T.V. RAJAGOPALA RAO, J.M. This is assessee's appeal directed against order of CIT (A), Vijayawada dt. 27th March, , 1986 and it relates to asst. yr. 1983-84. 2. Some disallowance made for cash payment towards purchases of more than Rs. 2,500 instead of issuing Crossed Cheque or Crossed Demand Draft and thus violating provision of s. 40A(3) is subject matter of this appeal. assessee is individual. assessee carried on business in purchase of White papers, manufacturing of note books and selling same on wholesale basis, for asst. yr. 1983-84 for which previous year ended by 31st day of March, 1983, assessee returned and income of Rs. 20, 780. income of assessee comprises of three sources mainly property, business and other sources. With regard to both second and third sources of income referred to above, return of income was not accepted and certain additions were made. While computing business income, ITO made addition by applying provisions of s. 40A(3) . as against returned income stated above, assessment was completed on total income of Rs. 4,98,800 by his assessment order dt. 25th Nov., 1985. 3 . Aggrieved against assessment order assessee went in appeal before CIT (A). CIT (A) knocked of disallowance made by ITO under s. 40A(3) to extent of Rs. 1,78, 466 and confirmed disallowances with regard to following five parties totalling to Rs. 2, 74, 239. . . Rs. (a) M/s. Krishna & Co. : 2,51,571 (b) M/s. B.S. & Co. : 5,110 M/s. Lakshmi Ganpati : paper and (c) 3,456 General Stores (d) Kesava Agancies, Nellore 8,933 (e) Swastik Coaters : 5,169 2,74, 2,74, . . 239 Now we are concerned in this appeal with correctness, propriety and legality of this allowance amounting to Rs. 2,74,239. 4 . We have heared Shri M.J. Swamy, ld. Advocate for assessee and Shri N. Jayakar, ld. Departmental representative. On behalf of assessee, paper book containing 40 pages was filed. Now let us take up purchases namely from M/s. Sri Krishna & Co., Tadepalligudem. As per letter furnished pages 2 of paper book, inter alia, ITO called upon explanation of assessee to state under what circumstances amounts noted against various dates were paid in cash to M/s. Sri Krishna & Co., Tadepalligudem. ITO called upon assessee to file explanation on or before 23rd Feb., 1985. assessee, however filed explanation dt. 28 th Feb., 1985. Copy of which is furnished at page 3 of paper compilation. assessee, inter alia, stated that he is regular customer of M/s. Sri Krishna & Co., Tadepalligudem from whom he purchased paper for his Stationery Mart and Clerks of said firm used to be sent on line to collect monies from their trade customers and clerks of said firm used to come with out Perrier intimation for payment of money by which time of Bank transactions were closed. In order to keep cordial business relationship and co-operation he was forced to comply their emergency requests for payments and in those circumstances payments were made against several dates noted in his reply t o M/s. Sri Krishna & Company, Tadepalligudem. Page 4 of paper book is letter dt. 30th Oct., 1985. Written by managing partner of M/s. Sri Krishna & Co., Tadepalligudem. When Income-Tax Inspector visited their shop and asked for day book and ledgers for accounting years 1982-83 and 1983- 8 4 and when he enquired about their transactions with M/s. Vijaya Stationery Mart, assessee proprietary concern at Vijayawada. In said letter he sated that in respect of supplies made by them, they used to get cash against receipt either by him or by his office Clerk, Shri Veerabhatulu Veeraghavlu and used to enter them either on same day or next day after returning from camp. He also stated letter that they have not insisted any party to pay only i n cash. He further stated that they accepted cheques or drafts from some parties. They have received payment by cheques from Ameebhatala paper Mart, Vijayawada. He further stated that they did not give any discount or commission against cash payments. All sums received from Vijaya Stationery Mart were recorded in ledger folio No. 221. When ledger extracts of M/s. Vijaya Stationery Mart were shown to him he has stated that sum of Rs. 10,995.30 was not paid to them by Vijaya Stationary Mart and they do not know to whom it was paid. Page 6 is letter dt. 16th June, 1982. Page 9 is letter dt. 26th July, 1982. Page 11 is letter dt. 23rd Aug., 1982. Page 13 is letter dt. 23rd Sept., 1982. Page 15 is letter dt. 30th Nov., 1982. Page 17 is letter dt. 7th Feb., 1983. Page 19 is letter dt. 18th Feb., 1983. Page 21 is letter dt. 1st March, , 1983. Page 23 is letter dt. 2nd March, , 1983. Page 26 is letter dt. 28 th March, , 1983. All these letters are either in English or in Telugu. These letters were addressed by Managing Partner of M/s. Sri Krishan & Co., Tadepalligudem, demanding assessee to pay outstanding amount due to them (noted in khata) in cash. request is to make such of payments as is possible to assessee and obtained receipt from bearer of letter which is no other then clerk, Shri Veeraghvalu. In each of letter it was requested that for each of payment made they may obtain receipt from (Gumasta) Veeraghvalu. In pursuance of requests made in above letters assessee seems to have paid amounts in cash on dates mentioned here- under : Person from Sl. Amount Date whom Receipt was No. paid obtained 1 2 3 4 17- Rs. Veerabhatuaa 1. 