Decided on March 02,1994



B.M. Kothari, Accountant Member - (1.) THE only ground in this appeal relates to deletion by the CIT (Appeals) of the disallowance of Rs. 50,07,304 made by the Assessing Officer (AO) under Section 40A(3) of the Income-tax Act, 1961.
(2.) The assessee is a public limited company. The share holders are stated to be the farmers of the cotton growing region around Bardoli. The assessee carries on the business of purchasing raw cotton and sells the pressed cotton bales after carrying out the ginning and pressing process. The company also carries out the activities of ginning and pressing work on job basis. The company, inter alia, made purchases from a partnership firm styled as Patidar Ginning & Pressing Co. Six directors of the assessee-company are partners or otherwise interested in the said partnership firm. The assessee-company made total purchases from the said firm amounting to Rs. 1,22,48,963. The company made cash payments during the period from October 1976 to June 1977 on various dates aggregating to Rs. 44,74,000. The company also received cash on various dates from the said firm aggregating to Rs. 13,85,000. The Assessing Officer treated the balance amount of Rs. 30,89,000 as the aggregate amount of cash payments made for purchase of goods, each exceeding Rs. 2,500 in contravention of the provisions of Section 40A(3). The addition made under Section 40A(3) in respect of other purchases relates to one Deepak Trading Co. to whom an aggregate payment of Rs. 16 lacs in cash was made on various dates during the year under consideration. The third party to whom such cash payments were made for goods purchased is Haldharu Purva Vibhag Kapas Sahakari Mandali Ltd. An aggregate payment of Rs. 3,49,867 was made to this party in cash on various dates. A sum of Rs. 31,563 was received from the said party by cheque. The balance amount of Rs. 3,18,304 was treated as cash payments for purchase in violation of Section 40A(3). The Assessing Officer thus made an addition of Rs. 50,07,304 in respect of cash payments, each exceeding Rs. 2,500 in violation of Section 40A(3) in relation to payments made to these parties as under : JUDGEMENT_1055_TLIT0_19940.htm The Assessing Officer has discussed in the assessment order the facts relating to these payments and has also considered the submissions made on behalf of the assessee with a view to examine as to whether such cash payments can be treated as having been made under exceptional or unavoidable circumstances and as to whether such cash payments can be treated as covered by CBDT Circular No. 220 dated 31-5-1977. After considering the entire submissions, he came to the conclusion that provisions of Section 40A(3) are clearly applicable and these payments are not covered by any of the exceptions provided in Rule 6DD(j) or as clarified in the above referred circular. The aforesaid addition under Section 40A(3) was made by him after receiving directions by the IAC under Section 144B. The learned CIT (Appeals) thoroughly examined the entire evidence in relation to these cash payments. As regards payments made to Deepak Trading Co. Rs. 16 lacs and Haldharu Sahakari Mandli Rs. 3,18,304, he came to the conclusion that payments made to these two parties essentially consisted of passing on the sale proceeds collected on behalf of those parties and, therefore, it cannot be treated as deemed purchases made from them. The assessee merely realised the sale proceeds on behalf of these two parties and made payments of such proceeds to them which does not attract the provisions of Section 40A(3). In order to arrive at this finding, he perused the necessary entries in the books of account which showed that sale proceeds were credited in the accounts of the said two parties and later on those amounts of sale proceeds were paid to them. He also examined the confirmations submitted by these two parties before coming to the said conclusion that the provisions of Section 40A(3) cannot be applied in relation to payments made to these two parties. As regards payments aggregating to Rs. 30,89,000 made to M/s Patidar Ginning & Pressing Co., he examined the relevant facts, material and evidence in great detail. He required the assessee to submit datewise charts from the books of account of the said partnership firm with a view to examine the correctness of the facts stated by the firm in their confirmation that they insisted for cash payments on those dates because of urgent business necessity for making payments on that very day. After examining all such relevant datewise details from the entries appearing in the books of the partnership firm as well as the assessee's books of account, he came to the conclusion that the assessee's case is clearly covered by the CBDT circular dated 31-5-1977 as well as by Rule 6DD(j). He thus deleted the entire addition made under Section 40A(3).
(3.) BEFORE us the learned Sr. D.R. vehemently argued that the major cash payment disallowed under Section 40A(3) has been made to the partnership firm in which the Directors are interested as partners. Huge amounts of cash payments have been made. Both the partnership firm and the assessee-company had their bank accounts in the same bank and the same branch. The assessee could conveniently make payment by account payee cheque/draft and such payments would have also enabled the partnership firm to meet their urgent business necessity on that very day. The same persons were operating the bank account of the company as Directors and the bank account of the firm as its partners. This is a case where the provisions of Section 40A(3) have been violated without existence of any unavoidable and exceptional circumstances. The Assessing Officer and the IAC have examined the facts of the case thoroughly and the view taken by the Assessing Officer should have been confirmed. He also placed heavy reliance on the judgment of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 which clearly says that the provisions of Section 40A(3) cannot be considered as placing an unreasonable restriction on the fundamental right to carry on business, the said provisions have been inserted with a view to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. It has further been held that the word 'expenditure' used in Section 40A(3) also includes payments made for stock-in-trade and for purchase of raw material. He, therefore, strongly urged that the addition made by the Assessing Officer should be restored.;

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