Sharma Associates Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. these appeals by the assessee are consolidated and disposed of by a common order as both the appeals were heard together and relate to the same assessee and also involve one common point.2. these appeals pertain to the assessment years 1989-90 and 1990-91 and arise out of the consolidated order of the commissioner of income-tax (appeals)-i, pune, dated october 12, 1992, wherein he dismissed both the appeals filed by the assessee. the assessee has taken separate grounds in respect of the assessment years 1989-90 and 1990-91, to urge that the commissioner of income-tax (appeals) erred in his decision and the various additions confirmed should be deleted.3. as per the statement of facts furnished by the assessee, the assessee-firm is carrying on business of promoters and builders since.....

Judgment:
1. These appeals by the assessee are consolidated and disposed of by a common order as both the appeals were heard together and relate to the same assessee and also involve one common point.

2. These appeals pertain to the assessment years 1989-90 and 1990-91 and arise out of the consolidated order of the Commissioner of Income-tax (Appeals)-I, Pune, dated October 12, 1992, wherein he dismissed both the appeals filed by the assessee. The assessee has taken separate grounds in respect of the assessment years 1989-90 and 1990-91, to urge that the Commissioner of Income-tax (Appeals) erred in his decision and the various additions confirmed should be deleted.

3. As per the statement of facts furnished by the assessee, the assessee-firm is carrying on business of promoters and builders since 1984. It follows the financial year as the previous year and the method of accounting followed by the assessee has not been stated in the assessment orders. For the assessment year 1989-90, it filed the return of income on March 23, 1990, declaring a total income of Rs. 13,00,783, but the Assessing Officer has computed the total income at Rs. 16,42,140 after making certain additions. For the assessment year 1990-91, the assessee filed the return of income on December 31, 1990, declaring an income of Rs. 3,69,880, but the Assessing Officer determined the total income at Rs. 25,74,110 after making certain additions. These additions were sustained by the Commissioner of Income-tax (Appeals) by his consolidated order dated October 12, 1992.

4. At the time of hearing, learned counsel for the assessee, Shri K.A.Sathe, and the learned Departmental Representative, Shri Gautam Kar, have been heard at great length and the paper compilations filed by them in the course of arguments have also been duly considered.

5. The common point involved in these appeals relates to taxability of certain deposits received by the assessee, such as deposit for installation of transformer, stamp duty, water development, M. S. E. B.and formation of society, from the flat purchasers. Such deposits collected amounted to Rs. 2,64,766 for the assessment year 1989-90 and Rs. 1,99,127 for the assessment year 1990-91. According to the assessee, as seen from the statement of facts, "that these amounts are collected in advance because the flat owners are likely to avoid payment once the flat is ready and possession is given. As a builder it is the responsibility to make payment to M. S. E. B. for installation of a transformer. The corporation also requires deposits for water connection lines. The stamp duty is payable by each of the flat holders to complete his title. Thus, all these payments are to the Government or Government agencies. The Maharashtra Ownership Flats Act, 1963, makes it obligatory under Section 10 for the promoter to take steps for formation of a co-operative society. Since we collect these amounts as promoters there is an overriding obligation on us by which the amounts are bound to be spent for the purpose for which they are collected. It is also submitted that since the credit to deposit account was not considered by us as our trading receipt, we did not debit the expenditure allowable".

6. However, the Assessing Officer treated the deposits collected as trading receipts as per directions under Section 144A given by the Deputy Commissioner of Income-tax, Pune Range-I, Pune, dated March 4, 1992. According to the Deputy Commissioner of Income-tax, it is the, flat purchasers who have paid the deposits and that too by virtue of an agreement entered into with them by the assessee. Therefore, these receipts partake of the character of trading receipts in the light of the decision of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. Therefore, these receipts were required to be taxed in the year of accrual of receipt, but deduction would be allowed as and when the liabilities were incurred. On the basis of this conclusion, he has directed the Assessing Officer to tax the receipts on receipt basis and allow deduction when expenses were incurred. Accordingly, the Assessing Officer subjected the aforesaid deposits as trading receipts and made additions to the incomes returned.

7. On appeal by the assessee, the Commissioner of Income-tax (Appeals) observed with reference to the model agreement that what the assessee collected were nothing but amounts under various heads by virtue of the agreement to sell the flats. The assessee's business is to construct and sell flats. Therefore, he concluded that besides the actual sale price, which the assessee is showing towards flats, it also received certain other amounts under various heads and the flat holder was under contractual obligation to pay these amounts. He also made an observation that the flat holder had no real option but to pay these amounts to the builder. Therefore, he agreed with the conclusion of the authorities that these amounts collected were nothing but trading receipts in the light of the judgment of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. The Commissioner of Income-tax (Appeals) also noted the fact that the assessee had not incurred any expenditure for the purpose for which the amounts were collected and there was also no obligation on the part of the assessee to refund these amounts to the persons concerned, but to transfer the balance amount to the co-operative society of flat holders as and when it would be formed. In view of this fact, he relied on the ratio of the Supreme Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, wherein the Supreme Court held that the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions. The Commissioner of Income-tax (Appeals) also rejected the contention of the assessee that as the amounts have been collected against particular liability, provision for such liability made in the profit and loss account should be allowed as a set-off because the provision would be without any basis and the provision as such could not be allowed as an expenditure, unless expenditure is incurred by it. As the assessee had not incurred any expenditure out of the deposits collected, deduction would not be admissible either. He further elaborated that the deposits were received in the course of the business carried on by the assessee and the assessee, was under no obligation to return these amounts immediately on handing over possession of the flats which would mean the assessee is entitled to keep these amounts indefinitely and that too without making any expenditure for the specific purpose for which they were collected. He also pointed out that there were certain non-refundable amounts and thus the amounts could not be called deposits. The ratio of the Supreme Court in the case of Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 was pressed into service to support his view. He pointed out that the amounts Were neither spent nor refunded. The principle of agency also did not apply as the amounts were received as trader in flats. The amounts were also not kept in bank accounts separately but were made use of in the business. Even the ratio of the Supreme Court in the case of CIT v.Sitaldas Tirathdas [1961] 41 ITR 367 did not apply because no expenditure has been incurred for the purposes for which the deposits were received. Even the decision of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 would not apply because in that case the assessee laid evidence before the income-tax authority regarding the estimated expenditure and that was not disputed by the Department. In the case of the assessee, the assessee has not at all incurred any expenditure and was also unable to quantify such expenditure with any precision and even otherwise. Such liability for incurring expenditure would be a contingent liability depending upon the happening of certain things. For all these reasons, the Commissioner of Income-tax (Appeals) concurred with the conclusion of the authorities that the amounts collected were trading receipts. He also concluded that in view of the fact that there was no time-limit fixed to return these amounts or to complete incurring of expenditure, there was no obligation at all to refund these amounts to the flat holders. He also pointed out the fact that in certain circumstances, these amounts had to be repaid did not alter the nature of the trading receipts. Accordingly, he confirmed the additions made by the authorities.

8. Shri K.A. Sathe, learned counsel for the assessee, has been heard at great length. He has reiterated the same arguments as were urged before the Commissioner of Income-tax (Appeals) and the Assessing Officer. He referred to Clauses 15 and 16 of the model agreement entered into by the assessee with the flat holders which read as under : "15. The purchaser hereby agrees to deposit an amount of Rs. 4,000 with the vendors towards the due performance of the terms and conditions of this agreement in respect of the said outgoings. The said deposit after deducting therefrom the arrears of taxes and/or expenses mentioned hereinabove and the expenses for the formation of co-operative housing society of flat-takers will be refunded by the vendor to the co-operative housing society of flat-takers when it is formed and when the entire property is finally transferred to it by the vendors.

16. The purchaser hereby agrees to contribute and pay his proportionate share towards the costs, expenses, and outgoings in respect of the matters specified in this agreement. The purchaser shall be responsible for additional municipal, taxes that may be levied by reason of any permitted tenancy or leave and licence agreement in respect of the flat allotted to the purchaser and the purchaser shall not give his flat allotted to the purchaser on leave and licence or on tenancy before the formation and registration of the co-operative housing society of flat-takers." 9. Referring to the aforesaid clauses, learned counsel for the assessee contended that the various amounts were collected by the assessee as agents for the flat purchasers in the same way as Tollygunge Club Ltd.'s case [1977] 107 ITR 776 (SC) had collected surcharge from every race-goer for and on behalf of charity. He has also contended that inasmuch as the assessee has followed the mercantile method of accounting, the ratio of the Supreme Court in the case of Calcutta Co, Ltd. v. CIT [1959] 37 ITR I would also be applicable and, therefore, its held in that case, the liability to pay the amounts collected to the various State authorities should also be allowed as accrued liability. In the course of the arguments, the following propositions were advocated by him, viz., (1) the amounts collected were to meet not the assessee's liability but the flat purchasers' liability and, therefore, the principle of agency applied. For the same reason, the judgment of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd v. CIT [1973] 87 ITR 542 could be distinguished. The ratio of the Supreme Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 could also be distinguished from the facts of the assessee's case, inasmuch as in that case, non-refundable deposits collected by the co-operative society were intended to meet its own long-term liabilities whereas in the case of the assessee, the deposits were collected to meet the liability of the flat purchasers.

In this view of the matter, therefore, the ratio of the Supreme Court in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 would apply with the result the deposits collected ceased to accrue to the assessee as trading receipts. He has also made a reference to the commentary given by the authors Chaturvedi and Pithisaria in their book on Income Tax Law (Fourth edition), Vol. 1, at page 961, wherein it has, been stated that "where the collecting person is merely an agent for somebody else, the collections are made by him in a fiduciary capacity.

These cannot be included in the agent's income as his trading receipts". He also relied on the decision of the Bombay High Court in the case of CIT v. Tanubai D. Desai [1972] 84 ITR 713 for the proposition that excess collection made by a solicitor was in a fiduciary capacity only. Another proposition canvassed was that the deposits collected by the assessee were like surcharge collected for charity by the Tollygunge Club Ltd.'s case [1977] 107 ITR 776, wherein the Supreme Court held that the amount of surcharge got diverted by an overriding title for the purpose of charity for which it was collected.

The ratio of the Supreme Court in the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 was also relied upon for the proposition that the deposits collected by the assessee were in the nature of dharmada collected in that case during the course of trade and that the dharmada was received and held under obligation to spend for charitable purposes only with the result that those amounts were not its trading receipts. The Supreme Court also held that the accounts collected as dharmada were not the price of goods purchased by the customers. The Supreme Court pointed out that dharmada was not a part of the price, but a payment for the specific purpose of being spent on charitable purposes. Shri Sathe also urged that the Commissioner of Income-tax (Appeals) was not correct in observing that the liability for incurring expenditure was contingent in nature and in that, he has not properly appreciated the ratio of the Supreme Court in the case of Calcutta Co.

