High Court Of Karnataka
Assistant Commissioner Of Income Tax vs. Sri Saraswathi Iron Foundry
Section 40A(3), Rule 6DD(J)
Asst. Years 1985-86, 1986-87
R. Gururajan & Jawad Rahim, JJ.
IT Appeal No. 10 of 1999
21st July, 2006
Counsel Appeared
M.V. Seshachala, for the Appellant : A. Shankar, for the Respondent
JUDGMENT
R. Gururajan, J. :
The Revenue is before us in this appeal. The following three questions of law are raised :
“(i) Whether the assessee is entitled to the relief claimed when he has not satisfied the conditions stipulated in s. 40A(3) of the Act and r. 6DD(j) of the Rules ?
(ii) Whether it is mandatory on the part of the assessee to furnish evidence as to the genuineness of the payment and the identity of the payee which has admittedly not been done in the present case in order to claim exemption under s. 40A(3) of the Act and r. 6DD(j) of the Rules ?
(iii) When admittedly the assessee had made payments through cheques to the extent of several lakhs of rupees, whether he is entitled to the relief claimed in respect of those payments where he has made cash payment to several lakhs of rupees ?”
The facts as narrated in the appeal are as under : The assessee is a firm. It carries on the business of manufacture of sheet metal machinery. During the relevant year 1986-87 the assessee made cash purchases to the tune of several lakhs of rupees and the Department sought an explanation from the assessee. The explanation was not accepted. An adverse order was passed by applying the provisions of s. 40A(3) of the Act. An appeal was filed. The appeal stood dismissed. Further appeal was filed to the Tribunal. The Tribunal has chosen to allow the appeals in part and the Tribunal dismissed the two appeals filed by the Revenue. It is in these circumstances, the Revenue is before us. Heard Sri Seshachala, learned counsel for the Revenue. He would argue that the finding of the Tribunal cannot but be perverse on the facts of this case. He would argue that a large sums of money have been made over without any cheque payment and by way of cash transactions. He would show that in terms of s. 40A(3), the AO was justified in rejecting the case of the assessee. He would say that the order of the CIT so also the order of the Tribunal are to be set aside in the light of grant of relief to the assessee. He would rely on Asstt. Director of Inspection (Inv.) vs. Kum. A.B. Shanthi (2002) 174 CTR (SC) 513 : (2002) 255 ITR 258 (SC). Per contra, learned counsel for the assessee would say that this appeal has to be confined to the asst. yrs. 1985-86 and 1986-87. He would also point out that after the orders of the CIT(A), the respondent has been granted the benefit of deletion of Rs. 83,767 for the asst. yr. 1986-87, and for the year 1985-86 the assessing authority has chosen to disallow the cash purchases to the extent of Rs. 1,50,307. He therefore says that though the Department got a case on the merits, even then according to him the appeal cannot be allowed in its entirety.
After hearing, we have carefully perused the material on record.The assessing authority has passed three assessment orders. For the asst. yr. 1985-86, the assessing authority has chosen to add back a cash transaction for the purpose of levy of tax in the case on hand. For the asst. yr. 1986-87, the AO has again chosen to add back the cash transaction. For the asst. yr. 1987-88, the AO noticed the genuineness of the expenditure in the light of the material on record.
Aggrieved by these assessment orders, the assessee filed three separate appeals. For the asst. yr. 1985-86, the CIT(A) has chosen to allow the appeal in part by confirming the disallowance. For the asst. yr. 1986-87, the appellate authority allowed the appeal and thereby directed the AO to allow the deduction in respect of the parties whose identity has been established by way of proper receipts and vouchers. The CIT(A) for the asst. yr. 1987-88 has chosen to allow the appeal in part and while so doing he noticed certain transactions to be genuine transactions and therefore he directed the AO to allow according to the bills available with the appellant.
