KHANDESH AYURVEDIC FARMACY v. INCOME TAX OFFICER
[Citation -1984-LL-1113-5]

Citation 1984-LL-1113-5
Appellant Name KHANDESH AYURVEDIC FARMACY
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 13/11/1984
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags payment in cash • daily allowance • actual payment • bank overdraft • cheque payment • stay petition • demand draft • cash payment • book entry • ayurvedic
Bot Summary: During the year in question in the ordinary course of business the assessee made payments in cash over Rs. 2,500 to six parties as detailed in para 4 of the ITO s order. The first cash payment over Rs. 5,000 to M/s K. K. Shah Co. was made on 29th Jan., 1980 by withdrawing certain amounts which were lying to the credit of the assessee with another party in Bombay namely S. Himmatlal Co. and K.T. Parakh, Bombay. The payment on 25th Sept., 1980 Rs. 5,000, on 30th Sept., 1980 Rs. 5,000 and on 7th Oct., 1980 Rs. 5,000 had to be made in cash because the parties insisted on for cash payments. Regarding the supply of goods against bill No. 8/80 to the tune of Rs. 7,020 although the supply itself was made on 3rd July 1980, the party insisted on cash payment much earlier on 12th April, 1980 to the tune of Rs. 7,020. As to the last item, namely, M/s Shrayas Art Printers Ltd. Shri Gujarathi pointed out from the account itself that the first payment could be made by demand draft but later on as the bills started accumulating, the assessee had to arrange for cash payment on various dates mentioned by the ITO as the parties insisted for cash payment. In particular in the case of M. Ramchandra the Departmental Representative pointed out that there is a very big gap between the date of payment in cash and actual supply of goods which took place only after payment made in cash. If from the facts presented by the assessee it is noticed that insistance on cheque payment would have resulted in hardship or inconvenience, the matter has to be examined sympathetically from a commercial point of view and not on the basis of subjective decision as to whether the assessee could have insisted a cheque payment.


This appeal is filed by assessee against order of CIT(A), Nasik dt. 9th May, 1984 confirming order of ITO dt. 27th March, 1982. There is also connected stay petition No. 14/PN/1984. In view of fact that we are giving decision on merit, stay petition filed becomes infructuous. first point raised in this appeal is regarding correctness of decision of lower authorities that in vie of provisions of s. 40A(3), disallowance of Rs. 69,071 being various payments made in cash by assessee is justified. Shri Gujarathi explained basis facts of case with which there is no dispute. assessee prepares ayurvedic preparations and has to made purchases of bottles, machinery, etc. During year in question in ordinary course of business assessee made payments in cash over Rs. 2,500 to six parties as detailed in para 4 of ITO s order. Shri Gujarathi pointed out that lower authorities have not followed provision of law correctly. Sec. 40A(3), no doubt, requires disallowance of expenditure which is incurred by payment in cash in excess of Rs. 2,500, but provision has also some built in relief measure. Thus where assessee shows that insisted payments by cheque or draft would have caused hardship or inconvenience, assessee is permitted to make such payments and claim deduction by pointing out circumstances under which payment had to be made in cash. Such circumstances are detailed in r. 6DD and also in CBDT circular No. 220 dt. 31st May, 1977. This circular itself makes it clear that circumstances under which such payments are to be allowed cannot be mentioned exhaustively. Shri Gujarathi then submitted that lower authorities erred in interpreting correct ratio arising from Hosanand Pinjomal vs. CIT, Gujarat 1977 CTR (Guj) 486: (1978) 112 ITR 134 (Guj). It would depend upon facts of each case. assessee had pointed out to lower authorities in respect of each case how assessee had no alternative but to make payments in cash. Shri Gujarathi further submitted that in all these cases assessee has further discharged burden cast on him of proving genuineness or correctness of payments by producing certain certificates from concerned parties. first two parties mentioned by ITO namely, M/s K.K. Shah & Co., and M/s Real Trading Corporation, and last one M/s Shrayas Art Printers (P.) Ltd. are all Bombay parties. assessee has to go to Bombay frequently. Apart from fact that he had nearly exhausted bank overdraft limits on relevant dates at Jalgaon assessee did not always consider it prudent to carry large amounts in cash in view of carry large amounts in cash in view of risk involved. Wherever possible assessee did make payments by demand drafts. For example firs payment in year to M/s K.K. Shah & Co. was made by demand draft on 1st Jan., 1980 to tune of Rs. 10,364. first cash payment over Rs. 5,000 to M/s K. K. Shah & Co. was made on 29th Jan., 1980 by withdrawing certain amounts which were lying to credit of assessee with another party in Bombay namely S. Himmatlal & Co. and K.T. Parakh, Bombay. second amount on 11th March, 1980 was also taken in cash from Himmatlal & Co. third amount Rs. 3,951 on 12th March, 1980 had to be made out of cash in