Ltd, v. CFT [1959] 37 ITR 1, 10. The learned Departmental Representative, on the other hand, vehemently supported the orders of the assessing authority and the appellate authority. On his part, he stated that the flat buyers want fully constructed flats only and not partly constructed flats and then run after various departments. The assessee also did not produce the terms and conditions of the payment between the builder and the State authorities. No individual flat owner could instal a transformer separately for his flat. Splitting of the cost of a flat into cost of flat and cost of deposits would not change the character of the receipt because the development of the project itself involves bringing out of water, electricity, etc. Till the builder handed over the transformer to the society, the transformer would be in his name. The various deposits roughly amounting to Rs. 7,000 per flat amounted to cost of flat only. These amounts were also not kept in a bank account separately nor spent for the specific purpose for which they were collected. For all these reasons, the amounts became part and parcel of the trading receipts of the assessee. Referring to the alternative argument of learned counsel for the assessee, he vehemently contended that the liability as such could not be allowed as a deduction because the actual payment would be much less than the deposits collected. For the balance amount claimed to have been transferred to the society after formation of the society there is no evidence to support and, therefore, it was only an argument in the air. In this connection, he has relied on the judgment of the Supreme Court in the case of Calcutta Co. Ltd, v. CIT [1959] 37 ITR 1 to distinguish the case laws relied upon by learned counsel of the assessee. According to him, the alleged liability was not quantified and no provision was also made in the profit and loss account for such liability. He has referred to the judgment of the Supreme Court in the case of Kedarnath Jute Mfg. Co.

Ltd. v. CIT [1971] 82 ITR 363, wherein the liability for sales tax was quantified and provided in the profit and loss account and also claimed as liability unlike in the case of the assessee. Therefore, he urged that the deposits collected formed part of the trading receipts. He also pointed out that there is no specific mention in the agreement for alleged transfer of unutilised amounts to the society when it is formed. He referred to the decision of the Tribunal, Special Bench, in the case of Shri Chatrapati Sahakari Sakhar Karkhana Ltd. v. Dy. CIT [1992] 198 ITR (AT) 78 (Pune) [SB], wherein it has been observed that various deductions made from the sale price of sugarcane were made under the directions of the Sugar Directorate, but no such direction is contained here. Even the balance amounts collected but remaining unutilised formed part of receipts of the assessee for which the decision of the Supreme Court in the case of Punjab Distilling Industries Ltd. V. CIT [1959] 35 ITR 519 was relied upon.

11. We have duly considered the rival submissions and verified the relevant portion of the model agreement and the paper compilation filed by the assessee. The authorities have proceeded on the basis that the various amounts collected were nothing but trading receipts. The case of the assessee was that notwithstanding the fact that these amounts were collected during the course of business none the less there was a liability to be incurred by the assessee as agent for and on behalf of the various flat purchasers. At once, we have to agree with the contention of the assessee because it is a universal fact that every independent house builder has to incur various expenditure in order to obtain water, sanitary, electric connections and also to perfect the title by paying stamp duty or municipal taxes. In other words, these amounts were payable to various State Government authorities for obtaining specific services for the house property. In the case of the assessee, no doubt these various amounts were collected under agreement entered into by the assessee with the flat purchasers in the normal course of business, but the destination of such payments is towards various authorities to whom payments are to be made. It is immaterial whether the amounts have been incurred immediately or after some time and the assessee had the benefit of user of these funds pollected. As a builder, it is the responsibility of the assessee to make payments to M.S.E.B. for installation of transformer in order to regulate the required amount of electricity for domestic consumption which is not practicable or feasible otherwise individually by the flat purchasers.

The assessee is also a promoter besides being a builder. The Maharashtra Ownership Flats Act, 1963, makes it obligatory under Section 10 for the promoter to take steps for formation of a co-operative society or company. The corporation also requires deposits for water connection, electricity, etc. Stamp duty is payable by each flat holder to complete his title. Thus the various payments have been collected for providing essential supply of services and towards legal payments for completing the title and it is in fact the liability of the proposed co-operative society which has been discharged by the assessee as a promoter. Therefore, though the amounts were collected from the flat purchasers in the normal course of business of flat building and selling, they were received in a different capacity as promoter and, consequently, they could not constitute trading receipts in the same way as surcharge collected in the case of Tollygunge Club Ltd. [1977] 107 ITR 776 (SC) and dharmada collected in the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 (SC). In fact, the assessee has maintained a separate account in respect of the various deposits collected and the accounts were debited as and when the amounts were incurred. If the assessee fails to spend them for the purpose for which they were collected, a civil or criminal suit could be filed for breach of trust or for cheating and the assessee would face severe consequences. In fact, under Section 5 of the Maharashtra Ownership Flats Act, the promoter is required to maintain separate account of sums taken as advance or deposit and to be trustee therefor and disburse them for the purpose for which they were given. Clause 19 of the model agreement reads as under.: " Clause 19 : The purchaser hereby agrees that in the event of any amount by way of premium to the corporation or the State Government for betterment charges or development tax or any other tax or payment of a similar nature becoming payable by the vendors the same shall be reimbursed by the purchaser to the vendors in proportion to the area of the flat agreed to be purchased by the purchaser, and in determining such amount, the decision of the vendors shall be final, conclusive and binding upon the purchaser." 12. In this sense, there is an overriding charge on the amounts collected and, therefore, they could not be regarded as trading receipts per se, in the same manner as the unrecorded receipt of Rs. 13,42,000 received by Mehta Construction Co. from the assessee has been taken as receipt on which reasonable rate of net profit was disclosed as income.

13. Another vital aspect discerned from the orders of the authorities is that although they were treating the various amounts collected as trading receipts and thus assessable to tax, none the less, they were in agreement on the fact that as and when the assessee incurred the expenses for the purpose for which they were collected, deduction would be admissible. In other words, they were inclined to treat the various amounts collected as part of sales or as additional trading receipts by taking the receipts similar to sales tax for which deduction would be admissible on actual payment under Section 43B of the Income-tax Act, 1961. In other words, the authorities were prepared to allow as deduction the amount actually spent for the purpose for which they were collected. But until such time, they would be content to assess them as trading receipts and straightaway as income. Therefore, there is an implied admission or tacit approval on the part of the authorities to treat the amounts collected as meant for specific purposes and in that view, they were liabilities to be discharged to the various State Government authorities. They were not prepared to allow such liability on accrual basis for the simple reason that quantification of such liability was not practicable, but it could be only an estimate. It is for this reason they were not inclined to apply the ratio of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, wherein admittedly the assessee has maintained accounts on mercantile basis and admitted receipts on mercantile basis and also claimed proposed development charges on mercantile basis. At the time of hearing, learned counsel for the assessee made a strenuous effort to bring home the fact that the assessee is also maintaining mercantile method of accounting, a fact which could not be discerned from the assessment order itself. A reference was made to the balance-sheet filed in the paper compilation where the amount receivable from the flat holders was shown as an asset in the same way as fixed and movable assets, but we are not inclined to be convinced about the factum of the assessee having maintained mercantile method of accounting for all the transactions of the business. In any case, the assessment orders do not bear out this point in favour of the assessee. It is universally true that the flat builders receive amounts from flat purchasers either in cash or in cheque in various instalments during the course of construction of the flats. It is inconceivable that any builder could account for all the flat purchase price in the first year of construction itself on the basis of the mercantile method of accounting. Similarly, it is impracticable for claiming the expenditure on mercantile method of accounting in the first year of construction itself without completing all the flats. Therefore, the claim of the assessee that the liability should be allowed on accrual basis is not tenable.

14. There is also an interesting aspect which has not been taken into account by the authorities nor canvassed before us. The deposits themselves do not constitute income even if they are regarded as trading receipts. In the very case of the assessee, the actual sale price of the various flats have been shown in the trading account and the resultant gross profit has been brought to the profit and loss account on the credit side against which various expenses incurred have been claimed as expenditure as deduction and only net profit of Rs. 2,08,073.53 has been arrived at against the sale price of more than Rs. 1,29,06,013 for the assessment year 1989-90. Normally, in all the contractors' cases, net profit is estimated according to the books of account or rule of thumb at reasonable percentage of the receipts.

Therefore, there is no justification for treating the entire receipts as profit of the year of receipt. Further, the stand taken by the authorities is also contradictory in the sense that the deposits were to be treated as income in the year of receipt, but they should be allowed as deduction in the year in which the expenditure was incurred.

15. In this connection, it is necessary to refer to the paper compilations filed. In respect of the payments made for formation of society and M.S.E.B. deposits, it is seen that the assessee has collected Rs. 2,18,000, but incurred expenditure of Rs. 3,76,272.61 during the previous year 1988-89 relevant for the assessment year 1989-90. In other words, the expenditure is greater than the collections made during that year. The opening balance of Rs. 2,86,236 is not assessable for the assessment year 1989-90 and it is to be considered for the relevant assessment year only. Coming to the assessment year 1990-91, similarly receipts amounted to Rs. 1,29,660 during the accounting year relevant for the assessment year 1990-91 as against the expenses incurred Rs. 2,53,358.77. Here also the expenses incurred were greater than the deposits collected for the assessment year 1990-91. The opening balance of Rs. 3,85,002.89 is not to be considered for this year.

16. Coming to water deposit, receipts for the assessment years 1989-90 and 1990-91 were Rs. 25,000 and Rs. 4,600, respectively, against which no expenses have been incurred. Similarly, in respect of deposits for stamp duty, the collections amounted to Rs. 90,359 against which there was no expenditure incurred for the assessment year 1989-90, while for the assessment year 1990-91, the collections amounted to Rs. 79,342 against which the expenditure amounted to Rs. 11,155. Similarly, in respect of water development, receipts for the assessment year 1989-90 amounted to Rs. 59,400 and for the assessment year 1990-91 Rs. 4,600 against which no expenditure has been incurred by the assessee. In short, the net balance arrived at by deducting the expenditure incurred during the year from the gross collections including the opening balance was assessed by the Assessing Officer for these assessment years 1989-90 and 1990-91 as additional income which is factually incorrect as indicated above. Even according to the basis adopted by the authorities, the actual amount collected during the assessment year less the amount spent, if any, could be regarded as trading receipt and not including the opening balance. Thus, there is factual discrepancy in the matter of quantum of income computed by the Assessing Officer.

It is also noticed that in the later assessment year 1991-92, the amount collected for the assessment year 1991-92 towards formation of the society and M. S. E. B. was Rs. 91,000 against which the expenditure incurred was Rs. 2,65,353 which shows the expenditure was greater than the amount collected. Therefore, it could be inferred that notwithstanding the fact that the assessee had not immediately spent various deposits collected and used the funds for its business, none the less, the factum of the assessee having ultimately incurred the expenses for the purpose for which they were meant would not be denied or disputed. It is also quite reasonable to anticipate that the amounts would be required to be paid towards completion of flats and not before the construction of the flats, because the facility would be made available subject to inspection and satisfaction of the authorities.