Further appeals were filed by the assessee as well as the Revenue. The Tribunal allowed the appeals filed by the assessee for all the three years in part, however, it dismissed the appeal filed by the Revenue for two years. Aggrieved by the said order, the Revenue has filed this appeal with regard to the asst. yrs. 1985-86 and 1986-87. No separate appeal as such was filed by the Revenue before the Tribunal with regard to the asst. yr. 1987-88. Even otherwise, the appellate order would show that only a direction was given to the AO to verify the bills and allow according to the bills available with the appellant. Therefore, we are satisfied that this appeal has to be confined only to the asst. yrs. 1985-86 and 1986-87. We have seen the orders passed by the authorities. It is seen that the assessee is engaged in scrap business. The Tribunal in the light of the order of the appellate authority notices s. 40A(3) and also r. 6DD(j) of the Rules. After noticing, the Tribunal has ruled that there is no doubt about the fact that in general the onus lies on the assessee to prove that the cases of cash purchases above the limit of Rs. 2,500 come within the ambit of r. 6DD(j) by producing relevant evidence. He further noticed that the assessee indeed made some cash purchases from certain small unregistered dealers at rates lower than at which it made other purchases from the registered dealers. The Tribunal noticed that the small dealers of scrap, who themselves are unregistered businessmen, would insist on receipt of payments in cash and would not also issue proper invoices, receipts, etc., as otherwise they would be under the fear of being entangled by the net of the Sales-tax Department. The Tribunal notices that it would not always be possible for it to issue cheques every time. In that view of the matter, the Tribunal has chosen to accept the case as one falling within r. 6DD(j) of the Rules. Such reasons cannot be accepted for the purpose of exemption under r. 6DD(j). We are therefore of the view that the Tribunal has committed a serious legal error in accepting the explanation so offered by the assessee. We are therefore of the view that the order of the Tribunal in this regard has to be set aside on the facts of this case. We are fortified by the judgments of the Supreme Court.
7. In Associated Engineering Enterprise vs. CIT (1998) 146 CTR (Gau) 191 : (1995) 216 ITR 366 (Gau), the Gauhati High Court has ruled as under : “Thus, it is not merely the genuineness of the transaction but also the existence of the circumstances warranting payment by cash. In Giridharilal Goenka’s case (1989) 80 CTR (Cal) 140 : (1989) 179 ITR 122 (Cal), the Calcutta High Court while propounding the view that the AO has to take into account the surrounding circumstances, considerations of the nature of business, its exigency and other related facts while exercising his discretion held that there cannot be an exhaustive list of such circumstances falling within the purview of cl. (j) of r. 6DD which can be uniformly applied.”
The apex Court in Asstt. Director of Inspection (Inv.) vs. Kum. A.B. Shanthi (supra) has chosen to notice with regard to the legislative powers in the matter of income-tax provision. The apex Court ruled that the object of introducing s. 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he makes some false entries, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the taxpayer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so-called lender also to manipulate his records to suit the plea of the taxpayer. The main object of s. 269SS was to curb this menace of making false entries in the account books and later giving an explanation for the same. Though it was with reference to loans and deposits, the very reasons accepted by the Supreme Court, are equally applicable with regard to the genuineness of cheque payment as against cash payment. The menace of false entries, false accounts, false pleas would then get eliminated.
Insofar as relief is concerned, we see in terms of the argument of Sri Shankar and in the light of the order of the CIT(A), the Department has to accept the transactions which are otherwise supported by the bills. He therefore says that in the light of the subsequent development of acceptance and in the light of the subsequent proof of documentary evidence, the deletion has to be to the extent of Rs. 83,767. His submission is accepted. Similarly insofar as the asst. yr. 1986-87 we have seen the order of the assessing authority in terms of the remand order. From the order it is seen that the assessee was able to produce the vouchers to the extent of Rs. 83,767. Therefore he is entitled for the deletion to the extent of Rs. 83,767. Similarly, in terms of the subsequent order, we see that for the asst. yr. 1985-86 the cash transaction was to the extent of Rs. 1,50,307. Hence the Department has to take into account this as the basis for the purpose of tax.
In the result, we deem it proper to accept this appeal in part. The proceedings pursuant to the asst. yr. 1986-87 are not interfered with in this order. Insofar as the asst. yr. 1986-87 is concerned, we deem it proper to accept the transaction of Rs. 83,767 in the light of the supporting documentary evidence and with regard to the balance amount the Department is to tax the assessee. Similarly for the year 1985-86, the assessing authority has to tax the cash transactions to the extent of Rs. 1,50,307.
In these circumstances, the questions of law are answered in favour of the Revenue and in terms of this order on facts.
Ordered accordingly. No costs.
[Citation : 287 ITR 313]
