KANTI LAL PURSHOTTAM & CO. v. COMMISSIONER OF INCOME TAX
[Citation -1985-LL-0129-4]

Citation 1985-LL-0129-4
Appellant Name KANTI LAL PURSHOTTAM & CO.
Respondent Name COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 29/01/1985
Judgment View Judgment
Keyword Tags income from undisclosed source • agricultural produce • discretionary power • mala fide intention • business expediency • bona fide belief • ignorance of law • payment in cash • stock-in-trade • crossed cheque • forest produce • additional tax • cash payment • tax evasion • bank draft • mens rea
Bot Summary: Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee was not entitled to exemption under clause or clause of r. 6DD in respect of the payment regarding the purchase of the goods from other traders The assessee-firm is carrying on business of commission agency and kirana goods at Ramganj Mandi. According to the ITO, such payments were caught within the mischief of sub s. of s. 40A of the I. T. Act, 1961, which was inserted from April 1, 1969, and the assessee had not been able to show any exceptional or unavoidable circumstances for the payment in cash or that the payment was impracticable or would have caused genuine difficulty to the payee. Of r. 6DD. But all the contentions of the assessee were turned down by the Tribunal and the Tribunal came to the conclusion that: Cl. of r. 6DD of the Income-tax Rules, 1962, did not cover the assessee's case. Of r. 6DD as, in the opinion of the Tribunal, the ignorance of law or non-clarity of the law to the assessee did not constitute exceptional or unavoidable circumstance in which he could not make the payments to the sellers by crossed cheques or by crossed bank drafts; and also that the amount was an expenditure, and covered by the mischief of s. 40A(3). Number of clarifications liberalising the payments have been issued from time to time by the Central Board of Direct Taxes and the assessee had a bona fide belief that the restriction provided by s. 40A(3) was not applicable to the purchase of stock-in-trade is it is not an exception in popular sense and cash payment could be made for agricultural produce. Learned counsel for the assessee farther drew our attention to CIT v. Sawaran Singh Balbir Singh 1982 136 ITR 595, wherein the Punjab and Haryana High Court has found on the facts of that case that since there was an agreement to pay by cash, it was due to exceptional circumstance that the assessee had to make payment in cash and the disallowance made by the ITO was not valid. Clause of r. 6DD has given a discretionary power to the ITO that if he is satisfied that the payment could not be made by a crossed cheque or a crossed bank draft due to exceptional or unavoidable circumstances and is also satisfied about the genuineness of the payment and the identity of the payee, the assessee will not be covered by the mischief of s. 40A(3).


JUDGMENT JUDGMENT judgment of court was delivered by BHARGAVA J.-This is reference under s. 256(1) of I. T. Act, 1961. Following two questions of law have been referred for opinion of this court by Income-tax Appellate Tribunal, Jaipur Bench: " 1. Whether, on facts and in circumstances of case, Tribunal is right in holding that word'expenditure' as used in subsection (3) of section 40A would include cost of purchasing goods meant for resale? 2. Whether, on facts and in circumstances of case, Tribunal is right in holding that assessee was not entitled to exemption under clause (f) or clause (j) of r. 6DD in respect of payment regarding purchase of goods from other traders? " assessee-firm is carrying on business of commission agency and kirana goods at Ramganj Mandi. assessee-firm purchased " dhania " goods and out of total purchases, those paid for in cash in excess of Rs. 2,500 between April 1, 1969, to June 2, 1969, amounted to Rs. 41,922. According to ITO, such payments were caught within mischief of sub s. (3) of s. 40A of I. T. Act, 1961 (hereinafter to be referred to as " Act "), which was inserted from April 1, 1969, and assessee had not been able to show any exceptional or unavoidable circumstances for payment in cash or that payment was impracticable or would have caused genuine difficulty to payee. As such, amount of Rs. 41,922 was treated as assessee's income from undisclosed source and was added to his total income. On appeal, AAC of Income-tax came to conclusion that sum of Rs. 18,371 could not be added to income of assessee in terms of s. 40A(3), but remaining amount aggregating to Rs. 23,551 was in his opinion covered by s. 40A(3). On further appeal before Tribunal, assessee contended that genuineness of purchase was not in doubt. Therefore, amount should not have been added to his total income. He