Taking into account all these facts and circumstances of the case, we are inclined to agree with learned counsel for the assessee that the ratio of the Supreme Court in the cases of CIT v. Tollygunge CM) Ltd. [1977] 107 ITR 776 and CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 would be applicable even though deposits were collected in the normal course of business, but the real nature of the deposits was nothing but liability and the assessee as a promoter has acted for and on behalf of the various flat owners so that he could complete the construction work and service connections and form the society to whom the balance of the various amounts collected would be handed over. In this view of the matter, therefore, we are of the opinion that the Commissioner of Income-tax (Appeals) was not justified in holding otherwise and confirming the additions made by the Assessing Officer for these years. These amounts were nothing but liability and the amounts were incurred towards specific purposes during the course or completion of the contract work and the balance was handed over to the society in which all the flat owners are members as required by the Maharashtra Ownership Flats Act, 1963. Accordingly, the additions made on account of these deposits for the assessment years 1989-90 and 1990-91 are hereby deleted.

17. Another dispute raised by the assessee relates to the addition of Rs. 70,000 as income from disclosed sources. During the course of the previous year, there was search conducted at the business premises of the assessee by the Department on June 28, 1990. Certain books of account and documents were seized. In File No. 24 at pages 123 and 125, certain transactions entered therein were noted. The assessee admitted that these amounts pertain to land transactions at Bund Garden Project.

The sheets contained the details of payments made by the assessee by way of cheques and cash. The assessee could co-relate the transactions made by cheques with reference to the ledger maintained which amounted to Rs. 1,35,000. The transactions on the right side contained dates and amounts which totalled up to Rs. 2,35,000. When confronted with these transactions, the assessee stated that the amounts were not paid as stated in the sheets, but offered for disclosure the entire amount which is included in the disclosure of Rs. 3,45,000 made by the assessee for the assessment year 1991-92. The Assessing Officer did not accept the claim because the dates and amounts were clearly mentioned in the sheets which would reveal cash payments which were not recorded in the books of account. Therefore, he proceeded to assess the unrecorded cash payments on financial year basis according to which three payments amounting to Rs. 70,000 came to be assessed for the assessment year 1989-90. The addition was made by the Assessing Officer after getting directions from the Deputy Commissioner of Income-tax under Section 144A of the Income-tax Act, 1961. The claim of the assessee before the Deputy Commissioner of Income-tax that the entire amount should be considered according to the disclosure in the assessment year 1991-92 was rejected and he directed the Assessing Officer to assess the various amounts in respect of various assessment years only. Accordingly, the Assessing Officer brought to tax the sum of Rs. 70,000 as income from undisclosed sources.

18. On appeal, the Commissioner of Income-tax (Appeals) justified the addition made by the Assessing Officer by relying on the factual payments and the disclosure made by the assessee.

19. At the time of hearing, learned counsel for the assessee referred to the details contained in the paper book pages 42 and 43. It is seen that various payments recorded on various dates on the right hand side and left hand side of the sheet amounted to Rs. 3,45,000 and this is said to have been disclosed by the assessee under Section 132(4) of the Income-tax Act, 1961. In view of this disclosure, it was vehemently contended that the assessment of Rs. 70,000 for the assessment year 1989-90 would amount to double taxation of the same amount which is not permissible under the law. In this connection, reference to page 26 of the paper compilation was made which contains the statement given by Shri Motilal Girdharilal Sharma, partner, under Section 132(4) of the Income-tax Act, 1961. The relevant question No. 8 and answer thereto are reproduced below : " Question No. 8 : I am producing before you pages Nos. 124 and 125 of the loose paper bundle Sr. No. 24. There appears to have been done some calculation on these two sheets. Can you clarify as to why these calculations are made Reply : I think, these calculations pertain to the transaction of land and I, therefore, declare this amount of Rs. 3,45,000 for the assessment year 1991-92 under Section 132(4). " 20. The learned Departmental Representative, on the other hand, strongly supported the orders of the authorities by pointing out that the transactions recorded in the sheets contained in pages 42 and 43 of the paper compilation reflected transactions which were not duly recorded in the books of account of the assessee maintained for these years. He pointed out that the three transactions fell within the accounting year relevant for the assessment year 1989-90 and, therefore, it represented unexplained expenditure which should be deemed to be income of the assessment year 1989-90.

21. We have duly considered the rival submissions and looked into the paper compilation filed by learned counsel for the assessee. When once the assessee admits candidly and that too forthwith at the time of search that these transactions pertained to land the acquisition of which is fundamental for construction of flats and inasmuch as the transactions contained therein were unrecorded in the books of account maintained by the assessee, they are certainly in the nature of unexplained investment in land which went to increase the value of the land in terms of Section 69 of the Income-tax Act, 1961, and the value of such investment may be deemed to be the income of the assessee of such financial year. It can also fall under Section 69B because while the assessee has accounted for the cheque payments, cash payments were not recorded as seen from page 42 of the paper compilation filed.

Therefore, it is a case of not fully disclosing the investment in land and in view of the disclosure made by the assessee, such amount may be deemed to be the income of the assessee of such financial year. It can also be brought under Section 69C as unexplained expenditure because the amount paid was an expenditure and which may be deemed to be the income of the assessee for such financial year. Thus, from all prescriptions contained in Sections 69, 69B and 69C such amount may be deemed to be the income of the assessee for such financial year. The disclosure of the assessee confirms this fact. Therefore, the Assessing Officer was quite justified in assessing the amount of Rs. 70,000 in respect of the three payments made on November 5, 1988, December 30, 1988, and January 24, 1989, which fell within the previous year relevant for the assessment year 1989-90. For the same reason, the Commissioner of Income-tax (Appeals) was quite justified in upholding the assessment made by the Assessing Officer in this regard.

Consequently, we have no hesitation in confirming the addition of income from undisclosed sources, even though the assessee has disclosed Rs. 3,45,000 for the assessment year 1991-92 and this would amount to double taxation. We are aware of this fact, but the assessment of unexplained investment or expenditure, etc., is as per the rules of evidence crystallised in Sections 69, 69B and 69C which are specific whereas the claim of double taxation is based on the maxim of equity which is a stranger to tax law. The remedy in this regard lies elsewhere and not before us. Accordingly, we uphold the order of the Commissioner of Income-tax (Appeals) sustaining the addition of Rs. 70,000 as income from other sources.

22. Another dispute pertaining to the assessment year 1990-91 relates to the assessment of Rs. 13,42,000 under Section 40A(3) of the Income-tax Act, 1961. At the time of search on June 28, 1990, a statement under Section 132(4) of the Income-tax Act, 1961, was recorded from Shri Motilal Girdharlal Sharma, son of Shri Giridharlal Sharma, an English translation of which is contained in pages 25 to 27 of the paper compilation. Question No. 6 and answer thereto are relevant for this purpose and read as under : "Question No. 6 ; I am producing before you page No. 68 of the loose paper bundle. In this bundle there are bills of work done by Mehta Constructions. According to these bills, the total amount payable is Rs. 40,51,418 (rupees forty lakhs fifty-one thousand four hundred and eighteen only). On verification of the ledgers of Sharma Associates and Sharma Builders the total amount paid has been shown as Rs. 26,39,200. In this context on enquiry with the partnership firm, Mehta Construction Co., they have confirmed that they have received an amount of Rs. 13,42,000 from Sharma Associates in cash and this amount has nowhere been shown in the account books of Mehta Construction Co. Since they have declared this amount in their income, it follows that they might have received this amount in cash, i.e., you have paid this amount in cash. In this connection what is your say Reply : The said amount of Rs. 13,42,000 is declared by me under Section 132(4) in the assessment year 1990-91." 23. It is seen that according to the bills for work done by Mehta Constructions Co. the total amount worked out to Rs. 40,51,418 whereas verification of the ledgers of the assessee revealed total payment shown at Rs. 26,39,200. The enquiry made with Mehta Construction Co.

showed that they have confirmed receipt of amount of Rs. 13,42,000 from the assessee in cash. But this amount was nowhere shown in the account books of Mehta Construction Co. Therefore, the Assessing Officer concluded that the amount has been received in cash by Mehta Construction Co. and paid in cash by the assessee. In reply, the assessee quite readily declared the sum of Rs. 13,42,000 under Section 132(4) of the Income-tax Act, 1961, in the assessment year 1990-91.

24. In the proceedings before the Deputy Commissioner of Income-tax, the assessee did not furnish details of various payments made to Mehta Construction Co., though it had been admitted by the assessee. The Deputy Commissioner of Income-tax observed that though the assessee dealt with Mehta Construction Co. throughout the year, there was no reason as to why the assessee could make cash payment when payments were required to be made by cheque or demand draft when payments exceeded Rs. 10,000. It was also noticed that payments to Mehta Construction Co. were also made by cheques by the assessee. Therefore, the Deputy Commissioner of Income-tax invoked the provisions of Section 40A(3). On the merits, the Deputy Commissioner of Income-tax pointed out that the contention of the assessee that payment was made in cash to Mehta Construction Co. because it had to make payments to labourers at the eleventh hour was rejected as there was no proof of the same.

Consequently, he directed the Assessing Officer to disallow the amount under Section 40A(3) because the exceptional circumstances contained in Rule 6DD(j) were not proved by the assessee. The Assessing Officer has pointed out that the assessee had declared an additional income of Rs. 13,42,000 in the return of income, but at the same time claimed the amount as expenses as labour payment to Mehta Construction Co. in the adjustment statement filed. Following the directions of the Deputy Commissioner of Income-tax, the Assessing Officer disallowed the amount under Section 40A(3) of the Income-tax Act, 1961.

25. On appeal, the Commissioner of Income-tax (Appeals) observed that no details were furnished by the assessee in respect of Rs. 13,42,000 and the assessee has not adduced any reason as to why Section 40A(3) was not applicable and why the assessee should be absolved from the provisions of Section 40A(3). He has pointed out that the assessee failed to establish the exceptional and unavoidable circumstances as contemplated by the judgment of the Madhya Pradesh High Court-Indore Bench in Porwdt Udhyog (India) v. CIT [1982] 135 ITR 591. Even the claim of deduction as expenditure was not accepted by the Commissioner of Income-tax (Appeals) because at the time of disclosure it was not the case of the assessee that the amount has been actually expended.

The amount was declared by the assessee only because the assessee had incurred expenditure outside the books without explaining the source thereof. Accordingly, he confirmed the addition made by the Assessing Officer.

