High Court Of Kerala
CIT vs. Eastern Condiments (P) Ltd.
Sections 40A(3), Rule 6DD(J)
Asst. Year 1992-93
G. Sivarajan & K. Balakrishnan Nair, JJ.
IT Appeal No. 85 of 2000
17th October, 2002
Counsel Appeared
P.K.R. Menon & George K. George, for the Appellant : P. Balachandran, for the Respondent
JUDGMENT
G. Sivarajan, J. :
This appeal is filed by the CIT, Central-I, Chennai, challenging the order of the Tribunal, Cochin Bench, in ITA No. 83/Coch/1996. The matter arises under the IT Act, 1961 (for short ‘the Act’). The assessment year concerned is 1992-93. The respondent-assessee is engaged in the manufacture and sale of various spices. The raw materials for the manufacture of the said products are mainly chilly, coriander, turmeric, etc. The appellant purchased those raw materials from various markets in the State of Tamil Nadu by paying the price in cash. The respondentassessee started this business during the financial year 1990-91. For the asst. yr. 1992-93, the relevant accounting period ended on 31st March, 1992, the assessee filed a return on 30th Dec., 1992, disclosing a net income of Rs. 1,54,668. In the audit report accompanying the return it was recorded that certain items were listed as cash purchases exceeding Rs. 10,000. The assessing authority sought for an explanation from the assessee regarding such cash payments. The assessee filed a written explanation on 10th March, 1995, wherein it is stated that the business was started only in 1990-91, that the turnover for that year was Rs. 2,91,148, that during the financial year 1991-92, the turnover increased to Rs. 1,40,71,274, that all the raw materials are agricultural produce, that the goods were procured through agents and that the suppliers were all new and they were not prepared to accept the cheques. It is also stated that all the purchases are supported by bills. The assessing authority, however, relying on the provisions of s. 40A(3) of the Act r/w r. 6DD(j) of the IT Rules disallowed an amount of Rs. 46,32,449 from the expenditure incurred. The assessee took up the matter in appeal before the CIT(A), Cochin, who by order dt. 14th Nov., 1995, deleted the disallowance made under s. 40A (3) of the Act. The Department took up the matter in appeal before the Tribunal and the Tribunal after due consideration of all relevant matters confirmed the order of the CIT(A), Cochin. Shri P.K.R. Menon, the learned senior Central Government standing counsel appearing for the appellant, submits that the assessing authority was perfectly justified in disallowing the deduction of expenditure to the tune of Rs. 46,32,449 incurred by the assessee for the purchase of the raw materials from parties outside the State by making cash payment. The senior counsel submits that under s. 40A(3) of the Act r/w r. 6DD(j) of the Rules though the assessing authority has the discretion to allow such expenditure under the circumstances specified in the Rules, the assessee is bound to explain the circumstances; specified in sub-rr. 1 and 2 of r. 6DD(j) and it is only on being satisfied of the explanation so made, the expenditure can be allowed. The senior counsel also pointed out that the assessee had not established a case by adducing evidence to the effect that the purchasers refused to receive cheques and that the assessee was compelled to pay cash for the raw materials purchased. We have also heard Shri P. Balachandran, learned counsel appearing for the respondentassessee. He submits that the assessee had started this business only during the financial year 1990-91 and that the sellers of raw materials outside the State were not prepared to receive cheques towards consideration for the sale of raw materials. He further submits that the assessee had procured the raw materials through agents who are lorry drivers and that the sellers were not prepared to accept cheques to be issued by the assessee. Counsel further submitted that the entire purchases so made are supported by bills, that the check-post authorities had verified the same and that the AO had not doubted the genuineness of the transactions. He accordingly submitted that the CIT(A) and the Tribunal were perfectly justified in accepting the explanation of the appellant and in directing deletion of the disallowance made by the assessing authority.
