- (1.) HEARD counsel for the parties.
(2.) THE Income-tax Appellate Tribunal (Allahabad Bench), referred the following questions for the opinion of this court under Section 256(2) of the Income-tax Act, 1961 (briefly, "the Act") I "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that there was no question of any disallowance in a case where the assessee's income is computed by application of gross profit rate on sales as shown? (ii) Whether, on the facts and in the circumstances of the case, there was material before the Tribunal to hold that the assessee's case comes within the meaning of the exceptions contemplated in Rule 6DD of the Income-tax Rules, 1962 ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in deleting the disallowance of Rs. 91,926 made by the Income-tax Officer under Section 40A(3) of the Income-tax Act, 1961 ?" The assessee, a registered firm, derives income from sale of Ayurvedic medicines. The proceedings relate to the assessment year 1971-72. The assessee disclosed a gross profit rate of 11 per cent, in respect of sales both at the head office and in the branch office at Rs. 1,01,020 and Rs. 90,547, respectively, as against gross profit rate of 13 per cent, shown in the last year. The Assessing Officer rejected the book version of the assessee and applied the gross profit rate of 15 per cent, and this is how an addition to the extent of Rs. 8,834 representing additional profit was made.
(3.) THE Assessing Officer also found that the assessee made cash payments exceeding Rs. 2,500 to its suppliers in the head office and in the branch office to the extent of Rs. 54,588 and Rs. 37,340, respectively. As the payments were not supported by the requisite draft/crossed cheques, etc., they were disallowed in view of Section 40A(3) of the Act. THE alternative plea of the assessee that the payments in cash had been made to the genuine parties in exceptional circumstances was rejected. The dispute was carried before the Appellate Assistant Commissioner and it was contended that Section 40A(3) was not applicable. It was pleaded that Section 40A(3) was applicable only to the expenditure and not to the price paid for purchases. In short, the plea was that the price paid for purchases did not amount to "expenditure". Alternatively, it was contended before the Appellate Assistant Commissioner that the case of the assessee was covered under exceptional circumstances, as stated under Rule 6DD(j) of the rules, framed under the Act. The Appellate Assistant Commissioner held that the payment for purchases was within the scope of Section 40A(3) and that the ingredients of Section 40A(3) having not been complied with, payments for purchases were rightly disallowed under Section 40A(3), read with Rule 6DD(j).;