PAUL BROTHERS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference is made under sub -s. (1) of S. 256 of the INCOME TAX ACT, 1961, at the instance of the assessee pertaining to two assessment orders of 1978 -79 and 1979 -80. The question referred reads as under:

(2.) THE assessee is a business firm at Tezpur in Assam. The assessee paid to Eastern Hardware Co. (India) the sum of Rs. 9,600, to Assam Asbestos Ltd. the sum of Rs. 16,000 and to Shew Prasad Mohanlal the sum of Rs. 24,959. The total of these three amounts is Rs. 50,559 which was paid in cash to the three firms at Tezpur. Similarly, relevant to the asst. year 1979 -80, the assessee paid to Steel Stores Rs. 19,030 and to Bajaj Engineering Co. Rs. 17,500. The total of these two amounts is Rs. 36,530. These amounts were also paid in cash at Tezpur. The payments were made to the five firms who have their principal seat at Gauhati. The assessee tendered proof before the ITO showing that the amounts were paid and the ITO was satisfied that the payments were true. Since the amounts were not paid by crossed cheques or by bank drafts, the payments were not allowed to be deducted. On appeal, the CIT allowed the appeal. But, on a further appeal, the Tribunal restored the order of the ITO on the basis of S. 40A (3) of the Act.

(3.) THE Indian Parliament incorporated the above provisions to check evasion of taxes. Even in genuine cases where payments are shown to have been made in cash, the assessee is put to the necessity to prove that in the area of business, banking facilities are not adequate. Therefore, impelled by genuine difficulty, the assessee had to make payment in cash. The same idea is writ large in the Rules. The assessee will have to show that there was no way left for the assessee except to pay in cash. In the nature of things whether in the statute, rules or circulars, all the contingencies cannot be enumerated exhaustively. Parliament referred to the inadequacy of facilities in S. 40A. The rule -making authorities illustrated some of the circumstances in the Rules. The Revenue supplemented the further circumstances when exemptions can be claimed and allowed. The Circular recited that if a seller does not have a bank account and payments are made at a place where either the purchaser or the seller does not have a bank account or payments are made on a bank holiday or the seller is refusing to accept payment by cheque or draft or the purchaser's business interest is shown to suffer due to the non -availability of goods, the purchaser may pay in cash and claim exemption. The cases decided by the Courts show in what circumstances exemptions can be accorded. In Mudiam Oil Co. vs. ITO (1973) 92 ITR 519 (AP) : TC18R.450, the Andhra Pradesh High Court considered the vires of S. 40A and held that Parliament had power to incorporate S. 40A(3) in the Act. There is another Andhra Pradesh High Court decision in Late Smt. Jyothi Chellaram vs. CIT (1988) 173 ITR 358 (AP) : TC18R.575 where a transaction was held not proved, and, therefore, exemption was not accorded. The Gujarat High Court in Hasanand Pinjomal vs. CIT (1978) 112 ITR 134 (Guj) : TC18R.483 considered the statement of objectives for incorporation of this provision in the Act and held that the statute and rules were promulgated to check tax evasion. In another case of the same High Court in Navsari Waste Cotton Products vs. CIT (1987) 163 ITR 378 (Guj) : TC18R.541 that Court remanded the subject -matter for consideration under r. 6DD as, in that case, when the transaction was entered into, the rules were not promulgated. In Kanti Lal Purshottam and Co. vs. CIT (1985) 155 ITR 519 (Raj) : TC18R.534 the Rajasthan High Court held that the transaction in the case was genuine and the default made by the assessee was "technical" and further held that the ITO in his discretion could exempt the transaction. In CIT vs. Sawaran Singh Balbir Singh (1981) 20 CTR (P&H) 131 : (1982) 136 ITR 595 (P&H) : TC18R.502 the Punjab & Haryana High Court held that, in exceptional circumstances, exemptions can be recognised. In Giridharilal Goenka vs. CIT (1989) 179 ITR 122 (Cal) : TC18R.526 of the Calcutta High Court, payment made was shown to have been made in unavoidable circumstances and, therefore, was exempted. The Kerala High Court in Rajarajeswari Weaving Mills vs. ITO (1978) 113 ITR 405 (Ker) : TC18R.494 held that payment was made on the "insistence" of the customer and, therefore, payment was allowed. In Narayan Bijoy Kumar vs. CIT (1986) 55 CTR (Pat) 333 : (1987) 163 ITR 695 (Pat), the High Court of Patna found that circumstances were "unavoidable" and therefore, exemption was granted. In Bhilai Motors vs. CIT (1984) 41 CTR (MP) 125 : (1987) 167 ITR 147 (MP), the Madhya Pradesh High Court held that the findings reached by the Tribunal were findings of fact and, therefore, for that reason, did not call for interference. In U.P. Hardware Store vs. CIT (1976) 104 ITR 664 (All) : TC18R.478 the Allahabad High Court did not accept the explanation of the assessee and exemption was not ordered. In another case in Ideal Tannery vs. CIT (1979) 117 ITR 34 (All) : TC18R.469 the same Court held that the transactions were not proved. In a third case, the same High Court in CIT vs. Satish Chandra (1983) 143 ITR 330 (All) : TC 18R.+ did not accord exemption (sic).