hand. fourth amount of Rs. 4,000 on 29th April, 1980 as also fifth and sixth amounts of Rs. 5,000 and Rs. 3,000 on 30th April 1980 and 25th June, 1980 also had to be made under similar circumstances. Regarding Real Trading Corpn. payment on 25th Sept., 1980 Rs. 5,000, on 30th Sept., 1980 Rs. 5,000 and on 7th Oct., 1980 Rs. 5,000 had to be made in cash because parties insisted on for cash payments. Both M/s K.K. Shah & Co. and M/s Real Trading Corporation, have given their certificates dt. 15th May 1982. These certificates apart from certifying that it is these suppliers who insisted on cash payments have also confirmed assessee s version regarding reality of transition. next item is that of M/s M. Ramchandra & Sons of Bombay with whom assessee did not have transaction earlier. practice of this party is to take cash first and then to supply goods and to send bills. Thus assessee paid Rs. 1,000 and Rs. 1,646 in cash on 31st Jan., 1980 and 13th Feb., 1980 to get goods and bill on 25th Feb., 1980 to tune of Rs. 2,646. Fortunately as amounts were less than Rs. 2,500, ITO did not challenge these transactions. Regarding supply of goods against bill No. 8/80 to tune of Rs. 7,020 although supply itself was made on 3rd July 1980, party insisted on cash payment much earlier on 12th April, 1980 to tune of Rs. 7,020. party has confirmed transaction and as per certificate dt. 17th May, 1982 it has confirmed transaction and as per certificate dt. 17th May, 1982 it has admitted having not insisted on taking cash. It has also confirmed reality of payment. On much later date party also gave its G. I. Number, etc. Regarding Ramchandra Vithaldas who is legal party of Jalgaon, Shri Gujarathi gave detailed copy of account of this party in books of assessee (pp. 10 and 11 of paperbook), here there is only one payment of Rs. 3,000 paid on 11th Oct., 1980 by self cheque withdrawal. This payment had to be made because day was Saturday and party insisted on cash payment as cheque payment would have delayed encashment till Monday or perhaps later. These were exceptional circumstances. Regarding Dalichand, another local party of Jalgaon, Shri Gujarathi showed from copy of account of that party (p. 9 of paperbook) how one solitary payment of Rs. 4,000 had to be made on 30th Aug., 1980 again on Saturday. As to last item, namely, M/s Shrayas Art Printers (P.) Ltd. Shri Gujarathi pointed out from account itself that first payment could be made by demand draft but later on as bills started accumulating, assessee had to arrange for cash payment on various dates mentioned by ITO as parties insisted for cash payment. By certificates dt. 17th May, 1982 party has certified that cash payments were done at request of party and it has confirmed assessee s version in full. Summing up his argument, Shri Gujarathi submitted that provisions of t h e Act, rule and Executive instructions show clearly that lower authorities have erred in making disallowance as above. In support he placed reliance on CIT vs. Satish Chandra (1983) 34 CTR (All) 321: (1983) 143 ITR 330 (All), Registhan (P.) Ltd. vs. CIT, Jaipur (1984) 40 CTR (Raj) 340: (1984) 146 ITR 620 (Raj), Rajarajeshwari Weaving Mills vs. ITO, A-Ward, Cannanore & Anr. 1978 CTR (Ker) 248: (1978) 113 ITR 405 (Ker). In support of his contention that payee is best witness in such cases and that assessee has fully discharged burden cast on him. Reliance was placed on case of Addl. CIT, Kanpur vs. Radhey Shyam Jagdish Prasad (1979) 9 CTR (All) 143: (1979) 117 ITR 186 (All). In reply Shri Walvekar submitted that action of authorities below is correct. Firstly CBDT circular does not apply because assessee has not shown that supply would not have been made but for cash payment. assessee has also linked certain cash payments with withdrawals from Bombay parties made much earlier, but there was sufficient time to obtain cheque or draft as case may be. Shri Walvekar further submitted that condition (iv) on para 4 of CBDT circular does not apply as assessee had already received goods and could as well have insisted on payment through demand draft as in other cases. In particular in case of M. Ramchandra Departmental Representative pointed out that there is very big gap between date of payment in cash and actual supply of goods which took place only after payment made in cash. Regarding case law Shri Walvekar submitted that in Registhan (P.) Ltd. vs. CIT, Jaipur (1984) 40 CTR (Raj) 340: (1984) 146 ITR 620 (Raj), actually supports case for disallowance. Accordingly Departmental Representative proposed that order of authorities below should be confirmed. On examination of various facts and arguments we hold that amounts are allowable. Sec. 40A(3) does not put blanket ban on allowance on all cash payments over Rs. 2,500. assessee can show exact circumstances under which he was compelled to make cash payment. If from facts presented by assessee it is noticed that insistance on cheque payment would have resulted in hardship or inconvenience, matter has to be examined sympathetically from commercial point of view and not on basis of subjective decision as to whether assessee could have insisted cheque payment. case law relief upon by both side show that in every case assessee has to first show that condition of allowance are fulfilled