6-1982 20,000.00 Veeraghavalu 6-7- Rs. Veerabhatuaa 2. 1982 15,000.00 Veeraghavalu 27- Rs. Veerabhatuaa 3. 7-1982 3,000.00 Veeraghavalu 5-8- Rs. Veerabhatuaa 4. 1982 5,000.00 Veeraghavalu 24- Rs. Veerabhatuaa 5. 8-1982 8,736.00 Veeraghavalu 20- Rs. Veerabhatuaa 6. 9-1982 13,264.00 Veeraghavalu 6- Rs. Veerabhatuaa 7. 12-1982 10,447.00 Veeraghavalu 8-2- Rs. Veerabhatuaa 8. 1983 25,000.00 Veeraghavalu 22- Rs. Veerabhatuaa 9. 2-1983 37,744.72 Veeraghavalu 1-3- Rs. Veerabhatuaa 10. 1983 20,000.00 Veeraghavalu 2-3- Rs. Veerabhatuaa 11. 1983 20,000.00 Veeraghavalu 3-3- Rs. 12, Veerabhatuaa 12. 1983 28 7.20 Veeraghavalu 29- Rs. 13. P.T. Venkatacharyulu 3-1983 25,000.00 31- Rs. 14. P.T. Venkatacharyulu 3-1983 25,000.00 It is case of assessee that because supplier of goods used to send clerk with request to arrange payment as far as he can and because clerk also usually used come out side Banking hours, in order to maintain and keep good business relationship, assessee used to pay amount in cash out of business compulsion and obtained receipts from said clerk or to whosoever payment used to be made in Cash. Both assessee as well as M/s. Sri Krishna & Co. Tadepalligudem, are Income-tax Assessee and there account were tallied with each other and there were no discrepancies found. Thus, identity of creditor was well as truth of Payments were clearly established and circumstances under which amounts were paid in cash were also made clear, in letter addressed and adverted to above. Therefore, case of assessee comes directly within four corners of exceptions contemplated under r. 6DD(J). Shri M.J. Swamy, ld. Advocate for assessee further contended that letter. dt. 30th Oct., 1985 was secured by Department already behind back of assessee, and Department wanted to rely upon certain alleged admission in said letter. For instance, it is stated in said letter that they do not insist any party to pay in cash, but they also used to accept cheques or drafts from parties. They received such payments from another customer belonging to Vijayawada , and they never showed nay discount or commission to their customers when they paid in Cash. It is contention of assessee that this letter was secured behind back of assessee and contents of letter was never put to assessee and h i s explanation elicited. In these circumstances, Shri M.J. Swami, ld. Advocate for assessee urged that contents of said letter may not be read against assessee, as it would be against he principle of natural justice to do so. In respect of this contention, he invited our attention to commentary of Chaturvedi & Pithisaria's IT Law. Third addition, where it is held as follows. All that is required that if they want to use any material collected by them which is adverse to assessee, then assessee must by given chance to make submissions thereon. principle of natural justice are violated if adverse order is made on assessee on basis of material not brought to his notice." Several High Court and Supreme Court decisions were cited in support of above submissions of law amongst which we can state two Supreme Court decisions namely, CIT vs. East Coast Commercial Co. Ltd., (1987) 63 ITR 449 (SC) and Kishin Chand Chellaram vs. CIT (1980) 19 CTR (SC) 360 : (1980) 125 ITR 713 at 720 (SC). Therefore, ld. Advocate for assessee urged tha both Lower Authorities has taken into consideration contents of said letter, secured at back of assessee, without giving him opportunity to explain it and therefore, impugned order is vitiated of violating principle of explain it and therefore, impugned order is vitiated of violating principle of natural justice. ld. Departmental representative on other hand contended that so called letters now furnished at pages 6,9,11,13,15,17,19,21,23 and 26 were never produced before ITO despite several opportunities given to t h e assessee and in order to prove said allegation, departmental representative submitted before us original file of ITO and particularly invited our attention to letters addressed to assessee on 4th Nov., 1985, 26th Aug., 1985, 25th July, 1985 and 15th Feb., 1985 whereby ITO specifically called upon to file his explanations for making cash payment inter alia, to M/s. Sri Krishan & Co., Tadepalligudem. He complains none of these opportunity was availed of by assessee and in those ld. CIT (A) ought not to have admitted letters as well as cash receipts as additional evidence under r. 46 of IT Rules. After considering arguments, we hold that ld. Departmental representative cannot now argue about admissibility of certain documents, especially when they were filed before CIT (A) and when Department was presumed to have been granted opportunity to concerned ITO to present his case before him. Further, we are of opinion, that when they are considered to be crucial documents which are essential for giving just decision ld. CIT (A) is entitled to secure them as