The provisions of section 40A(3) is not intended to restrict the business activities. There is no restriction on the assessee in his trading activities.

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The provisions of section 40A(3) is not intended to restrict the business activities. There is no restriction on the assessee in his trading activities.

Punjab & Haryana High Court
In the case of
CIT vs Brij Mohan Singh And Co.
Dated: 7 December, 1993
Author: A Bahri
Bench: A Bahri, N Kapoor
1. This petition has been filed under Section 256(2)of the Income-tax Act, 1961, with a prayer to direct the Income-tax Appellate Tribunal, Amritsar Bench, to draw up a statement of the case and refer the following question of law to this court for adjudication :
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in deleting the addition of Rs. 12,70,683 made under Section 40A(3) of the Income-tax Act by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals)?”
2. Earlier, the Tribunal declined to refer the aforesaid question to this court, vide order dated July 28, 1992 (annexure P-1). The assessing authority framed an assessment on March 26, 1987, vide order annexure P-3, and made additions to the tune of Rs. 12,70,683 as deduction of the aforesaid amount was not allowed under Section 40A of the Act. As such payments were made in cash and not by cheques or drafts, the aforesaid amount was not to be treated as expenditure. The appeal filed by the assessee against the aforesaid order in this respect was dismissed on March 18, 1988 (annexure P-4). The matter was taken before the Tribunal. Vide order dated October 25, 1991 (annexure P-5), the Tribunal allowed the deduction of the aforesaid amount as expenditure.
3. Shri R.P. Sawhney, the advocate for the Revenue, while referring to the decision of this court in CIT v. Surinder Sugar Store[1989] 177 ITR 511 (P & H), has argued that the aforesaid question of law should be ordered to be referred to this court. In that case, the judges were satisfied that the question of law arose out of the order of the Tribunal, to refer such a question. No doubt, the question in that case is similar to the one referred to above. Such a decision could hardly be taken as a precedent, laying down any proposition of law. The contention that in all cases where similar questions are sought to be referred, this court should exercise jurisdiction under Section 256 of the Act is too wide a proposition to be accepted. The detailed facts of the case of Surinder Sugar Store [1989] 177 ITR 511 (P & H), referred to above, are not given in the judgment so that any opinion could be formed regarding similarity of the facts with the present case.
4. At the outset, it may be stated that it is the order of the Tribunal which is to be taken into consideration while disposing of a reference under Section 256(2)of the Act to find out if therefrom any question of law arises or not. If the question arising in the case is only with respect to acceptance of any evidence or material on the basis of which a finding is recorded, the same would be a question of fact and not a question of law, which could be referred under Section 256of the Act. However, if the question arises about the interpretation of any provisions of the Act or its applicability to the admitted set of facts, a question of law may arise. For that, this court is not obliged to refer to either the material produced before the income-tax Officer (assessing authority) or the orders passed by such authority or by the appellate authority. The Supreme Court in CIT v. Managing Trustee, Jalakhabai Trust [1967] 66 ITR 619, while interpreting the scope of Section 66(2) of the Indian Income-tax Act, 1922, observed as follows (headnote) :
“. . . . The High Court is not called upon to decide whether the question sought to be referred may ultimately be decided in favour of the assessee; the High Court has only to consider whether a question of law which may be supported by reasonable argument arises out of the order of the Tribunal.”
5. The provisions of Section 40A(3)of the Act are to be read along with Rule 6DD of the Rules framed under the Act, dealing with the subject of payments made by the assessee in cash and not by cheques or drafts of sums more than the prescribed amount. These provisions are quoted and have been authoritatively commented upon and interpreted by the Supreme Court in Attar Singh Gurmukh Singh v. ITO[1991] 191 ITR 667. After quoting the aforesaid provision, it was held as under (at page 672):
“Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of Section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in Section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of Section 40A(3) and Rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute, the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business. . . .”
6. It was further observed as under (at page 673) :
“. . . . it may be stated that the word ‘expenditure’ has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means that all outgoings are brought under the word ‘expenditure’ for the purpose of the section. The expenditure for purchasing stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits under Section 28 on principles of commercial accounting. The payments made for purchases would also be covered by the word ‘expenditure’ and such payments can be disallowed if they are made in cash in sums exceeding the amount specified under Section 40A(3). We have earlier observed that Rule 6DD has to be read along with Section 40A(3). The rule also contemplates payments made for stock-in-trade and raw materials. This rule is in accordance with the terms of Section 40A(3). The rule provides that an assessee can be exempted from the requirement of payment by a crossed cheque or a crossed bank draft where purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials.”
7. It may be stated that the view expressed by the Punjab and Haryana High Court in CIT v. New Light Tin Manufacturing Co. [1980] 121 ITR 229 and CIT v. Kishan Chand Maheshwari Dass[1980] 121 ITR 232 was approved. The aforesaid decision in Attar Singh’s case [1991] 191 ITR 667 (SC) was referred to and relied upon by the Gujarat High Court in Nathalal Jethalal v. CIT[1993] 199 ITR 757, though the earlier view of the Gujarat High Court was contrary as mentioned in the judgment of Attar Singh’s case [1991] 191 ITR 667 (SC). Thus, payments made in cash or for acquiring stock-in-trade or other materials could be exempted from the purview of Section 40A of the Act.