We have considered the rival submissions and also perused the orders of the Tribunal and the authorities below. The assessee had offered an explanation to the effect that they have started business only during the financial year 1991 and that since the suppliers were new, they were not prepared to accept the cheques and the appellant was perforced to make cash payments for such purchases. The assessing authority had observed that there is no evidence in support of the claim that the sellers of raw materials insisted for cash and that cash receipts also do not in anyway indicate that the sellers insisted on cash payments. The first appellate authority has observed that, on verification of the accounts, it was found that these raw materials were purchased by payment in cash to the extent of Rs. 46,32,449. The appellate authority also noted that earlier the matter was remanded to the assessing authority for a report and the assessing authority in the report has stated that all the purchases were found to be genuine and that the items listed in Annexure-I to the audit report in Form No. 3CD are supported by regular bills. It is in the above circumstances, the appellate authority has directed deletion of the disallowance made under s. 40A(3) of the Act. The Tribunal after referring to the provisions of r. 6DD(j) of the Rules observed that it cannot be said in the circumstances that r. 6DD(j) has not been satisfied in the assessee’s case. The Tribunal further observed that having regard to the nature of the transactions, it was necessary to have expeditious settlement as otherwise the delay would have caused difficulty to the assessee by not getting the goods and that genuineness of the payments is not doubted. The Tribunal also noted that the assessee purchased the goods from the markets in various places of Tamil Nadu and that it is not disputed that the payments were properly vouched and there were no bogus transactions in the year. The Tribunal further noted that in the case viz., P.M. Abdul Razak vs. ITO (1997) 63 ITD 398 (Coch) the Cochin Bench of the Tribunal held that since the AO did not doubt the genuineness of the cash payments nor had he alleged anything of making false claim of cash payments, the disallowance could not be made. According to the Tribunal the facts of the present case are similar to the facts of the decided case. The Tribunal in the above circumstances upheld the order of the CIT(A), Cochin. In this case the remand report sent by the assessing authority to the CIT(A) reads as follows : “As directed, the bills and sales-tax documents relating to the purchases detailed in Annexure I to the audit report in Form 3CD were called for and examined. It is noticed that all the items purchased are agricultural produce like, chillies, turmeric, coriander, etc. All the items listed in the Annexure are supported by regular bills. All the bills bear stamp of the sales-tax check post. All the purchases in the list are thus found to be genuine”.
As already noted, the assessee from the very beginning has been stating that the business was started only in 1991 and since the purchases of raw materials were being made through agents, the suppliers were not prepared to accept cash (sic-cheque) payments. As per the provisions of r. 6DD(j) where the assessee satisfies the AO that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft due to exceptional or unavoidable circumstances or because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof and also furnishes evidence to the satisfaction of the AO as to the genuineness of the payment and the identity of the payee, the assessing authority has got discretion to allow the expenditure. The instant case squarely falls under sub-r. (2) of r. 6DD(j) of the IT Rules. The assessee had clearly stated that it was not practicable for effecting payments by crossed cheque to the suppliers for the reason that the suppliers are new and that the purchases are effected through lorry drivers. The remand report of the assessing authority clearly shows that all the transactions are supported by regular bills and all those bills bear stamp of sales-tax check-post. The assessing authority in fact wanted evidence from the assessee’s suppliers that they had refused to receive cheques and that payments should be made in cash. According to us, nothing will turn out by obtaining a letter from the suppliers to the effect that they are not prepared to accept cheques. It is a matter for inferences to be drawn from the facts and circumstances of each case. Having regard to the fact that the assessee had started the business only during the financial year 1990-91, that the assessee has clearly stated that the suppliers were not inclined to receive payments by cheque and further fact that the AO had observed that all the purchases are genuine, we are of the view that the two appellate authorities are justified in holding that assessee had satisfied the provisions of r. 6DD(j) of the Rules and in allowing the claim for deduction of expenditure. The conclusion arrived at by the appellate authorities cannot be characterised as unreasonable or perverse. We have considered the case only with reference to the factual situation obtained so far as the asst. yr. 1992-93 is concerned and it may not be understood as a precedent for the future years of assessment. We accordingly dismiss this appeal with the above observations.
[Citation : 261 ITR 76]