additional evidence. Further, we accept contention of Shri M.J. Swamy, ld. Advocate for assessee that by taking contents of letter dt. 30th Oct., 1985 and using said contents against assessee Lower Authorities violated principle of natural justice, and thus, their finding regarding applicability of s. 40A(3) of IT Act so far as payment sot M/s. Sri Krishan & Co., Tadepalligudem are concerned is vitiated by error of law. Shri M.J. Swamy, ld. Advocate for assessee. Further contended that provisions of s. 40A(3) are not mandatory in view of decisions of Rajasthan High Court (1986) 53 CTR (Raj) 19 : (1985) 155 ITR 519 (Raj.) in case of Kanti Lal Purshotiam & Co. vs. CIT was following is held as per head note (quote from head noted). He, further, invited our attention to CBDT Circular clarifying r. 6DD(j) in Circular No. 220, dt. 31st May, 1977. He again invited our attention to r. 4 in said Circular quoted at page 1515 in Chaturvedi & Pithisaria ', Third Edition, material portion of which read as follows : "All circumstances in which conditions laid down in r. 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet requirements of said rule are ; (i) purchaser is new to seller ;or (ii) transactions are made at place where either purchaser or seller does not have bank account." He argues that admittedly M/s. Sri Krishna & Co., Tadepalligudem, does not have any Bank Account in Vijayawada. Therefore, firstly, for reason that seller insisted for payment of cash as evidenced by several letters brought on record and secondly, as seller had no Bank Account in Vijayawada, where cash payments were made, requirements of r. 6DD(j) were met with and cash payment cannot be disallowed under provisions of s. 40A(3) as said payments were made vide exceptional circumstances. ld. Departmental representative argued firstly that he matter is covered by Punjab & Haryana High Court's decision reported as Hari Chand Virender Paul vs. CIT, Patialea-I, (1982) 30 CTR (P&H) 325 : (1983) 140 ITR 148 (P&H) where in head note, facts, as well as decision thereon, were noted at page 149 as follows : "where assessee contended that goods were purchased on credit basis number of days earlier to date on which alleged payment was made and seller made demand for payment after banking hours and insisted on cash payment. Held that since assessee had ample opportunity to make payment by crossed cheque or crossed bank draft and need not have waited till demand was made for payment, there was no exceptional or unavoidable circumstances which justified non-compliance with provisions of s. 40A(3) and disallowance of sum of Rs. 28 ,231 was justified". It is contended that in this case also assessee had long running account with M/s. Sri Krishna & Co., Tadedalligudem and in such case assessee had no justification to pay amount in cash, especially when it is obligation to pay seller of goods arose long before cash payment. In th o s e circumstances, according to Punjab & Haryana High Court disallowance as contemplated under s. 40A(3) is clearly as attracted. After considering arguments of both sides, we are of opinion, that when r. 6DD(j) listed exceptional circumstances and if payment made by assessee comes under one of said exceptional circumstances, then disallowance on under s. 40A(3) itself does not arise. Therefore, in those circumstances, in our considered view, 140 ITR 48 (P&H) does not have any application. In result, disallowance of 2,51,517 representing cash payment made to M/s. Sri Krishna & Co., Tadepalligudem, has to be set aside and appeal is allowed with regard to said payment. 5 . Now let us take up payment made to M/s. B.S. Company, Guntur, amounts paid was Rs. 5,110 on 25th May, 1982. That assessee filed confirmatory letter from party stating seller refused to accept payment by cheque draft and it was contended on behalf of assessee that purchaser's interest would suffer due to non-availability of goods if cash was not paid as demanded. account copy of B.S.N. Company, Guntur, was provided at page 29 of paper compilation. letter addressed by M/s. B.S.N. Company, Guntur is provided at page 30 of paper compilation. At para 4 of letter it is stated that sellers refused to accept payment by way crossed cheque or demand draft and in para 5 it is stated that sellers require purchaser to pay in cash and in para 6 of letter it is stated that specific discount is given by seller for payment to be made by way of cash. Para 4 of this letter gives impression that seller refused to accept cheques and insisted on cash payment. Neither identity of party nor fact of payment were in dispute. ITO dismissed plea of assessee that payment in cash was made in exceptional circumstances and it was exempt under .r 6DD(j) on ground that assessee did not adduce any evidence except filing confirmatory letter, whereas, inquiry revealed that seller is old customer to assessee and accept cheque payments also. This clearly indicated that there was no insistence as such from seller for payment of cash and there are no circumstances to justify claim to be brought within exception to s. 40A(3). Hence, sum Rs. 5,110 was