COMMISSIONER OF INCOME-TAX Vs. AHMAD HUSSAIN

JUDGEMENT

(1.) The following questions of law have been referred by the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad : "1. Whether, on the facts and in the circumstances of the case the agreement dated August 31, 1957, followed by letter dated September 28, 1957, from the payee, constituted a legal and valid contract between the assessee and the payee operative during the previous year and requiring the assessee to make payments in cash, as contemplated in Rule 6DD(c) of the Income-tax Rules, 1962, read with Section 40A of the Income-tax Act, 1961 ?

(2.) Whether, on the facts and in the circumstances of the case, there was material before the Tribunal to hold that the payments by crossed cheques or crossed bank drafts would have resulted in genuine difficulty to the payee and there were exceptional and unavoidable circumstances for not making payments by crossed cheques drawn on a bank or by a crossed bank draft within the meaning of Rule 6DD(j) of the Income-tax Rules, 1962?

(3.) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that Clause (c) and/or Clause (j) of Rule 6DD of the Income-tax Rules, 1962, were applicable and that the disallowance of Rs. 31,938 under Section 40A(3) was not justified ?" 2. Dispute is in respect of assessment year 1970-71. It has been found that the assessee, which is a company manufacturing tobacco, had made cash payments of Rs. 31,938 to one Sri Syed Mahmood Ali Rizvi, proprietor of Rizvi Company. These payments have been made on account of packing, filling and despatching charges for tobacco. Admittedly, these payments were made after April 1, 1969, when Section 40A(3) of the I.T. Act had come into force. The payments were disallowed by the ITO, as, according to him, it was in violation of the aforesaid section. The Tribunal, however, set aside the order and held that these payments were made in exceptional circumstances as Sri Rizvi was a labour contractor for filling, packing and despatching tobacco who had to employ a number of workers and pay their wages in cash. Further, there was an agreement entered into between the assessee and Sri Rizvi as far back as 1957. Although the word "cash" was not mentioned in the agreement, the intention of the parties was clear as evident from a letter dated September 28, 1957, sent by Syed Mahmood Ali Rizvi to assessee, copy of which has been filed as annexure C. Construing these documents and considering the circumstances, the Tribunal held that these payments were bona fide and covered by Rule 6DD(c) and (j) as well. 3. It has been vehemently urged by the learned counsel for the CIT that Section 40A(3) being a remedial provision and enacted with a view to prevent evasion of tax should be construed strictly. Assuming it to be so, how does this help the Department is not understandable. The agreement was entered into between the parties as far back as 1957. The payment used to be made in cash and the dispute arose only in 1970-71 due to the enactment of Section 40A(3) which requires that where an assessee incurs any expenditure in respect of which payment is made in a sum exceeding two thousand five hundred rupees, then it should be paid by crossed cheque or bank draft, else it could not be allowed as deduction. The Legislature, however, while enacting this provision reduced its rigour by adding a proviso and permitting deduction in circumstances mentioned in the various sub-clauses in Rule 6DD. As there was an agreement between the parties which has been believed by the Tribunal coupled with/the finding that the bona fides of the payment were not disputed, the claim of the assessee was squarely covered by sub- Clause (c) of Rule 6DD. In this view of the matter, it is not necessary to decide if deduction could have been allowed under Clause (j) although there appears to be no hesitation in saying that even this finding of the Tribunal appears to be well founded.