26. At the time of hearing, learned counsel for the assessee referred to us the reply given by the assessee to the Assessing Officer by letter dated March 6, 1992, with specific reference to paragraph 4.1 thereof. According to the assessee, the payee demanded payment in cash for making payment 'to the labour force and but for the payment in cash it would have caused genuine difficulty to the payee and, hence, the assessee paid the amount in cash. The payment is said to have been made by the assessee in cash in order to avoid inconvenience to the payee.

In this regard a confirmation letter filed by Mehta Construction Co.

stating that they required cash payment because payment by cheque would have been inconvenient was relied upon. Therefore, it was urged that the disallowance was not called for. In this connection, the statement given by Shri Prakash B. Mehta, partner of Mehta Construction Co. under section, 133A of the Income-tax Act, 1961, contained in pages 34 to 36 of the paper compilation has been referred to. The relevant question and answer read as under : "Question : You have stated above that the total payment made by Sharma Associates in respect of the project at Popular Heights is approximately Rs. 40 lakhs. Has the above amount been entirely received by cheque Answer: Cheque payments are recorded in the ledger accounts amounting to Rs. 27.09 lakhs in the case of Mehta Construction Co.

The total payment of Rs. 40.6 lakhs approximately has been made to Mehta Construction Co. Therefore, the above firm has received cash payment of Rs. 13.42 lakhs for which I have no proof, but I am willing to pay tax on it. I may also clarify here that I have used the money for making payments to labourers although I have no proof.

However, with regard to the project at 'Anantrao Complex' at Rasta Peth which was done by Mehta Enterprises there is no cash payment.

The ledger account has been given to you." 27. From the above it is a fact that the partner has admitted receipt of cash payment of Rs. 13.42 lakhs for which he had no proof, but he was willing to pay the tax on it. He also stated that he had used such money for making payments to the labourers although he had no proof to prove the same. Learned counsel for the assessee relied on the decision of the Tribunal, Jaipur Bench, in the case of ITO v. Madhoram Bhagwandas [1985] 12 ITD 608, the Calcutta High Court judgment in Giridharilal Goenka v. CIT [1989] 179 ITR 122, the Patna High Court in CIT v. Chandmull Radhakishun [1987] 163 ITR 697, the Gujarat High Court in Hasanand Pinjomal v. CIT [1978] 112 ITR 134, the Tribunal judgment in ITO v. Victory Iron Works (P.) Ltd. [1990) 38 TTJ (Cal) 160, the Punjab and Haryana High Court in CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595, in support of the contention that when the expenditure is genuine and the party admits it the amount could not be disallowed.

28. The learned Departmental Representative, on the other hand, pointed out that such cash payment came to light only during the survey operations conducted under Section 1315A of the Income-tax Act simultaneously in the business premises of Mehta Construction Co. The sum of Rs. 13,42,000 represented undisclosed payment made to Mehta Construction Co. out of undisclosed income of the assessee. When the Assessing Officer asked for details of payments of Rs. 13,42,000 the assessee was unable to furnish such details. In the circumstances, the Assessing Officer was justified in taking the entire amount as a one time payment and that too in excess of Rs. 10,000 as contemplated under Section 40A(3). He pointed out that the burden of proof was on the assessee as the facts were within the special knowledge of the assessee and, therefore, the legal consequences of application of Section 40A(3) followed. He referred to the various decisions relied upon by learned counsel for the assessee and stated that those cases would go to support the stand of the Department rather than that of the assessee.

He pointed out that the Calcutta High Court in the case of Giridharilal Goenka v. CIT [1989] 179 ITR 122 pointed out that the object of Section 40A(3) is to check tax evasion and not to deny deduction. Since the assessee has resorted to tax evasion, the benefit of deduction was not admissible to the assessee. He referred to the judgment of the Patna High Court in the case of CIT v. Chandmull Radhakishun [1987] 163 ITR 697 and the Gujarat High Court in Hasanand Pinjomal v. CIT [1978] 112 ITR 134 to contend that one has to look to the surrounding circumstances and if so considered, it will be clear that the provisions of Section 40A(3) were rightly invoked. Referring to the judgment of the Tribunal, Calcutta Bench, in the case of YTO v. Victory Iron Works (P.) Ltd. [1990] 38 TTJ 160, the learned Departmental Representative contended that the concept of business expediency should not be stretched too far to defeat the provisions of Section 40A(3).

Referring to the decision of the Punjab and Haryana High Court in the case of CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595 relied upon by learned counsel for the assessee, the learned Departmental Representative pointed out that both the parties are known to each other and most of the payments were made by cheque. In these circumstances, when cash payments were made, both the parties had agreed not to enter them in their accounts. Therefore, the action of the parties clearly went to defeat the purpose of Section 40A(3).

Neither break-up details nor purpose of payments were furnished and in such circumstances, he wondered how the claim of deduction could be allowed to the assessee. The test of expenditure having been wholly and exclusively incurred for the purpose of business was also not satisfied and hence it was not admissible as deduction.

29. We have duly considered the rival submissions and the paper compilation filed. We agree with the observation of the Commissioner of Income-tax (Appeals) that merely because Mehta Construction Co. has confirmed the fact of receipt of payment in cash, it did not absolve the assessee from the provisions of Section 40A(3). Section 40A(3) is only concerned with genuine payments and not bogus payment. Even in such case of genuine payments in cash exceeding Rs. 10,000 exceptional and unavoidable circumstances are required to be proved by the assessee in order to get over the legal bar contained in Section 40A(3). The facts and circumstances necessitating the payment in cash or causing inconvenience or unavoidable hardship to the payee should be established by the assessee. The assessee has not furnished details of such payments either. The payments were outside the books of account and, therefore, the case of the assessee is vulnerable to bring home the case within the exceptional circumstances contained in Rule 6DD(j) of the Income-tax Rules, 1962. Assuming that Mehta Construction Co. has done some construction work and the assessee has to pay for the same, it is not known why the parties have chosen not to record the payments in the books of account. If the payments are not proved, the genuineness of work done is questionable and, consequently, the genuineness of payment is also equally questionable. It would amount to inflation of expenses unless payment is proved. Mere admission of the payment by Mehta Construction Co. may be motivated for reasons best known to it. After all Mehta Construction Co. would be taxed in respect of such receipts net profit at a percentage thereof, but it would not affect it otherwise. The case of the assessee stands on a different footing. First of all the nature and source of payment has to be accounted for by the assessee. The details of payments, whether cash and the dates of payments are required to be proved by the assessee either with reference to its own record or with reference to the record of Mehta Construction Co. although the partner, Shri Prakash B. Mehta of Mehta Construction Co., admitted in reply that he had received the money from Sharma Associates and had used the money for making payments to labourers, but he had also no proof for details of labour payments.

It is universally true that labour payment is made weekly on Saturday based on the work turned out by the labour during the week. Therefore, if the cash payments could be established to have been made on Saturday in order to enable the payee to effect cash payments to labourers, that would satisfy the exceptional circumstances required by law. Therefore, the genuineness of the payment itself is open to doubt, not to speak of the exceptional circumstances under which the payments were made. It is also seen that there was no cash payment made by the assessee to Mehta Enterprises in respect of Anantrao Complex at Rasta Peth. Therefore, there is more than that meets the eye so far as this payment of Rs. 13,42,000 is concerned. The real purpose and intent and object of the payment has not been brought on record and for reasons best known to the parties, the assessee has agreed to disclose the amount under Section 132(4) and the payee has offered to admit the income thereon.

Taking into account all these facts and circumstances of the case, we have to agree with the conclusion of the Commissioner of Income-tax (Appeals) that the assessee has failed to discharge the burden with evidence and establish satisfactorily the exceptional or unavoidable circumstances or genuine difficulty so as to lift the bar of disallowance contemplated by Section 4QA(3) of the Act. Accordingly, the disallowance is warranted and the order of the Commissioner of Income-tax (Appeals) is upheld.30. Another issue pertains to the disallowance of Rs. 6,13,000 on account of defective vouchers. At the time of search conducted in the business premises of the assessee, a statement under Section 132(4) of the Income-tax Act, 1961, was recorded from the partner, Shri Motilal G. Sharma. Question No. 9 and answer given thereto are relevant which read as under : "Question No. 9 ; In this bundle there are vouchers unsigned and defective. Some vouchers which are paid have not been shown in the cash book. Moreover, at the time of raid, it was noticed that the partners had purchased on March 28, 1989, and March 29, 1989, N. S. C. and N.S.S. of Rs. 31,000 each. These transactions have been shown in the cash book on March 30, 1989, as debit. All these discrepancies have been brought to your notice. Have you any explanation to offer for the same Reply : The entries about N. S. C. and N. S. S. which ought to have been made on March 28, 1989, have been through mistake made on March 30, 1989. There was sufficient balance on March 28, 1989. For other mistakes, I hereby declare Rs. 6,13,000 under Section 132(4) for the assessment year 1990-91. " 31. It is seen that in the loose bundle, serial No. 24 (annexure "A"), there were vouchers unsigned and defective. Some vouchers which were paid have not been recorded in the cash book. It was also noticed that the N.S.C. and N. S. S. certificates purchased by the partners on March 28, 1989, and March 29, 1989, for Rs. 31,000 each were entered in the cash book on March 30, 1989. The assessee explained the discrepancy in respect of the date of entry relating to N. S. C. and N. S. S.certificates. In respect of other defects, the assessee declared a sum of Rs. 6,13,000 under Section 132(4) of the Income-tax Act, 1961. Thus the assessee had declared a total income of Rs. 25,00,000 inclusive of Rs. 6,13,000 under Section 132(4). The assessee had shown this amount in the return of income as its receipts but also claimed the same amount as deduction. The claim was rejected by the Assessing Officer on the ground that the assessee has not proved the genuineness of the expenditure of Rs. 6,13,000. When the matter was referred to the Deputy Commissioner of Income-tax, he directed the Assessing Officer to disallow the claim of deduction of expenditure of Rs. 6,13,000 in his directions given under Section 144A of the Income-tax Act, 1961.

32. Before the Commissioner of Income-tax (Appeals), the stand taken by the assessee was that although it has declared a sum of Rs. 6,13,000, none the less it has expended the same amount. The Commissioner of Income-tax (Appeals) pointed out that the expenditure was not recorded and the nature and source of such expenditure was also not explained.

Section 69C was invoked by the Assessing Officer. Therefore, he held that the addition could be sustained under Section 69C. Accordingly, he confirmed the disallowance.