further submitted that Word " expenditure " used in sub-s. (3) of s. 40A could never cover purchases, since purchases were not expenditure in same sense as payment for salary or wages or rent, etc., was. It was in fact investment. He further submitted that his case was covered by provisions of cls. (f) and (j) of r. 6DD. But all contentions of assessee were turned down by Tribunal and Tribunal came to conclusion that: " Cl. (f) of r. 6DD of Income-tax Rules, 1962, did not cover assessee's case. payments in question were not made' to cultivator Or producer of such articles or produce' as were referred to in cl. (f) of r. 6DD. case of assessee was also not covered by cl. (j) of r. 6DD as, in opinion of Tribunal, ignorance of law or non-clarity of law to assessee did not constitute exceptional or unavoidable circumstance in which he could not make payments to sellers by crossed cheques or by crossed bank drafts"; and also that amount was expenditure, and, therefore, covered by mischief of s. 40A(3). assessee, therefore, submitted application under s. 256(1) of Act and Tribunal allowed said application and referred above-mentioned two questions of law to this court for our opinion. Learned counsel for assessee brought to our notice that there is divergence of opinion between various High Courts as far as question No. 1 is concerned. Punjab and Haryana High Court in CIT v. Avtar Singh and Sons [1981] 129 ITR.671 held that word " expenditure " used in s. 40A(3) did cover expenditure on purchase of stock-in-trade and Supreme Court has already granted special leave to appeal against said judgment of Punjab and Haryana High Court and matter is pending before Supreme Court and, therefore, he had frankly conceded that no useful purpose would be served by expressing any opinion on question No. 1. Before we discuss question No. 2, it will be profitable to reproduce s. 40A(3). It is as follows: " (3) Where assessee incurs any expenditure in respect of which payment is made, after such date (not being later than 31st day of March, 1969), as may be specified in this behalf by Central Government by notification in Official Gazette, in sum exceeding two thousand five hundred rupees otherwise than by crossed cheque drawn on bank or by crossed bank draft, Such expenditure shall not be allowed as deduction: Provided that where allowance has been made in assessment for any year not being assessment year commencing prior to I st day of April, 1969, in respect of any liability incurred by assessee for any expenditure and subsequently during any previous year assessee makes any payment in respect thereof in sum exceeding two thousand five hundred rupees, otherwise than by crossed cheque drawn on bank or by crossed bank draft, allowance originally made shall be deemed to have been wrongly made and Income-tax Officer may recompute tota income of assessee for previous year in which such liability was incurred and make necessary amendment, and provisions of section 154 shall, so far as may be, apply thereto, period of four years specified in subsection (7) of that section being reckoned from end of assessment year next following previous year in which payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in sum exceeding two thousand five, hundred rupees is made otherwise than by crossed cheque drawn on bank or by crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to nature and extent of banking facilities available, considerations of business expediency and other relevant factors." Clauses (f) and (j) r. 6DD are as follows: " 6DD. Cases and circumstances in which payment in sum exceeding two thousand five hundred rupees may be made otherwise than by crossed cheque drawn on bank or by crossed bank draft.-No disallowance under sub-section (3) of section 40A shall be made where any payment in sum exceeding two thousand five hundred rupees is made otherwise than by crossed cheque drawn on bank or by crossed bank draft in cases and Circumstances specified hereunder, namely:....... (f) where payment is made for purchase of- (i) agricultural or forest produce; or (ii) produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) products of horticulture or apiculture; to cultivator, grower or producer of such articles, produce or products;...... (j) in any other case, where assessee satisfies Income-tax Officer that payment could not be made by crossed cheque drawn on bank or by crossed bank draft (i) due to exceptional or unavoidable circumstances, or (ii) because payment in manner aforesaid was not practicable, or would have caused genuine difficulty to payee, having regard to nature of transaction and necessity for expeditious, settlement thereof, and also furnishes evidence to satisfaction of