e., goods. Fruit of labor, as the productions of the earth, comprehending all vegetables and fruits ; the productions of intellect, or genius, as poems and prose compositions ; the productions of art, as manufactures of every kind.
The term 'produce', as defined in the New Webster's Dictionary of the English language (Deluxe Encyclopedic Edition), is as follows: Produce, to bring forth into existence ; to bring about; to cause or effect, esp. intellectually or creatively ; to give birth to ; to bear, furnish, yield ; to make accrue ; to bring about the performance of, as a movie or play; to extend, as a line-v.i. to bring forth or yield appropriate offspring, products, or consequences 98. At page 452, again their Lordships dealt with the meaning of the word "produce" as under: The expression 'produced' was given a wider meaning than the word 'manufacture' pointing out that the word 'produced' will include an activity of manufacturing the materials by applying human endeavour on some existing raw material but the word 'produce' may include securing certain produce from natural elements, for example, by growing plants on soil, or by operating mines and the like or for example, by milching the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk.
99. Whether the sellers to whom the assessees made the payments exceeding Rs. 20,000 by way of bearer cheques were producers or not would depend upon the facts of the case of each seller. Before us, the assessee has only produced the sales bills issued by the seller and the transport receipts for transportation of the goods to the assessee's destination. From the sales bill itself it cannot be decided whether the sellers are producers or not. It has been claimed by learned Counsel for the assessee, Sri Gautam Banerjee, that the Assessing Officer had raised the issue of applicability of Section 40A(3) at the fag end of the assessment proceedings in the month of March, 2006 and he did not allow any opportunity to the assessee to produce necessary evidence that the sellers from whom the assessee purchased hides and skins are producers thereof.
100. It was also contended by learned Counsel for the assessees in the above mentioned cases that the assessee's case also falls within Clause (g) of rule 6DD, Clause (g) would be applicable where the payment is made for the purchase of the products manufactured or processed without the aid of power in the cottage industry to the producer of such products.
101. To verify the contention of learned Counsel, we referred to the assessment orders in the cases of both the assessees. In the case of LI Chong Tannery the relevant finding at page 2 of the assessment order reads as under: In the course of hearing on March 13, 2006, the authorised representative Shri Sumantra Guha was requested to show cause why the payments exceeding Rs. 20,000 otherwise than crossed or account payee cheques shall not be disallowed under Section 40A(3) of the Act. The authorised representative vide his written submission dated March 21, 2006, explained the nature of payments under Section 40A(3) which are as follows: Rule 6DD(f)(ii) of the Income-tax Rules stated that 'No disallowance under Section 40A(3) shall be made when any payment exceeding Rs. 20,000 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft where the payment is made for the purchase of the produce of animal husbandry (including hides and skins) to the cultivators, growers or producers of such articles, produces or products.
In the instant case, the payments have been made for the purchase of raw hides and skins to the cultivators, growers or producers of such raw hides and skins (i.e., butchers) and hence the provisions of Section 40A(3) of the Income-tax Act, 1961, will not be applicable for such payments.
The assessee's contentions have been examined but it could not be proved that the parties from whom the purchases of raw hides were made during the year are either cultivators, growers or producers of raw hide and skin related to animal husbandry, dairy or poultry farming. As such, the above payments in excess of rupees twenty thousand to those dealers of skin/hide does not quality for exemption, as per rule 6DD(f) of the Income-tax Rules.
102. From the above it is evident that for the first time on March 13, 2006, the "Assessing Officer asked the assessee to show cause why the payment exceeding Rs. 20,000 otherwise than by crossed or account payee cheque should not be disallowed under Section 40A(3). The assessee furnished its explanation on March 21, 2006, claiming that its case falls within rule 6DD(f)(ii). The Assessing Officer rejected the assessee's contention on the ground that the assessee could not prove that the parties, to whom the payment had been made, were either cultivators, growers or producers of raw hides and skins.
103. However, it is evident that the Assessing Officer did not allow any opportunity whatsoever to the assessee to lead necessary evidence in support of its contention that the persons from whom hides and skins were purchased were the producers thereof. The Commissioner of Income-tax (Appeals) has discussed the legal aspects of the issue at length, but the factual matrix of the case has not been examined even at his end. In view of the above, we set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer and direct him to allow adequate opportunity to the assessee to produce necessary evidence in support of its contention. Thereafter he will readjudicate the issue in accordance with law and in the light of our observations/ findings in this order.
104. We may further mention that the facts in the case of Chong Hing Tannery are more or less identical because in this case also the query was raised sometime in March, 2006 and the assessee furnished reply on March 21, 2006 and March 30, 2006. More or less similar explanation was given by the assessee and the Assessing Officer rejected the assessee's claim without allowing opportunity to the assessee to produce necessary evidence in support of its claim. Therefore, for the detailed discussions in the case of LI Chong Tannery, we set aside the orders of the authorities below in the case of Chong Hing Tannery also on this point and restore the matter back to the file of the Assessing Officer to readjudicate the issue as per our direction above.