33. At the time of hearing, learned counsel for the assessee made a pointed reference to the fact that even before the Commissioner of Income-tax (Appeals), the assessee claimed the amount to be allowed as a deduction, vide ground No. 3 of the grounds of appeal filed before the Commissioner of Income-tax (Appeals). It is seen from ground No. 3 that due to heavy pressure from the Department the assessee accepted in his statement that he wanted to disclose Rs. 6,13,000 with presumption to cover any unvouched expenditure, etc. The basis of declaration was legitimate business expenditure paid out of the so-called undisclosed income. It was also submitted that when the regular assessment was taken up by the Assessing Officer, it was found that no addition was called for on account of defective or unsigned vouchers, because all original vouchers were produced before the Assessing Officer.

Therefore, he strongly urged that the expenditure covered by the disclosure should be allowed as deduction.

34. The learned Departmental Representative, on the other hand, supported the decision of the Commissioner of Income-tax (Appeals).

According to him, the search party found defective vouchers. The senior partner agreed to disclose it as income and also claimed it as deduction. According to him, when a voucher is defective, it is not a curable defect. Therefore, the claim of expenditure could not be allowed.

35. We have duly considered the submissions of the parties and the paper compilation and the record. After careful consideration of the matter, we are of the opinion that the claim of deduction made by the assessee is admissible. From the recorded statement under Section 132(4) it is seen that unsigned vouchers which would mean bogus vouchers and defective vouchers which would mean rectifiable vouchers and also unrecorded but paid vouchers, were noticed by the search party among the loose bundles of vouchers. It is only on account of these three facts and also on account of the pressure and heat generated by the search, the assessee volunteered to declare a sum of Rs. 6,13,000 as income. Thus, the declaration of income has direct nexus and live connection with the various kinds of vouchers found in the loose bundle of vouchers. There is no contradiction coming forth from the Department to the contention of the assessee taken before the Commissioner of Income-tax (Appeals) and also before us that at the time of regular assessment, no defective vouchers or unsigned vouchers were noticed by the Assessing Officer and no addition was "made on that account. Even there is no finding given by the Assessing Officer as regards unrecorded transactions with reference to vouchers found in the loose bundle of vouchers. All that the Assessing Officer stated in paragraph 8 of his assessment order was that "Since the assessee has declared the amount of Rs. 6,13,000 in its return of income, the same has been accepted as the income of the assessee. However, the assessee could not prove that the expenses were on account of defective vouchers, etc." In our opinion, the Assessing Officer has misplaced the burden on the assessee instead of proving the same to the hilt, because in the absence of any findings given in the regular assessment order to support the addition of Rs. 6,13,000, he cannot turn round and ask the assessee to prove the expenses on account of defective vouchers. Except the declaration made under Section 132(4), there is nothing on record to impeach the veracity of the vouchers found at the time of search.

Even though the assessee has disclosed the sum of Rs. 6,13,000 to cover unsigned, defective and unrecorded paid vouchers though under the pressure applied by the search party as claimed by the assessee, there is no material to warrant such findings and conclusion in the regular assessment order passed by the Assessing Officer. Therefore, the Assessing Officer is on weaker ground to disallow the claim of expenditure in respect of which the assessee has disclosed the income of Rs. 6,13,000. What the assessee has disclosed is to cover up the so-called unrecorded expenses or possible omission and commission of such expenses, but after having disclosed an amount of Rs. 6,13,000 to cover up such expenses imputed by the Department at the time of search, it is not open to the Department to turn round and ask the assessee to prove the expenses while at the same time accepting the disclosed income as part of the total income. It is not open to the Department to do so. Inasmuch as the Department has been merely content to accept the income declared under Section 132(4) of the Income-tax Act, it is not open to reject the claim of deduction of expenditure incurred by the assessee covering the income which has been declared. This point has not been appreciated by the authorities. As a matter of fact, as seen in retrospect with reference to the regular assessment made by the Assessing Officer no defective memo, no defective vouchers, no unsigned vouchers, no unrecorded paid vouchers were found out so as to warrant or justify the additional income declared by the assessee under Section 132(4). When the Department wanted the assessee to disclose certain amount as alleged by the assessee for which no contradiction is coming forth from the Department side, it is only equitable or justifiable to allow deduction by way of expenditure to cover which the amount has been asked to be declared. As a matter of fact, neither the assessee could prove the expenditure nor the Department could disprove the expenditure because really no unsigned vouchers, no defective vouchers and no unrecorded paid vouchers were found out by the Department so as to warrant any additional income in respect of them. Even the assessment order makes only passing reference to the disclosure made by the assessee under Section 132(4) on the spur of the moment and it is not supported by material evidence gathered in support of the additional income declared by the assessee. If the Department proceeded on the assumption and presumption that there are unrecorded expenses, the inference that could be drawn is in favour of the assessee because it is only on account of unproved expenditure noticed by the Department, the assessee was called upon to declare the amount under Section 132(4). Having declared the amount, the assessee could not be asked to prove the expenditure which is an established fact. Therefore, the claim of the assessee deserves to be accepted as the Department has misplaced the burden of proof on the assessee without discharging it itself. Consequently, we modify the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow deduction of Rs. 6,13,000.

36. Another dispute relates to the addition of Rs. 50,000 as unexplained cash credits in terms of Section 68 of the Income-tax Act, 1961. The assessee has obtained loans of Rs. 10,000 each from five persons who were found to be employees of the sister concern of the assessee-firm and some of them were friends of the partners of the assessee-firm. From the books of account found and seized at the time of search operation, it was found that the amount was credited on April 1, 1989. The assessee had not filed any confirmation letters from these parties at the time of investigation but subsequently confirmation letters were filed. When the Assessing Officer insisted on production of cash creditors with bank pass books for examination, the assessee did not produce cash creditors nor the bank pass books. The Assessing Officer found that these five persons were earning meagre income by way of salary though repayment was made by way of bearer cheques.

Therefore, the Assessing Officer concluded that the assessee has failed to establish the capacity and genuineness of the transactions. Even the Deputy Commissioner of Income-tax in his proceedings under Section 144A held likewise.

37. On appeal, relying on the three-fold tests laid down by the Calcutta High Court in the case of Shankar Industries v. CIT [1978] 114 ITR 689 and Bharati P. Ltd. v. CIT [1978] 111 ITR 951, the Commissioner of Income-tax (Appeals) concluded that the capacity and genuineness of the payments were not established and, therefore, the Assessing Officer was justified in treating the loans as not genuine and thus confirmed the addition made by the Assessing Officer.

38. At the time of hearing, learned counsel for the assessee was duly heard. According to him, the addition should not have been made as the assessee has filed confirmatory letters.

39. The learned Departmental Representative, on the other hand, strongly supported the orders of the authorities.

40. After due consideration, we are of the opinion that the assessee has only proved the identity of the parties and not the capacity and genuineness of the payments. It is necessary to point out that even repayment by bearer cheque does not necessarily establish the genuineness of payment because soon after encashing the bearer cheque the payee could be asked to return the money to the payer. It is only to give a colour of genuineness, the assessee has resorted to bearer cheque payment without anticipating investigation to be conducted by the Assessing Officer. Keeping in view the close relationship or friendship it could be inferred that the cash creditors have lent their names and the assessee has not established satisfactorily the nature and source of the cash credits. Therefore, it may be assessed as income of the assessee of the previous year relevant for the assessment year 1990-91. Reliance is placed on the judgment of the Calcutta High Court in Shankar Industries v. CIT [1978] 114 ITR 689.

42. I have read carefully the proposed order of my learned colleague. I agree with him on all the grounds of appeal in both the assessment years except ground No. 1 for the assessment year 1990-91. This ground relates to the addition of cash payment of Rs. 13,42,000 under the provisions of Section 40A(3) of the Income-tax Act, 1961, representing the payments by the assessee to Mehta Construction Co. which is confirmed by the Commissioner of Income-tax (Appeals).

43. To recall the facts, the income-tax authorities carried out the survey proceedings in the premises of Mehta Construction Co. They came across a paper showing approximate value of construction work carried out by Mehta Construction Co. for the assessee. On a comparison of this paper with the books of account of Mehta Construction Co. it was noticed that only a portion of the payments from the assessee towards the work was recorded. When asked to reconcile the difference the partner of Mehta Construction Co. admitted that the difference of Rs. 13,42,000 represented cash payments by the assessee, i.e., Sharma Associates, from time to time to Mehta Construction Co. for paying to the labourers.

44. The said partner of Mehta Construction Co. then offered the said amount to be considered in the hands of Mehta Construction Co. as a part of its income. We are informed that the said firm had been assessed to tax on the estimated income which was a percentage of its estimated receipts inclusive of Rs. 13,42,000. When the assessee's partner was confronted with this evidence during the course of search proceedings he accepted the fact of payment and offered that the said amount be taxed as income. In the return of income filed by the assessee, the assessee added as its income and also claimed a corresponding amount as business expenditure. The Assessing Officer, however, following the directions of the Deputy Commissioner of Income-tax under Section 144A taxed the amount as per the declaration but refused to allow the deduction on the ground that the said amount being very large must have been paid in contravention of Section 40A(3) and there being no exceptional circumstance justifying the cash payment the disallowance had to be made. The Commissioner of Income-tax (Appeals) has endorsed this finding.

45. Learned counsel for the assessee, Shri K.A. Sathe, urged that the deduction of Rs. 13,42,000 ought to have been allowed. He emphasised the fact that the very basis of treating the amount of Rs. 13,42,000 as income was that it represented the expenditure actually incurred by the assessee which the recipient had admitted and also offered it for taxation. Thus, there was no doubt or dispute that firstly the actual payment was made by the assessee, secondly, that it was for the purpose of business, i.e., for construction work given to Mehta Construction Co., thirdly, that the said payment was made from time to time and, fourthly, that it was made as and when making payment to labourers which had to be in cash. If these facts were clear then Shri Sathe urged that there should be no dispute about the genuineness of payment.

He stated the purpose of Section 40A(3) was to help the Assessing Officer in arriving at the correct income where cash payments could not be verified. If the payment was genuine, there was no reason to invoke Section 40A(3). For this purpose, he relied on the decision of the Calcutta High Court in the case of Giridharilal Goenka v. CIT [1989] 179 ITR 122. According to him this decision fully supported his case.

He then pleaded that having shown that the expenditure was for the purpose of business and allowable under Section 37 if it was the Department's case that the said expenditure was hit by Section 40A(3) then the burden was, in the first case, on the Department to show that each payment exceeded Rs. 10,000 and that, therefore, the provisions of Section 40A(3) were applicable. In this case, the Department has merely assumed that the individual payments must have been more than Rs. 10,000 because the total payments were amounting to Rs. 13,42,000. We have asked learned counsel to give the details of payments but he expressed his inability to do so because no details were kept in any form.