8. In another case, similar questions were considered by this court in CIT v. Sawaran Singh Balbir Singh[1982] 136 ITR 595. While noticing the facts, it was held that nothing could be pointed out to show that the Tribunal did not take into consideration the relevant evidence or relied upon irrelevant evidence while arriving at the finding. The facts noticed were as under (headnote) :
“During the course of the assessment proceedings for the assessment year 1972-73, the Income-tax Officer found that the assessee, who was engaged in husking of paddy, had made purchases of bardana and gunny bags from a firm with which the assessee had a running account and the dealings were in cash as well as by cheques. The agreement between the assessee and the proprietor of the firm to pay by cash was an oral one. The Income-tax Officer disallowed under Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD(j) of the Income-tax Rules, 1962, certain payments in cash exceeding Rs. 2,500 made by the assessee, rejecting the contentions of the assessee that the cash payments were made due to exceptional and unavoidable circumstances as it was impracticable to cope with the supply of rice as ordered by the Government that the payments were genuine and the identity of the payee could not be doubted. The Appellate Assistant Commissioner and, on further appeal, the Tribunal accepted the contentions of the assessee and allowed its appeal.”
9. In CIT v. Union Agencies[1987] 166 ITR 529 (Delhi), the case of Sawaran Singh Balbir Singh [1982] 136 ITR 595 (P & H), referred to above, was relied upon and the petition filed under Section 256(2) of the Act was dismissed, stating that no referable question of law was involved. In the facts of the present case, it was observed that it would be impracticable to carry on such business through cheque payments. In fact, there might be a serious impediment in ensuring proper distribution of butter and other dairy products. The only answer is the credit facility which was not granted by Om Parkash and Co., in this case except on a deposit of Rs. 3,00,000 or a bank guarantee. It was observed that was a question of fact and not a question of law.
10. Guidelines were issued by the Central Board of Direct Taxes on the subject, vide Circular No. 220 dated May 31, 1977. Para 4 of this circular letter provides as under (see [1977] 108 ITR (St.) 8, 9);
“4. All the circumstances in which the conditions laid down in Rule 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are;
(i) The purchaser is new to the seller ; or
(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account ; or
(iii) The transactions and payments are made on a bank holiday; or
(iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from this particular seller ; or
(v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods ; or
(vi) Specific discount is given by the seller for payment to be made by way of cash.”
11. In para 6, it was further observed that the above circumstances were not exhaustive but were illustrative and there could be cases other than those falling within the above categories, which would also meet the requirements of Rule 6DD(j).
12. Reverting to the case in hand, reference to the order of the Tribunal dated October 25, 1991 (annexure P-5), be made and the only conclusion on perusal therefrom would be that it is only a question of fact and no question of law arises. In para 10 of the order, it was observed by the Tribunal:
“We have closely considered the facts prevailing in the year and the relevant provisions. The assessee’s assertion that it had no bank account at Hamira has not been even stated to be wrong and, therefore, it is accepted as a fact. The other averment that even Jagatjit Industries Ltd., also had no bank account at Hamira did not come for any adverse comments from the Revenue authorities. Such being the case, the second exception spelt out by Circular No. 220 dated May 31, 1977, reported in [1977] 108 ITR (St.) 9 clearly came to the assessee’s rescue because the transactions were made at a place where the assessee and the seller both did not have a bank account. The requirement of exception 2 is that transaction exceeding Rs. 2,500 would be permissible where either the purchaser or the seller does not have a bank account. “Or” has not been used as conjunctive but is clearly used as a disjunctive. In other words, the absence of a bank account of either of the two parties would be sufficient to bring the case within the exception of Clause (j) of Rule 6DD of the Rules. Therefore, on the facts, the assessee established its case that being within the purview of Rule 6DD(j) of the Rules, no addition under Section 40A(3) of the Act was justified.”
13. The Tribunal, as would be seen, accepted the material produced by the assessee in support of its contention while holding that the assessee did not have any bank account at the place where the purchases were made. A similar finding was recorded with respect to the seller of liquor. One of the conditions of the circular aforesaid, thus, stood complied with to enable the assessee to claim deduction of the expenditure. Further, the plea of the assessee was accepted that the actual amount for which purchases of liquor under the permits granted by the Excise and Taxation Department were to be made, would be known only at the time of actual purchase. Thus, at that relevant time, it was not possible to obtain bank drafts to make the purchases. Furthermore, the present is a case where the identity of the payee has been successfully established, i.e., the liquor to be purchased by the assessee, a liquor contract or from the distillery could only be made on issuing of permits, identifying the distillery. As already observed above, the object of the provisions of Section 40A is to curb the flow of black money and not to put an impediment to the trade and business.
The decision of the Tribunal being based entirely on the facts, no referable question of law arises.
 The petition is dismissed.

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