disallowed under s. 40A(3). ld. CIT (A) confirmed this disallowance on ground that Inspector's report showed that seller accepted both cheques and cash payments and in fact cheque payment of Rs. 7,662 was made to this very party. Shri M.J. Swamy, ld. Advocate for assessee contended that for same reason, which he has argued in case of M/s. Sri Krishna & Co. Tadepalligudem, contents of IT Inspector's report or contents of letters he secured from creditor should not be read against assessee as contents of said letter were never put assessee and his explanation was not sought for. He filed confirmatory letter which clearly reveals that creditor insisted cash payments. It is also alleged that this party and not bank account at Vijayawada. This was not denied by learned departmental representative, and, therefore, payment comes within exception as stated under r. 6DD(j) for reason already set out in case M/s. Sri Krishna & Co., Tadepalligudem. 6 . next payment is cash payment of Rs. 3,456 to M/s. Sri Lakshmi Ganapathi Paper & General Stores. This Addition was made by ITO on ground that he assessee had not adduced any evidence whatsoever and thus finding was confirmed by ld. CIT (A). Sri M.J. Swamy, ld. Advocate for t h e assessee contends that this finding of Lower authorities are clearly wrong. In fact Lower Authorities had before them letter dt. 28 th Nov., 1 9 8 5 copy of which is furnished at page 31 addressed by Shri Lakshmi Ganapathi Paper Agency to ITO, where-in they have stated that Inspector visited their premises and enquired about payments made by M/s. Vijaya Stationery Mart they accept cheques drafts, but generally they insist on cash payment. In fact on two occasions assessee made payment by cheques. Therefore, it is evident that is was not consistent practice of creditor or insist on cheques. On other hand it is general practice of this creditor to insist cash payment in preference to cheques. When such important material piece of evidence is present before them, it is unfortunate ld. Advocate, Shri M.J. Swamy argued that Lower Authorities ignored said material and freshly commented that assessee did not adduce any evidence. We accept criticism made against lower authorities as clearly justified and we hold that payment of 3,456 is made to Shri Lakshmi Ganapathi Paper Agency on its insistence, and, therefore, it comes under one of exception enumerated in r. 6DD(j) and disallowance is unwarranted. 7. next disallowance which falls for our consideration is amount of Rs.5,160 paid to M/s. Swastic Coaters and amount of Rs. 8,933 paid to M/s. Kesava Agencies. Both lower authorities held that no evidence was adduced by assessee in order to show that these payments come under r. 6DD(j). It is stated that several opportunities were given to ITO for this purpose. Both these parties, are now parties to assessee. There is only one single transaction entered into by assessee with each of these parties. CBDT whose Circular was already quoted above wanted to explain circumstances under which r. 6DD(j) provisions can be extended. Firstly, it is stated that all circumstances cannot be exhausted or cannot be contemplated. However, in para 4 of said Circular No. 220 dt. 31st May, 1977. It has listed out certain circumstances and one of circumstances was stated to be where purchaser was new to seller. Here in this case both parties according to assessee was new to seller, and, therefore payments made to them are covered by r. 6DD(j). 8 . As regards Kesava Agencies, Nellore, are concerned their account book furnished at page 33 of paper compilation would show that transaction on 3rd June, 1982 is only transaction entered into with that party. Further at page 34 it is stated firstly that purchaser was new to seller and, secondly transaction is completed at place where seller head no bank account, specific discount was given by seller for payment in cash and it is also stated that payment was made after bank time to their representative. As regards payments to Swastik Coaters is concerned it was argued that they had no bank account at Vijayawada and that this was only transaction entered into and that is also new party to them. Hence these circumstances compelled ;assessee to pay cash for supplies received from parties. In those circumstances s. 40A(3) disallowance cannot be sustained. ld. Departmental representative relied upon Punjab and Haryana High Court's decision which is already cited above and had held as supply of goods were made long back there is no justification to assessee to make cash payment long after it supplied goods to parties. After hearing both sides we are in climed to agree with ld. Advocate, Shri M.J. Swamy, for assessee and held that in view of his contentions not having been controverted they should be taken to be true, and therefore, in our opinion, there are no valid reasons for disallowance of cash payment made to these parties, especially when identity as well as payments made were clearly established. 9 . In result, appeal is fully allowed and orders of lower authorities are hereby set aside. *** TATIKONDA SUBARAO v. INCOME TAX OFFICER