46. The Department also does not have any data on this point. Then Shri Sathe pleaded that it has been brought on record that the payments were made to Mehta Construction Co. from time to time to enable them to make payments to their labourers. Such payments are required to be made in cash and payments to Mehta Construction Co. first by cheque and thereafter to the labourers would have been time consuming and not practical. Mehta Construction Co. would have found it inconvenient and impracticable. Thus the payment was covered by the Explanation provided in Rule 6DD(j), viz., the payment by cheque or draft was not practicable or it would have caused genuine difficulty to the payees.

Shri Sathe relied on the decision of the Gujarat High Court in the case of Hasanand Pinjomal v. CIT [1978] 112 ITR 134 for the proposition that the applicability under Rule 6DD(j) should be "adopted from the angle of the businessman and not of the Revenue. Then he relied on the Punjab and Haryana High Court decision in the case of CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595 where the payment in cash on the basis of oral agreement between the assessee and the payee was held allowable. He referred to the decision of the Patna High Court in the case of GPT v. Chandmull Radhakishun [1987] 163 ITR 697 where it was held that Section 40A(3) was to apply to check evasion. If the payment in cash was made as a commercial requirement Rule 6DD(j) was satisfied and disallowance would not be made. A reference was made to the decision of the Calcutta Bench of the Tribunal in the case of ITO v.Victory Iron Works (P.) Ltd. [1990] 38 TTJ (Cal) 160 wherein it was held that the assessee could not be expected to have control over the cash balance of payees to verify whether by demand or to get the payment in cash was justified or not. Finally, Shri Sathe contended alternatively that if one is not able to state whether or not the individual payments were more than Rs. 10,000 it should not be said to be covered by Section 40A(3) of the Act.

47. The learned Departmental Representative, Shri Kar, strongly opposed the contention of the assessee. Taking us through the facts relating to the addition, he pointed out that this clearly showed that neither the assessee nor the payee Mehta Construction Co. wanted to disclose the cash payment by keeping them outside the books. It was only a result of the Departmental enquiry during the survey that the fact of payment was disclosed. According to him, the assessee had no option except to accept the amount of Rs. 13,42,000 representing this income. It was strange that they have declared the said amount as income. The assessee by claiming the amount as expenditure is trying to nullify the effect of the declaration. This according to him was not permissible.

Referring to the various cases relied upon by Shri Sathe, he pointed out that all these cases really help the Department because in none of the cases the High Courts have pointed out that the provisions of Section 40A(3) are meant for anti-evasion and it is the assessee's case that Section 40A(3) is intended to be operated. Shri Kar stated that the burden to show that each individual payment was less than Rs. 10,000 was on the assessee and since the assessee failed to show these facts the Department should presume that the entire amount was a one time payment and thus clearly hit by Section 40A(3). He further pointed out that as the assessee did not show the payments from the books there was obviously an admission of suppression and the Department is fair in disallowing Rs. 13,42,000 under Section 40A(3).

48. Shri Sathe in his rejoinder pointed out that the purpose of Section 40A(3) was to frustrate generally for claiming the expenses by showing cash payments, the verification of which was difficult. In the present case, on the other hand, there was no doubt that the actual business expenditure had been incurred on the basis of which the amount was treated as income under Section 69C. He stated that what the assessee declared as income was one aspect while claiming the same amount as allowable expenditure was another aspect of the transaction. Since the assessee had not been able to point the sources where the money was found for payment but the actual money spent constituted legitimate business expenditure which the assessee was claiming and it had to be allowed. Since the return of income was not filed at the time of survey and search action was taken, it was presumed to treat the transaction as amounting to evasion. He then stated that the learned Departmental Representative had completely misunderstood the reasons for reliance on the various cases. After recalling the above facts and arguments of the rival parties, I am inclined to hold that the claim of the assessee has to be allowed in full. It has been pointed out very rightly that the very basis of declaration of Rs. 13,42,000 was actual payment made by the assessee to Mehta Construction Co. for the purposes of business.

The assessee has filed in its compilation a copy of writing made showing how the firm of Mehta Construction Co. had arrived at the payment received from the assessee. When that firm had accepted that Rs. 13,42,000 was actually received by it, it was the case of genuineness of expenditure and identity was clearly established. If so, there was no necessity to invoke the provisions of Section 40A(3) of the Act as held by the Calcutta High Court in the case of Giridharilal Goenka [1989] 179 ITR 122. For this reason alone, I am of the opinion that there was no case for disallowance under Section 40A(3) of the Act. If the Department wanted to assert that there was a clear business expenditure still disallowable under Section 40A(3) the initial burden was on the Department to show that there were individual payments of more than Rs. 10,000, because the recipient itself claimed that the amount was paid from time to time. No attempt has been made to discover the details of the payment. If it is a prima facie case there was no basis on facts for invoking the provisions of Section 40A(3) and that would be one more reason not to consider Section 40A(3).

49. Even assuming that Section 40A(3) was to be considered, I am of the opinion that the assessee's arguments that Rule 6DD(j) was satisfied carry force. It is already pointed out that the payment made was for labour payment which had to be made in cash. We can visualise as far as the payments are concerned there could have been urgency in payment to labourers on various occasions and Mehta Construction Co. would have asked the assessee to pay the amount in cash to avoid delay in banking procedure. One cannot lose sight of the fact that even today the banking transactions do not take place as speedily as one could wish them to. In the business world, therefore, even today cash payment is still most convenient and practicable. As has been pointed by the Gujarat High Court in the case of Hasanand Pinjomal [1978] 112 ITR 134, the practicability is to be seen from the commercial point of view. In the present case, the genuineness of the payment not being in doubt which is the overlapping condition in such case, I have no hesitation to hold that the payment can be said to come under Explanation of Rule 6DD(j).

50. I, therefore, allow the assessee's claim. The amount of Rs. 13,42,000 is an allowable deduction, in computing the business income of the assessee.

51. Another fact which came to notice at the time of search and seizure was that Mehta Construction Co. had prepared bills for Rs. 40,51,418 and actually it had received by cheque from the assessee Rs. 26,39,200 leaving the balance. The partner of the said Mehta Construction Co.

stated in clear terms that it dealt with the assessee throughout the year. This fact had been admitted by the Assessing Officer. A small discrepancy should not come in the way. The assessee's partner in his statement at the time of search and seizure was under the apprehension and the same statement has been used for drawing a harmful and adverse inference against the assessee. For all these reasons, I am inclined to allow the appeal on this ground.

53. As we have differed in our conclusion on the point of disallowance under Section 40A(3), the following question is referred for decision by Third Member, viz : " Whether, on the facts and in the circumstances of the case, the genuineness of the cash payments made by the assessee is proved and whether the same is disallowable under Section 40A(3) of the Income-tax Act, 1961 ?" 54. There was a difference of opinion between the Hon'ble Members, who first heard this appeal and hence, reference under Section 255(4) of the Income-tax Act, 1961, has been made to me as a Third Member. The following question is referred for my decision : " Whether, on the facts and in the circumstances of the case, the genuineness of the cash payments made by the assessee is proved and whether the same is disallowable under Section 40A(3) of the Income-tax Act, 1961'?" 55. The brief admitted facts are as under : The business as well as the residential premises of the assessee were subjected to search under Section 132 of the Act on June 28, 1990. During the course of the search, the Revenue authorities found out that the assessee had dealings on a substantial scale with Mehta Construction Co. The business premises of Mehta Construction Co. were also subjected to survey under Section 133A of the Act. During the course of survey under Section 133A at the business premises of Mehta Construction Co. a loose sheet of paper, placed at page 25 of the paper book, was found. From the said loose paper, the Department discovered that Mehta Construction Co. had done the work to the extent of Rs. 40,51,418. However, the verification of ledger of the assessee revealed payment of Rs. 26,39,200 only. The enquiries made with Mehta Construction Co. showed that a sum of Rs. 13,42,000 was received by them from the assessee in cash. The assessee as well as Mehta Construction Co. did not make any entry in the books regarding the casfr payment of Rs. 13,42,000 or its receipt. The Revenue confronted Mehta Construction Co. with the receipt. Mehta Construction Co. admitted to have received a sum of Rs. 13,42,000 only for the labour payments. They also admitted to have utilised the said sum of Rs. 13,42,000 for the payment of wages to labourers. It was also admitted that the receipt of Rs. 13,42,000 was not accounted for by them in the books of account. Mehta Construction Co., therefore, declared a sum of Rs. 13,42,000 to be assessed in their hands.

56. The loose sheet of paper found was also placed by the Revenue before the assessee. The assessee also admitted that the cash payment of Rs. 13,42,000 was made by the assessee but was not entered in the books of account. The statement of one of the partners of the assessee during the course of search was recorded and the partner declared the said sum of Rs. 13,42,000 under Section 132(4) of the Act.

57. The assessee filed a return of income placed at page 10 of the paper book in which the sum of Rs. 13,42,000 was disclosed as income.

However, simultaneously, the assessee claimed it as a deduction as expenditure incurred by the assessee wholly and exclusively for the purpose of business.

58. The Assessing Officer examined the issue and was of the view that the assessee had incurred the liability for the expenditure for which the payment was made in cash in violation of the provisions of Section 40A(3) of the Act. He, therefore, disallowed the expenditure of Rs. 13,42,000 by invoking the provisions of Section 40A(3) of the Act. The Assessing Officer, it may be mentioned, was of the view that the entire amount of Rs. 13,42,000 was a one time payment and being in excess of Rs. 10,000, the statutory limit laid down by Section 40A(3), was to be disallowed under the said provision. The assessee also did not succeed before the first appellate authority.

59. Being aggrieved, the assessee filed an appeal before the Tribunal.

The learned Accountant Member who proposed the order was of the view that (1) the genuineness of payment has not been established ; and (2) in any way the cash payment was hit by Section 40A(3) of the Act. The learned Accountant Member was also of the view that the mitigating circumstances as enumerated under Rule 6DD(j) were also absent and, therefore, the addition made by the Revenue was justified. He accordingly, sustained the addition.

60. The learned Judicial Member, however, differed with the proposed order of the learned Accountant Member and was of the view that the genuineness of the payment is established. He was also of the view that the cheque payment was not practicable as transaction of both the payer and payee was outside the books of account. Thus, on this issue, the learned Judicial Member differed with the findings of the learned Accountant Member. I do not consider it essential to reproduce their detailed arguments in support of their respective orders.

61. On the question referred to me, I have heard both learned counsel for the assessee, Shri K.A. Sathe and learned Senior Departmental Representative, Dr. Sunil Pathak. Shri K.A. Sathe, learned counsel for the assessee, more or less advanced the same arguments which were considered by the learned Members, who originally heard the appeal. He pointed out that as far as the genuineness of the payment is concerned, there should not be any doubt in view of the admission of Mehta Construction Co. that the sum of Rs. 13,42,000 was received by them in cash. Mehta Construction Co. also offered the said amount for taxation in their hands. Unless the payment was received by Mehta Construction Co. no such declaration was possible on their part. Mehta Construction Co., therefore, readily agreed that the sum of Rs. 13,42,000 was their receipt in their hands on which the tax was willingly paid by them.