Income-tax Officer as to genuineness of payment and identity of payee." These rules were published in Gazette of India, Extraordinary, Part II, s. 3(ii), page 215, dated February 14,1969. Learned counsel for assessee has vehemently argued that purpose of introducing s. 40A(3) was to block loopholes so that tax liability may not be reduced artificially by deduction of expenditure and in this connection brought to our notice portion of speech of Deputy Prime Minister and Minister of Finance delivered on February 29, 1968, while introducing Finance Bill, 1968, which is found in [1969] 67 ITR (Statutes) p. 15: 15: " Tax liability is sometimes artificially reduced by diverting profits to relatives and associate concerns in form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often with view to frustrating investigation as to identity of recipients and genuineness of claim. To plug these loopholes, I propose to provide that payments made in businesses and professions to relatives or associate concerns will have to pass test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after date to be notified later will be allowed as deduction only if these are made by crossed cheques or by crossed bank drafts. And, therefore, he submitted that very purpose of introducing this new section was to have check over dishonest assessee who wants to make false deductions on account of expenditure incurred in cash and this intention is further fortified by reference to r. 6DD(j) wherein it has been provided that ITO is to be satisfied that payment could not be made by crossed cheque or crossed bank draft due to exceptional or unavoidable circumstances and he is to be satisfied about genuineness of payment and identity of payee. rigour of this clause is, however, relaxed by proviso to said sub-section which provides that no disallowance under this sub-section shall be made where any such payment is made otherwise than by crossed cheque or crossed bank draft in such cases and under such circumstances as may be prescribed having regard to nature and extent of banking facilities available, considerations of business expediency and other relevant factors. And it was only with this object that CBDT has framed r. 6DD. Counsel for assessee has further submitted that since assessee was purchasing agricultural produce, he was exempted from operation of s. 40A(3), in view of cl. (f) of r. 6DD. According to him, words " to cultivator, grower or purchaser of such articles, produce or products " apply and govern only sub-clause (iv) of cl. (f) and it does not govern cls. (i), (ii) and (iii) and since assessee was dealing in agricultural purchase like dhania, he was covered by cl. (f Xi) of r. 6DD. Learned counsel for assessee brought to our notice that since some doubt was expressed or created regarding interpretation of cl. (f) of r. 6DD, CBDT published another notification as corrigendum-" Income-tax (Amendment) Rules, 1969, amending r. (f) as under - See ([1969] 72 ITR (St.) 20): " (f) where payment is made for purchase of- (i) agricultural or forest produce; or (ii) produce of animal husbandry (including bides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) products of horticulture or apiculture, to cultivator, grower or producer of such articles, produce or products; " It was published in Gazette of India, Extraordinary, Part II sec. 3(ii), page 393, dated March 25, 1969, and, therefore, he has submitted that even Board of Direct Taxes thought it necessary to issue corrigendum so as to amend cl. " (f) " of r. 6DD so that words " to cultivator, grower or purchaser of such articles, produce or products " govern all four clauses of cl. (f), and, therefore, it was obvious that assessee's contention, that words govern only sub-cl. (iv) of cl. (f) was perfectly justified and there was nothing wrong if on basis of that interpretation, be thought that it was not necessary for him to make payment through crossed cheque or crossed draft as he was dealing in agricultural produce, was fully justified. Even cl. (j) was substituted vide Notification No. S.O. 3769 dated November 18, 1970, " with effect from April 1, 1970 ", and substituted clause (j) runs as under ([1971] 79 ITR (St.) 29): " (j) in any other case, where assessee satisfies Income-tax Officer that payment could not be made by crossed cheque drawn on bank or by crossed bank draft- (1) due to exceptional or unavoidable circumstances) or (2) because payment in manner aforesaid was not practicable, or would have caused genuine difficulty to payee, having regard to nature of transaction and necessity for expeditious settlement thereof, and also furnishes evidence to satisfaction of Income-tax Officer as to genuineness of payment and identity