Mufti, J. - (1.) THE assessee is a registered firm carrying on business of sale and purchase of cloth. For the assessment year 1970-71, the assessee filed his return of income at Rs. 40,026. Daring the course of assessment proceedings, the ITO discovered that the assessee had made cash payments exceeding a sum of Rs. 2,500 for some of the purchases. THE aggregate amount of such payments was Rs. 42,770. THE ITO disallowed the amount under Section 40A(3) of the I.T. Act, 1961. He, however, rejected the assessee's application to summon the concerned parties at his expense for examination under Section 133 of the Act. On appeal, the AAC reduced the disallowance to a sum of Rs. 22,258. For the assessment year 1971-72, the AAC struck out the entire disallowance of Rs. 90,000. Aggrieved by the orders of the AAC, the revenue as well as the assessee went up in appeal to the Tribunal. THE Tribunal held that Section 40A(1) and (3) confine their operation only to items of expenditure whicli can be claimed as deductions in determining the profits of business. Purchases do not constitute an expenditure. Moreover, the ITO failed to issue summons to the concerned parties and in so doing denied the assessee an opportunity to justify the payments. In this view, the Tribunal upheld the orders of the AAC and also deleted the disallowance retained by him. At the instance of the CIT, the Tribunal has referred the following two questions for our opinion : "1. Whether the Appellate Tribunal is legally correct in its view, that the provisions of Section 40A(1) and (3) continue their operation only to items of expenditure which can be claimed as deduction in determining the profits of business ? 2. Whether, on the facts and in the circumstances of the case, there was material for the Tribunal to hold that the assessee was denied the opportunity to prove the genuineness of his claim in respect of cash payments exceeding Rs. 2,500?"
(2.) IN U.P. Hardware Store v. CIT [1976] 104 ITR 664 (All), this court held that payments made to the suppliers for purchase of goods would be covered by the word "expenditure" used in Section 40A(3) and could be disallowed if they are made in cash in sums exceeding Rs. 2,500. Following that decision, our reply to the first question is in the negative, against the assessee and in favour of the revenue. In Munnalal Murlidhar v. CIT [1971] 79 ITR 540 (All) the principle laid down by this court was that, under Section 37 of the Indian I.T. Act, 1922, it was the duty of the ITO to enforce the attendance of a witness, whose evidence was material and that his failure to do so would vitiate the assessment. This principle is equally applicable under Section 133 of the present Act. In the present case, the position is that the assessee wanted to examine the concerned parties in order to justify the impugned cash payments. He asked the ITO to summon them and offered to bear the necessary expenses. The ITO refused to oblige, observing: "In spite of repeated opportunities given to the assessee, the assessee has not been able to prove the inconvenience and difficulty it should have involved to the payee if the payment had been made by crossed cheques or crossed bank drafts. Summoning that party might have at the most proved the genuineness of the party and the genuineness of the payment. But that should have not helped the assessee in discharging his onus of proving the inconvenience or difficulty to the payee. Since the assessee has failed to prove that his case falls within the exceptions as provided by Rule 6DD of the I.T. Rules, the payments amounting to Rs. 42,770 made in cash shall be disallowed and shall be added to the total income of the assessee."
(3.) IN this, the ITO has assumed that the evidence of the payees will not be helpful to the assessee in bringing out the compelling circumstances for making cash payments. That this assumption was not correct is clearly borne out from the judgment of the AAC. Before the AAC, the assessee produced confirmatory letters from some of the concerned parties which said that, although the assessee wanted to give crossed cheque or bank draft, they did not accept the same as they needed cash amount for their business purposes. Acting upon these confirmatory letters the AAC granted relief to the assessee holding that the requirements of Clause (j) of Rule 6DD were satisfied. Even otherwise, the assumption was arbitrary and baseless. If not the payees, who else could be a better witness to depose as regards the compelling circumstances under which payments were made in cash ? Their evidence was as much material on this aspect as on the other aspect whether the payments were in fact received by them. On the principles stated above, it was the duty of the ITO to summon them, of course, if the assessee was prepared to bear the expenses, as he really was. His failure to do so amounted to a denial to let the assessee produce evidence and vitiated the assessment. Learned counsel for the revenue, however, argued that the effect was cured as the AAC had permitted the assessee to produce the evidence. We are unable to accept this argument. Before the AAC, confirmatory letters of some and not all the payees were produced. He did not summon the payees whose confirmatory letters were not produced. On the other hand, he justified the action of the ITO observing that "the request of the appellant to issue summons under Section 131 to all the parties from all over amounted to setting an impossible task for the Income-tax Officer". We cannot see any such impossibility. The assessee was prepared to pay the expenses. All that the ITO had to do was to sign and issue the summons. That could not pose any serious problem.;