62. Even the Income-tax Department, learned counsel asserted, did not doubt the genuineness of the payment. The Assessing Officer, during the course of the assessment proceedings proceeded on the ground that there was a violation of Section 40A(3) of the Act. Even for a moment, he did not doubt that the sum of Rs. 13,42,000 was in fact paid by the assessee to Mehta Construction Co. Learned counsel also drew my attention to the Section 144A directions issued by the Deputy Commissioner of Income-tax, who also did not doubt the genuineness of the payment. The Deputy Commissioner of Income-tax merely directed the Assessing Officer to consider the disallowance under Section 40A(3) of the Act. Learned counsel thus strongly asserted that as far as the Department is concerned, the payment was accepted as genuine.

63. While drawing my attention to the order of the learned Accountant Member, learned counsel pointed out that he considered the issue with respect to the genuineness of the payment. The learned Accountant Member, according to learned counsel, did not consider whether the provisions of Rule 6DD(j) were applicable. The learned Accountant Member, gave a finding against the assessee only on the ground that the payment was not genuine.

64. Since the genuineness of the payment has been established by the assessee, which is also not doubted by the Revenue, the appellant is entitled to the deduction of Rs. 13,42,000 as genuine expenditure incurred by the assessee for the purpose of his business. He pointed out that 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 could allow the deduction. In this regard, learned counsel has placed reliance on the decision of Giridharilal Goenka v. CIT [1989] 179 ITR 122 (Cal).

65. Learned counsel further submitted that during the course of deposition of the partner of Mehta Construction Co., it was admitted by them that they also paid in cash the said sum of Rs. 13,42,000 to its labourers. Mehta Construction Co. is assessed to tax by the same Assessing Officer who completed the case of the assessee. No attempt was made by the said Assessing Officer to apply the provisions of Section 40A(3) in the case of Mehta Construction Co. The facts of the case in the case of the assessee as well as in the case of Mehta Construction Co. were identical and, therefore, the assessee only should not have been singled out for the disallowance under Section 40A(3) of the Act.

66. Learned counsel also pleaded that there is no evidence on record to show that the provisions of Section 40A(3) are applicable. The Department, during the course of search operations of the assessee or during the survey operations or the business premises of Mehta Construction Co. did not come across any evidence to show that any of the payments exceeded a sum of Rs. 10,000. There is also no evidence on record to show that the entire amount of Rs. 13,42,000 was a single payment so as to attract Section 40A(3) of the Act. The assessee had made the payment on several occasions and some of the payments may be below the statutory limit of Rs. 10,000. In the absence of any evidence that any of the payment exceeded Rs. 10,000, the addition under Section 40A(3) could not be justified.

67. Learned counsel further contended that even assuming that Section 40A(3) was applicable to some of the payments, the assessee's case was covered by Rule 6DD(j) of the Rules. The payment of Rs. 13,42,000 was outside the books of account of the assessee and also was not accounted for by the recipient Mehta Construction Co. In such circumstances, the cheque payment was not practicable as it would have caused hardship to the payee. The practicability, for the purpose of Rule 6DD(j) must be judged from the point of view of the businessman and not of the Revenue. He submitted that for the purpose of carrying on his business, a businessman may have to make the payment otherwise than by crossed cheques or demand drafts in certain circumstances voluntarily and not out of sheer necessity. In such a situation, the point of view of the businessman is material which should not be lost sight of. Learned counsel took me through the order of the learned Judicial Member and pointed out that the" learned Judicial Member had properly understood this aspect of the case. In the opinion of learned counsel, the case of the assessee is, therefore, covered by exceptional and unavoidable circumstances and even if Section 40A(3) is applied, no addition can be made on account of practicable difficulty to the assessee and the hardship to the payee as laid down in the Rule 6DD(j) of the Rules. In this regard, learned counsel placed reliance on the decision of the Gujarat High Court in the case of Hasanand Pinjomal v. CIT [1978] 112 ITR 134.

68. The application of Rule 6DD(j) is not limited only to the transactions which are recorded in the books of account. The provisions of the said rule could also be made applicable to the transactions outside the books of account as held by the Ahmedabad Bench of the Tribunal in the case of Hynoup Food and Oil Industries Pvt. Ltd. v.Asst. CIT [1993] 47 TTJ (And.) 556.

69. Though the assessee has offered a sum of Rs. 13,42,000 for taxation since it was the genuine expenditure wholly for the purpose of business, it has to be allowed to be deducted while computing the income of the assessee. The net result of the transaction should, therefore, be taken at NIL. In this regard, learned counsel has drawn my attention to the decision of the Patna Bench of the Tribunal in the case of Nishant Housing Development (P) Ltd. v. Asst CIT [1995] 52 ITD 70. Learned counsel continued and argued that the order of the learned Accountant Member is contradictory in certain respects. During the course of the search, the assessee had also offered a sum of Rs. 6,13,000 on account of defective vouchers. The assessee had admitted that a sum of Rs. 6,13,000 should be assessed as the income. However, while filing the return of income, though the said sum of Rs. 6,13,000 was offered for assessment, the assessee had also asked for its deduction on the ground that these were the genuine business expenditure. Both the learned Accountant Member and the learned Judicial Member have agreed that the sum of Rs. 6,13,000 should be allowed to be deducted while computing the profit of the assessee. The facts regarding Rs. 13,42,000 are similar and, therefore, the same principles should have been applied to this expenditure also. On this ground also, the addition is not justified. Learned counsel strongly supported the reasons advanced by the learned Judicial Member.

71. The learned senior Departmental Representative, Dr. Sunil Pathak, on the other hand, defended the order of the learned Accountant Member.

He pointed out that neither the assessee nor Mehta Construction Co.

filed the details of payment with respect to Rs. 13,42,000. The loose sheet of paper recovered from Mehta Construction Co. was the only document from which it could be seen that Mehta Construction Co. had done the total work of about Rs. 40.51 lakhs whereas the cheque payments were accounted for only to the extent of Rs. 26.39 lakhs. The sum alleged to have been paid in cash was quite substantial and, therefore, it is logical to presume that every payment must have exceeded the statutory limit of Rs. 10,000. Such a substantial amount, in the opinion of the learned Senior Departmental Representative has to be paid in sums exceeding Rs. 10,000. There is no basis to presume that the payment must have been made by the assessee in sums less than Rs. 10,000. Thus, the provisions of Section 40A(3) are clearly applicable in the case of the assessee.

72. The learned Senior Departmental Representative continued and asserted that the provisions of Section 40A(3) were enacted to check cases of tax evasion. These provisions are to be strictly applied. The provisions were enacted with a view to ensure easy cross verification.

It was also to ensure that the assessee does not utilise his concealed income for the payment of expenditure. If the provisions of Section 40A(3) are to be effectively implemented, the transactions outside the books of account should be brought within the tax net.

73. By drawing my attention to the decision of the Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667, the learned senior Departmental Representative pointed out that only genuine and bona fide transactions are excluded from the scope of Section 40A(3). With a view to qualify for deduction, the expenditure in violation of Section 40A(3) should not only be genuine but the transactions should also be bona fide. In the case of the assessee, the transaction is outside the books of account and, therefore, cannot be considered as bona fide. The assessee admittedly made the payments from concealed income which should not be considered as bona fide transactions.

74. The case of the assessee also does not fall under Rule 6DD(j) of the Rules. The assessee had done business with Mehta Construction Co.

to the extent of about Rs. 40.50 lakhs out of which the cheque payments recorded in the books of account amounted to about Rs. 26.39 lakhs. The offices of the assessee as well as Mehta Construction Co. were located in Pune only and as the assessee could pay the substantial amount by cheques, there is no reason why the payment of Rs. 13,42,000 could not be made by crossed cheques or account payee demand drafts. In this regard, the learned senior Departmental Representative has referred to the decision of the Gauhati High Court in the case of Associated Engg.

Enterprise v. CIT [1995] 216 ITR 366.

75. The learned Departmental Representative further argued that in order to claim the benefit under Rule 6DD(j), it is not sufficient for an assessee merely to establish that the payment was genuine and the payee was identifiable. The provisions of Section 40A(3) can even be applied to genuine cases. In order to avoid the rigour of Section 40A(3), the case of the assessee has to fall under Rule 6DD(j) of the Rules. The learned Departmental Representative draws my attention to the decision of the Pune Bench of the Tribunal in the case of Shri T.G. Mutha v. ITO, Ward 2(6), Pune, in I.T.A. No. 645/PN/1994, dated April 21, 1995, and contended that even genuine payments may come within the sweep of Section 40A(3) of the Act.

76. While dealing with the judicial pronouncements cited by learned counsel for the assessee, the learned Departmental Representative pointed out that the ratio laid down in the decisions does not support the case of the assessee. These cases dealt with the situation where the entry with respect to the expenditure was recorded in the books of account. The learned Departmental Representative, therefore, urged that the provisions of Section 40A(3) are applicable and the case is not covered by Rule 6DD(j) of the Rules.

77. In reply, learned counsel for the assessee pointed out that the purpose of enactment of Section 40A(3) is to curb tax evasion in the case of bogus expenditure. In the case of the assessee, the expenditure is admittedly genuine and as a matter of fact, has been accepted as such by the Revenue. Learned counsel has also taken us through Rule 6DD(j) and pointed out that the said rule does not speak of bona fide expenditure. The section as well as the rule made thereunder only speak of genuineness of the payment. Regarding the case of Shri T.G. Mutha learned counsel pointed out that the said case was decided on its own facts and does not apply to the present case. He, therefore, reiterated that no addition can be made under Section 40A(3) of the Act in the case of the assessee.

78. I have heard the parties to the dispute and have also carefully perused the orders of my learned brothers. The question referred to me has two separate and distinct parts, viz., (1) whether the genuineness of the cash payments made by the assessee is proved ; and (2) whether the same is disallowable under Section 40A(3) of the Act.

79. I first take up the first part to examine whether the cash payments are genuine. In this regard, nothing much need be said in view of the fact that the genuineness of the expenditure has never been in doubt.