of payee." This amendment was published in Gazette of India, Extraordinary, Part 11, s. 3(iii), page 1855, dated November 19, 1970. On basis of this, learned counsel for assessee has submitted that amendment brought in Act by introducing new s. 40A(3) and introducing new r. 6DD and thereafter issuing amendment to Rules received several queries from various trade associations and members of public about operation of new provisions and, therefore, first circular was issued on March 25, 1969, and another circular was issued on November 19, 1970, by Central Board of Taxes and more clarifications were made by Central Board of Direct Taxes even after 1970. Number of clarifications liberalising payments have been issued from time to time by Central Board of Direct Taxes and, therefore, assessee had bona fide belief that restriction provided by s. 40A(3) was not applicable to purchase of stock-in-trade is it is not exception in popular sense and cash payment could be made for agricultural produce. assessee did not make payment by crossed cheque or crossed draft as envisaged by s. 40A(3). It may be at best ignorance of law or that law was not clear but there was no mens rea and there was no fraud; that conduct of assessee was not contemptuous. Two interpretations were possible to cl. (f) of r. 6DD and liberal interpretation more beneficial to assessee should be taken if two views are possible and, in this connection, he has placed reliance on CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC), CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC), CIT v. Simpson & Co. [1980] 122 ITR 283 (Mad) and CIT v. Mahindra & Mahindra Ltd. [1983] 144 ITR 225 (SC) and Division Bench decision of this court reported in Mansinghka Brothers P. Ltd. v. CIT [1984] 147 ITR 361 (Raj). On basis of these authorities, he has submitted that if language of taxing provision is ambiguous or capable of more meaning than one, then court should adopt that interpretation which favours assessee, more particularly so, where provision relates to imposition of penalty. He further submits that effect of disallowing this and charging of additional tax burden amount to penalising assessee. By disallowing such amount, tax is being charged not on real income but on imaginary income and this can be termed as penal in nature. He has placed reliance on Cement Marketing Co. of India v. Asst. Commr. of S. T. [1980] 124 ITR 15 (SC) and submitted that since assessee had bona fide belief and there is no mens rea or wilful fraud, he was entitled to deduction of these amounts from his total income and he should not be penalised. Learned counsel for petitioner-assessee has placed reliance on Supreme Court judgment in Motilal Padampat Sugar Mills Co. v. State of UP [1979] 118 ITR 326, wherein it was observed as follows (p. 339): " Moreover, it must be remembered that there is no presumption that every person knows law. It is often said that every one is presumed to know law, but that is not correct statement: there is no such maxim known to law. Over hundred and thirty years ago, Maula J. pointed out in Martindale v. Falkner [1846] 2 CB 706:' There is no presumption in this country that every person knows law: it would be contrary to common sense and reason if it were so.' Scrutton L. J. also once said:' It is impossible to know all statutory law, and not very possible to know all common law.' But it was Lord Atkin who, as in so many other spheres, put point in its proper context when he said in Evans v. Bartlam [1937] AC 473:'...the fact is that there is not and never has been presumption that every one knows law. There is rule that ignorance of law does not excuse, maxim of very different scope and application'. " Section 40A(3) came into force from April 1, 1969, and period during which cash payments were made ranged between April 3 to June 2, and some margin should also be given for time taken in publishing Gazette and receipt of Gazette by public. Every assessee does not subscribe to Gazette and, therefore, matters published in Gazette come to knowledge of public after some time only. assessee is entitled to benefit of cl. (j) and this should be taken as exceptional or unavoidable circumstance. More so when there is no mens rea or any mala fide intention and payments have been found to be genuine and identity of payee is also not disputed and there was no mischief of tax evasion on behalf of assessee. Learned counsel for assessee farther drew our attention to CIT v. Sawaran Singh Balbir Singh [1982] 136 ITR 595 (P & H), wherein Punjab and Haryana High Court has found on facts of that case that since there was agreement to pay by cash, it was due to exceptional circumstance that assessee had to make payment