and that his version regarding actual payment is correct. It is for ITO to show how conditions are not fulfilled and that evidence produced is insufficient or unreliable. Form this point of view we find that in all cases assessee had genuine reason to depart from practice of cheque payment. It is possible that in some cases there was nominal time gap between withdrawal from one firm and payment to party concerned. Form this however, it does not necessarily follow that assessee should or could have utilised time gap for obtaining demand draft. In commercial circles it is common to find that assessee delays payment even of cash as much as possible so that he can utilise amounts during interregnum for more other profitable deals. Therefore, fact that there is some gap between date of withdrawal of amount from one party and payment to another party in Bombay does not necessarily mean that assessee had all time and facility for insisting on payment by cheque. From facts given above it is clear that wherever impugned cash payments have been made same have been made under extraordinary and exceptional circumstances warranting application of proviso to s. 40A(3), r. 6DD(j) and Executive instructions referred to above. We accordingly hold that sum of Rs. 69,071 is to be allowed in full. second point raised in this appeal is regarding disallowance of travelling expenses of Rs. 10,000 out of Rs. 21,789. Shri Gujarathi submitted that these expenses have been incurred in ordinary course of business. In earlier years they were allowed in full for asst. yr. 1979-80 expenditure was of order of Rs. 9,200 when turnover of Rs. 5,86,000. For asst. yr. 1980-81 expenditure came to Rs. 70,478 when turnover was Rs. 7,41,000. Compared to these figures expenditure of Rs. 21,789 on turnover of Rs. 10,25,000 this year is quite fair. At this stage of hearing we invited attention of Shri Gujarathi to observation of ITO in para 5 of his order where ITO has made disallowance mainly on ground that daily allowance of partner has been increased from Rs. 30 per day to Rs. 50 per day and that parties could not give any details of work done or of actual bills of travelling, lodging and boarding etc. To this Shri Gujarathi submitted that accounts are audited and that reality of payment is not suspected. It was further submitted that amounts are reasonable. It is not practicable in case of partnership firm to recall all detail of lodging and boarding, etc., Regarding purpose of journey, Shri Gujarathi submitted that as same was not fully recorded in books it was not possible to give details to ITO at time of hearing. He, however, submitted that CIT(A) has admitted that work is of technical type which can be done only by partners. As amounts are reasonable same should be allowed. In reply Shri Walvekar submitted that past history is not quite relevant in view of failure of assessee to produce adequate proof regarding business necessity and actually incurring of impugned expenditure. Referring to p. 21 of paperbook Shri Walvekar highlighted fact that most of expenditure is incurred buy partners and not by employees. He further submitted that question of allowance has to be examined with reference to character of expenditure and not with reference to place at which expenditure is incurred. lodging and boarding expenses of partners which are not allowable when incurred at headquarters, do not become allowable merely because they are incurred away from headquarters. In support reliance was placed in cases of Ramkrishan Sunderlal vs. CIT (1951) 19 ITR 324 (All) and in Sri Ram Mahadeo Prasad vs. CIT (1953) 24 ITR 176 (All). Accordingly, it was submitted that disallowance is correct. In his rejoinder Shri Gujarathi submitted that ITO has arrived at wrong conclusion regarding possibility of use of travelling expenses for personal expenses of partners. Partners have adequate resources in form of salary and other income and there is nothing to suggest that travelling expenses have been for meeting household expenses. On examination of various facts, we hold that some disallowance is warranted. audit of accounts does not have much significance because auditors have not stated what evidence was produced before them. If satisfactory evidence was produced before auditors, then, there is no reason why same could not have been produced before IT authorities. Whilst there is no doubt that book entry in form of expenditure has to be believed, in absence of evidence to contrary, in view of case law relied upon by Departmental Representative, it cannot be said that entire expenditure partakes character of expenditure allowable under s. 37. On account of failure of assessee to produce particulars, we also hold that reasonable disallowance of Rs. 5,000 in place of Rs. 10,000 would meet requirements of case. Accordingly income is reduced by Rs. 5,000 on this count. last ground of appeal is regarding disallowance of Rs. 1,250 out of purchases. At time of hearing, we pointed out to assessee that this issue does not arise out of order of CIT(A). Possibly ground was raised before CIT(A). At this stage of hearing Shri Gujarathi did not press his contention. Accordingly this ground is rejected. Appeal is partly allowed. *** KHANDESH AYURVEDIC FARMACY v. INCOME TAX OFFICER
Report Error