The Assessing Officer as well as the Deputy Commissioner of Income-tax in his direction under Section 144A of the Act have never expressed any doubt regarding the genuineness of the payments. The case of the Revenue has all along been that the payment has been made in cash in violation of Section 40A(3) of the Act. Even the Commissioner of Income-tax (Appeals) did not doubt the genuineness of the payment and proceeded only on the ground that the said expenditure was disallowable under Section 40A(3) of the Act. It is also the undisputed fact that the payer as well as the payee admitted to have paid and received the sum of Rs. 13,42,000. As a matter of fact, the Revenue has acted on the statement of the assessee as well as Mehta Construction Co. and has brought the amount to tax in the case of Mehta Construction Co. The surrounding facts, therefore, leave no room for doubt that the payment is genuine and the expenditure was incurred by the assessee during the course of his business. If the payment for expenditure was not genuine, there was no necessity for applying the provisions of Section 40A(3) of the Act. The said provisions are applicable where the assessee incurs any expenditure in respect of which the payment is made, in a sum exceeding Rs. 10,000 otherwise than by crossed cheques drawn on a bank or crossed bank drafts. In other words, Section 40A(3) cannot be called in aid where the expenditure is bogus. Such an expenditure cannot be allowed to be deducted because such expenditure has not been incurred by the assessee. The provisions of Section 40A(3) can be applied only in cases where an assessee in fact incurs an expenditure but violates the mandate of Section 40A(3) of the Act. I am, therefore, of the view that the expenditure was genuine and the learned Judicial Member was justified in holding it as such.

80. I proceed to answer the second part of the question with some trepidation. The Government felt that the taxpayers were making claims for deduction of the expenses in large amounts shown to have been paid in cash often with a view to frustrate the investigation as to the identity of the recipient and genuineness of the claim. To plug the loop-holes the provisions of Section 40A(3) were enacted on the statute book. The object of the said provision is to check tax evasion and to facilitate cross verification. In other words, the object of enacting Section 40A(3) is to ensure that payments in respect of which deductions are claimed by taxpayers are genuinely made and accumulated payments are not claimed as deduction. The assessee comes under the sweep of the section if the expenditure is not genuine or if the case is not covered by the rules made under Section 40A(3) of the Act, Section 40A(3) concentrates on the size and manner of payment. What is pertinent to the enquiry under the said section is whether the payment for an item of business expenditure is in a sum exceeding Rs. 10,000 and further whether the payment is by means of a crossed cheque or a bank draft. Section 40A(3) uses the word "sum". The said word denotes the payment at any one time and not the sum total of payments made to a particular person during the course of any one day. Thus, if more than one payment not exceeding Rs. 10,000 are made at different times to a particular person in the course of one and the same day, the ban of Section 40A(3) cannot come into operation on the ground that the aggregate during the day exceeds Rs. 10,000. For the purpose of applying Section 40A(3), it is therefore, mandatory that one single payment must exceed a sum of Rs. 10,000. Unless this required condition is fulfilled, Section 40A(3) cannot be brought in operation. In the case before me, it is true that the assessee had admitted to have paid a sum of Rs. 13,42,000 in cash. However, there is no material on record to suggest that the entire sum was paid as one transaction or the various payments on various dates or months exceeded the statutory limit laid down by Section 40A(3). The Assessing Officer, dealt with the cases of both the assessee as well as the recipient but did not collect the details of the payments. It appears from the record that both the parties expressed their inability to supply any details. In such an eventuality, the payment may have been made (1) by a single transaction ; (2) by various transactions, each transaction exceeding the statutory limit ; (3) by various transactions wherein some of the transactions exceeded the statutory limit and others did not; and finally (4) by various transactions wherein the statutory limit was not exceeded by the assessee. In a situation mentioned at No. (4) above, no addition need be made. In a situation mentioned at No. (3), only those amounts which violated Section 40A(3) can be considered for the disallowance under that section. The other transactions which did not exceed statutory limit, therefore, cannot be disallowed. In situations (2) and (1), the whole amount can be disallowed under Section 40A(3) of the Act. The situation before us, however, is not at all clear and it is not known whether the assessee, in fact, made the payment in violation of Section 40A(3) of the Act. This can only be presumed by looking at the largeness of the sums involved. However, the moot question is whether Section 40A(3) can be made applicable on presumption. It is dangerous to lay down a proposition that Section 40A(3) can be invoked on presumption, conjectures or surmises. With a view to invoke the provisions of Section 40A(3) a clear finding with evidence is necessary that the single payment by an assessee exceeded the statutory limit as laid down in Section 40A(3) of the Act. If the disallowance is based on mere guess work, untold harm is likely to visit an honest taxpayer.

81. In the case before me, the payment pertains to one full accounting period and, therefore, it is likely that some of the payments may have been below the statutory limit or it is also possible, for the sake of arguments, that all payments were below the statutory limit laid down by Section 40A(3). In such a situation, venturing a guess is hazardous and may lead to unintended harm to the assessee. It is enough to mention that in the absence of full details of cash payments the application of Section 40A(3) is a very doubtful proposition. In my view, therefore, Section 40A(3) does not apply to this case.

82. Assuming that the provisions of Section 40A(3) apply to the case before me, I am of the considered view that the disallowance under that section cannot be sustained as the case of the assessee is covered by exceptional circumstances. The payment as well as receipt was not recorded in the books of account by the assessee as well as the recipient, Mehta Construction Co. The intention of the parties was, therefore, to keep the transaction outside the books of account. Such a situation, in my view, will be an exceptional circumstance as per Rule 6DD(j) of the Rules. I can do no better than to borrow extensively from the decision in the case of Hynoup Food and Oil Industries Pvt. Ltd. [1993] 47 TTJ (And) 556, wherein on identical facts, it was laid down as under (at page 565) : " We, therefore, come to the second important submission of the assessee that the circumstances in this case were such that cheque payments could not be expected and was, therefore, not made. To put it plainly, the contention was that, since these payments were made in a business outside the books, the payments had to be made in cash and they could not be expected to be made by cheques. Now, here is a situation where a person carries on activity which is outside his regular books and derives income from it and this very fact enables him to claim the exemption under Section 40A(3). In other words, he derives an advantage from his own wrong. Are we to hold that such a result would be permissible under the law or would be within the policy of law Secondly, if the deduction is permitted in such cases, it would put a person doing irregular business in a better or more advantageous position than a person who does business within the legal requirements. On this question, the Revenue has relied upon the decision of the Gujarat High Court in the case of Hasanand Pinjomal [1978] 112 ITR 134 in support of the contention that the application of Section 40A(3) is mandatory and more particularly on the decision of the Andhra Pradesh High Court in S. Venkata Subba Rao v. CIT [1988] 173 ITR 340.

Now, although the application of this section is mandatory, it is not without exceptions that are found in the rule made under this section. The Andhra Pradesh High Court has dealt with this application in the above case. That was the case of a person dealing in smuggled goods who claimed immunity from application of this section on the ground that, since the business was illegal, it was not possible to comply with that section. The High Court rejected the assessee's contention stating, 'may be that in an illegal business, like smuggling, it may not be practicable to comply with the requirements of Sub-section (3) of Section 40A, but that only means that such illegal business ought not to be carried on. It is a business prohibited by law. By taxing its income, it is not legalised or validated' (at page 344). The High Court held that the assessee must establish the genuineness of the payment and the identity of the payee and unless he does that, he cannot take advantage of Clause (j) of Rule 6DD. For ready reference, the relevant part of the rule is reproduced below: 'No disallowance under Sub-section (3) of Section 40A shall be made where any payment in a sum exceeding two thousand five hundred 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) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft -- (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.' The above quotation of the High Court judgment refers to the practical difficulty in complying with Section 40A(3) and the judgment also speaks of the requirements of proving the genuineness of the payment and identity of the payee. The word 'and' in the sentence after Clause (2) connects this requirement with Clause (2).

It can, therefore, be seen that the High Court was dealing with the application of Clause (2) only. Clause (1), however, is separate because the word 'or' is at its end and the High Court has not applied it. If that clause is applicable, it would not be necessary for the assessee to prove the genuineness of the payment and the identity of the payee because that requirement is not connected with Clause (1). Moreover, the Andhra Pradesh High Court was dealing with the case of illegal business, while the present case is of business outside the books, which may or may not be illegal. That would be covered by the expression 'exceptional circumstances, in Clause (1) because, generally speaking, business recorded in the books is within the rule and business outside the books is an exception.

While, therefore, it could be the intention of the law makers that illegal business should not be done, if the assessee finds it difficult to supply the proof of payment, it would not have been intended that business outside the books should not be done but that it should be recorded in the books. On the above reasoning, the decision of the Andhra Pradesh High Court is distinguishable.

However, even if it is applicable, in the alternative, if it is the intention of the law makers that income from that kind of business is to be taxed, then, logically speaking, the law makers must be deemed to have taken into account the difficulty in obtaining proof regarding the expenditure. Therefore, while complying with the statutory requirements, we must so interpret the law that the reality of the situation is duly taken into account. Finally, if the State claims a share in any income, it cannot deny to the citizen the expenditure whereby the income is earned (CIT v. S. C. Kothari [1971] 82 ITR 794 (SC)). Therefore, we are of the view that the assessee's case would be covered by the exceptions provided in Rule 6DD(j)." 83. Since the transaction was outside the books, it was not practicable or advisable to make the payment by account payee cheque or crossed demand draft. I am, therefore, of the view that the case of the assessee is covered by Rule 6DD(j) of the Rules.

84. The assessee is also entitled to the deduction of the expenditure.

As already mentioned above, the genuineness of the expenditure is not at all in doubt. It is also not in doubt that it was business expenditure. The Revenue has not also brought on record any material to show that the expenditure was disallowable under the provisions of law.

Since the assessee declared a sum of Rs. 13,42,000 this has to be included as the income of the assessee and simultaneously deduction has to be allowed. If the assessee has incurred expenditure in excess of the amounts recorded in the books, then the unexplained expenditure would be assessable as income under Section 69C of the Act. However, on the same analogy, the expenditure has to be allowed as deduction while computing the income of the assessee and the net result would, therefore, be NIL addition. In this regard, the case of the assessee is supported by the decision of the Patna Bench of the Tribunal in the case of Nishant Housing Development (P) Ltd. v. Asst. CIT [1995] 52 ITD 85. The decision referred to by the Revenue in the case of Shri T.G.Mutha does not advance the case of the Revenue. In the said decision, it was found as a fact that the provisions of Rule 6DD(j) were not applicable. However, in the case before me, Rule 6DD(J) is found applicable. It may also be mentioned that Section 40A(3) places no restrictions on the assessee in his trading activities, it only empowers the Assessing Officer to disallow the deduction claimed as an expenditure, in respect of which, the payment is made by cash and there are no exceptional and unavoidable circumstances. The consideration of business expediency and other relevant factors are not excluded. The genuine transactions wherein Rule 6DD(j) also applies are, therefore, outside the sweep of Section 40A(3) of the Act.

86. Considering the facts and circumstances of the case and the other material placed before me, I agree with the view expressed by learned Judicial Member. The point of difference is answered accordingly and the case will now go back to the Bench for passing consequential order in accordance with the opinion of the majority.