in cash and disallowance made by ITO was not valid. He has also brought to our notice CIT v. Kohli Khan Bhandak [1978] 111 ITR 419 (All), wherein Allahabad High Court refused to call for reference as it was satisfied that Tribunal was justified in giving benefit of r. 6DD(j) to assessee on ground that this was very first year of business of assessee, that assessee was not known in market and hence could not make payment by cheque and looking to nature of business, cash payment was unavoidable. He also referred to Hasanand Pinjomal v. CIT [1978] 112 ITR 134 (Guj), wherein also Gujarat High Court gave to assessee benefit of r. 6DD(j) on facts of that case on ground of practicability in making cash payment. On other hand, learned counsel for Revenue has placed reliance on decision of this court in Registhan P. Ltd. v. CIT [1984] 146 ITR 620, wherein Division Bench of this court dismissed application for reference under s. 256(2) filed by assessee on ground that no question of law arose when Tribunal had taken into consideration material on record and found that there was no exceptional circumstance for making payments in cash. He has further submitted that High Court should not look to statement of objects and reasons for interpreting provisions of any law and relied on Aswini Kumar v. Arabinda Bose, AIR 1952 SC 369. In rejoinder, Shri Ranka, learned counsel for assessee, drew our attention to K. P. Varghese v. ITO learned counsel for assessee, drew our attention to K. P. Varghese v. ITO [1981] 131 ITR 597 (SC), wherein Supreme Court itself referred to speech made by mover of bill explaining reasons for its introduction for purpose of ascertaining mischief sought to be remedied by legislation and object or purpose for which legislation is enacted. We have given our thoughtful consideration to whole matter and have also gone through relevant records and various citations at Bar. Income-tax is tax on real income and purpose of introducing s. 40A(3) was to block loopholes of making cash payment and claim as deductions with view to frustrate investigation as to identity of recipients and genuineness of claim. Proviso to s. 40A(3) shows that Legislature intended not to make provision of s. 40A(3) very strict and absolutely mandatory. rigour of whole restriction was loosened by proviso and by making r. 6DD in pursuance thereof. Clause (j) of r. 6DD has given discretionary power to ITO that if he is satisfied that payment could not be made by crossed cheque or crossed bank draft due to exceptional or unavoidable circumstances and is also satisfied about genuineness of payment and identity of payee, assessee will not be covered by mischief of s. 40A(3). It is also admitted that assessee used to deal with agricultural produce and if he was under impression that he is covered by clause (f)(i) of r. 6DD, even if payment was not made to cultivator, it was not necessary for him to make payments by crossed cheque or crossed draft as he had bona fide belief that interpretation was justified and there is no doubt that cl. (f) as introduced or inserted by notification dated February 14, 1969, was capable of two interpretations and, therefore, it had become necessary for Central Board of Direct Taxes to issue corrigendum and amendment of cl. (f) by notification dated March 25, 1969. Moreover, thereafter also there were some queries by different organisations and associations and as result thereof, Central Board of Direct Taxes had to issue several circulars in this respect. All these show that position of law and interpretation were not very clear and there were some doubts with regard to its interpretation and benefit of this doubt should be in favour of assessee. Since, in present case, identity of payee is not disputed, transaction has been found to be genuine. Genuineness of payment has been established. default even if made is only technical and when there is discretion given to ITO in cl. (j), in our opinion, in facts and circumstances of case, assessee was entitled to exemption under cl. (f) and cl. (j) of r. 6DD in respect of payments regarding purchase of goods from other traders in course of his business. In result, answer to question No. 2 is in negative, in favour of assessee and against Revenue. Tribunal was not right in holding that assessee was not entitled to exemption under cl. (f) and cl. (j) of r. 6DD in respect of payments regarding purchase of goods from other traders. In view of our decision with regard to second question, it is not necessary for us to answer question No. 1. reference is answered accordingly. parties are left to bear their own costs. *** KANTI LAL PURSHOTTAM & CO. v. COMMISSIONER OF INCOME TAX
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