105. Learned Counsel for the assessee had also raised an additional ground in both the above cases which was with regard to computation of deduction under Section 80HHC. The additional ground is admitted by us vide our finding in paragraph 3.1 above. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that at the end of Section 80HHC, there is Explanation which defines several terms used in Section 80HHC. Explanation (baa) defines the words "profits of the business", which reads as under: (baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession as reduced by: (1) ninety per cent, of any sum referred to in Clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India; 106. From the above it is evident that profits of business for the purpose of Section 80HHC means the profits of business as computed under the head "Profits and gains of business or profession". Section 29 of the Income-tax Act provides that profits and gains of business shall be computed in accordance with the provisions contained in Sections 30 to 43D of the Income-tax Act. Thus, whatever is the profits and gains of the business as computed by the Assessing Officer under the head "Profits and gains of business or profession", should be taken as profits of the business for the purpose of computation of deduction under Section 80HHC. We, therefore, direct the Assessing Officer to recompute the deduction under Section 80HHC as per our observation above.
107. Now coming to the case of Paramount Leathers vide I. T. A. No. 826 (Kol)/07, which is a Departmental appeal, Sri S. Bandyopadhyay appeared as an intervener. He submitted that considering the facts of the assessee's case. Rule 6DD(f) as well as rule 6DD(g) both would be applicable in the case of the assessee. We find that the facts in the case of M/s. Paramount Leathers are also similar to the facts in the case of M/s. LI Chong Tannery discussed above. In the case of M/s.
Paramount Leathers also, the Assessing Officer vide letter dated March 13, 2006 asked the assessee to show-cause as to why disallowance under Section 40A(3) should not be made.
108. The assessee furnished the written submissions dated March 20, 2006 claiming that the payments were made to the producers of hides and skins and, therefore, rule 6DD was applicable. The Assessing Officer rejected the assessee's explanation without allowing any opportunity to the assessee to produce evidence in support of its contention. The facts being similar to M/s. LI Chong Tannery, for the detailed discussions in paragraphs 20 to 20.3 above we are of the opinion that the matter in this case also needs to be re-examined at the end of the Assessing Officer as per our direction in the case of LI Chong Tannery.
109. However, in the case of this assessee, other issues are also involved and, therefore, this Departmental appeal will now be placed before the Division Bench for consideration and adjudication of the other issues. The issue with regard to disallowance under Section 40A(3) is to be restored back to the file of the Assessing Officer to be readjudicated upon as per our observation/direction above.
110. Sri Somnath Ghosh appeared as an intervener in the case of Mrinal Ghosh vide I, T. A. No. 2375 (Kol)/07. According to him the assessee's case falls under rule 6DD(k) and rule 6DD(h). We find that during the accounting year relevant to the assessment year under consideration, the assessee made two cash payments exceeding Rs. 20,000 at a time. The first payment was made on April 30, 2000 amounting to Rs. 36,000 and the second payment on June 16, 2000 amounting to Rs. 34,000. The assessee has produced before us the xerox copy of the calendar of the year 2000 and we find that April 30, 2000 was a Sunday, i.e., bank holiday.
111. Therefore, the payment made on April 30, 2000 will squarely fall within Clause (k) of rule 6DD. With regard to other payment made on June 16, 2000, it was contended by the assessee that the payment was made to the decorator who did not have the bank account at the relevant time and, therefore, the assessee's case would fall within the ambit of Clause (h) of rule 6DD. We find, that Clause (h) of rule 6DD reads as under: (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; 112. From the above it is evident that where the payment is made in a village or town which is not served by any bank, then only the conditions of the above clause would be satisfied. In the case before us, the Assessing Officer has recorded the finding that the decorator is of locality of Chinsurah, Dist. Hooghly having full banking facilities. The above finding of fact recorded by the Assessing Officer has not been controverted before us by learned Counsel. He has not claimed that the place where the payment is made does not have the banking facility.
113. But his claim is that the person to whom he made the payment did not have bank account at the relevant time. In our opinion, if the place where the recipient resides or carries on business is having banking facility, conditions of rule 6DD(h) would not be satisfied merely because the recipient has not opened his bank account. In view of the above, we reject the assessee's claim with regard to applicability of rule 6DD(h) in respect of payment of Rs. 34,000 on June 16, 2000. In this appeal, other issues are involved. Therefore, the matter will be placed before the Division Bench for consideration and adjudication of other issues.
114. Now coming to the Departmental appeal in the case of Sri Shyamal Kr. Dey vide I. T. A. No. 1772 (Kol)/2007, the Assessing Officer has determined the income by applying a net profit rate of the turnover.
The Assessing Officer in addition to the determination of net profit as a percentage of turnover, made further disallowance under Section 40A(3). The Commissioner of Income-tax (Appeals) deleted the disallowance made under Section 40A(3). The Revenue aggrieved with the order of the Commissioner of Income-tax (Appeals) is in appeal before us. It is contended by learned Counsel that once a net profit rate is applied, no further addition/disallowance can be made under Section 40A(3). In support of this contention, he has relied upon the decision of the hon'ble Allahabad High Court in the case of CIT v. Banwari Lal Banshidhar in which their Lordships held as under (headnote): affirming the decision of the Tribunal, that no disallowance could be made in view of the provisions of Section 40A(3) read with rule 6DD(j) of the Income-tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases made by the assessee.
115. The above decision of the hon'ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of the hon'ble Allahabad High Court hold that the Commissioner of Income-tax (Appeals) was justified in deleting the disallowance under Section 40A(3) made by the Assessing Officer. Accordingly, we uphold the order of the Commissioner of Income-tax (Appeals) and dismiss the Revenue's appeal.
(i) ITO v. Keneram Saha and Subhash Saha I.T.A. No. 1545/K/07 CO No. 58/K/07; and All the aforesaid Revenue's appeal and C.O. of the assessee are allowed for statistical purposes.
The aforesaid appeals of the assessees allowed for statistical purposes.