Bhargava, J. - (1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961. Following two questions of law have been referred for opinion of this court by the Income-tax Appellate Tribunal, Jaipur Bench : "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the word 'expenditure' as used in Sub-section (3) of Section 40A would include the cost of purchasing the goods meant for resale ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee was not entitled to exemption under Clause (f) or Clause (j) of Rule 6DD in respect of the payment regarding the purchase of the goods from other traders ? "
(2.) THE assessee-firm is carrying on business of commission agency and kirana goods at Ramganj Mandi. THE assessee-firm purchased "dhania" goods and out of the total purchases, those paid for in cash in excess of Rs. 2,500 between April 1, 1969, to June 2, 1969, amounted to Rs. 41,922. According to the ITO, such payments were caught within the mischief of sub Section (3) of Section 40A of the I.T. Act, 1961 (hereinafter to be referred to as "the Act"), which was inserted from April 1, 1969, and the assessee had not been able to show any exceptional or unavoidable circumstances for the payment in cash or that the payment was impracticable or would have caused genuine difficulty to the payee. As such, the amount of Rs. 41,922 was treated as the assessee's income from undisclosed source and was added to his total income. On appeal, the AAC of Income-tax came to the conclusion that a sum of Rs. 18,371 could not be added to the income of the assessee in terms of Section 40A(3), but the remaining amount aggregating to Rs. 23,551 was in his opinion covered by Section 40A(3). On further appeal before the Tribunal, the assessee contended that the genuineness of the purchase was not in doubt. THErefore, the amount should not have been added to his total income. He further submitted that the word "expenditure" used in Sub-section (3) of Section 40A could never cover purchases, since purchases were not an expenditure in the same sense as payment for salary or wages or rent, etc., was. It was in fact an investment. He further submitted that his case was covered by the provisions of Clauses (f) and (j) of Rule 6DD. But all the contentions of the assessee were turned down by the Tribunal and the Tribunal came to the conclusion that: "Clause (f) of Rule 6DD of the Income-tax Rules, 1962, did not cover the assessee's case. THE payments in question were not made 'to the cultivator or producer of such articles or produce' as were referred to in Clause (f) of Rule 6DD. THE case of the assessee was also not covered by Clause (j) of Rule 6DD as, in the opinion of the Tribunal, the ignorance of law or non-clarity of the law to the assessee did not constitute exceptional or unavoidable circumstance in which he could not make the payments to the sellers by crossed cheques or by crossed bank drafts " ; and also that the amount was an expenditure, and, therefore, covered by the mischief of Section 40A(3), THE assessee, therefore, submitted an application under Section 256(1) of the Act and the Tribunal allowed the said application and referred the above-mentioned two questions of law to this court for our opinion. Learned counsel for the assessee brought to our notice that there is divergence of opinion between the various High Courts as far as question No. 1 is concerned. The Punjab and Haryana High Court in CIT v. Avtar Singh and Sons [1981] 129 ITR 671 held that the word "expenditure" used in Section 40A(3) did cover expenditure on purchase of stock-in-trade and the Supreme Court has already granted special leave to appeal against the said judgment of the Punjab and Haryana High Court and the matter is pending before the Supreme Court and, therefore, he had frankly conceded that no useful purpose would be served by expressing any opinion on question No. 1. Before we discuss question No. 2, it will be profitable to reproduce Section 40A(3). It is as follows : "(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969), as may be specified in this, behalf by the Central Government by notification in the Official Gazette, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction I Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of Section 154 shall, so far as may be, apply thereto, the period of four years specified in Sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." Clauses (f) and (j) Rule 6DD are as follows : ":6DD. Cases and circumstances in which payment in a sum exceeding two thousand five hundred rupees may. be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.--No disallowance under Sub-section (3) of Section 40A shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely :--...... (f) where the payment is made for the purchase of- (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including .hides and skins) or dairy or poultry farming ; or (iii) fish or fish products ; or (iv) the products of horticulture or apiculture; to the cultivator, grower or producer of such articles, produce or products ;..... (j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft-- (i) due to exceptional or unavoidable circumstances, or (ii) 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 Income-tax Officer as to the genuineness, of the payment and the identity of the payee." These rules were published in the Gazette of India, Extraordinary, Part II, Section 3(ii), page 215, dated February 14, 1969. . Learned counsel for the assessee has vehemently argued that the purpose of introducing Section 40A(3) was to block the loopholes so that the tax liability may not be reduced artificially by deduction of expenditure and in this connection brought to our notice a portion of the speech of the Deputy Prime Minister and Minister of Finance delivered on February 29, 1968, while introducing the Finance Bill, 1968, which is found in [1969] 67 ITR (Statutes) p. 15 : "Tax liability is sometimes artificially reduced by diverting profits to relatives and associate concerns in the form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often with a view to frustrating investigation as to the identity of the recipients and the genuineness of the claim. To plug these loopholes, I propose to provide that payments made in businesses and professions to relatives or associate concerns will have to pass the test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after a date to be notified later will be allowed as a deduction only if these are made by crossed cheques or by crossed bank drafts."
(3.) AND, therefore, he submitted that the very purpose of introducing this new section was to have a check over the dishonest assessee who wants to make false deductions on account of expenditure incurred in cash and this intention is further fortified by reference to Rule 6DD(j) wherein it has been provided that the ITO is to be satisfied that the payment could not be made by a crossed cheque or a crossed bank draft due to exceptional or unavoidable circumstances and he is to be satisfied about the genuineness of the payment and the identity of the payee. The rigour of this Clause is, however, relaxed by the proviso to the said sub-section which provides that no disallowance under this sub-section shall be made where any such payment is made otherwise than by a crossed cheque or a crossed bank draft in such cases and under such circumstances as may be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. AND it was only with this object that the CBDT has framed Rule 6DD. Counsel for the assessee has further submitted that since the assessee was purchasing agricultural produce, he was exempted from the operation of Section 40A(3), in view of Clause (f) of Rule 6DD. According to him, the words "to the cultivator, grower or purchaser of such articles, produce or products" apply and govern only Sub-clause (iv) of Clause (f) and it does not govern Clauses (i), (ii) and (iii) and since the assessee was dealing in agricultural purchase like dhania, he was covered by Clause (f)(i) of Rule 6DD, Learned counsel for the assessee brought to our notice that since some doubt was expressed or created regarding the interpretation of Clause (f) of Rule 6DD, the CBDT published another notification as corrigendum--"Income-tax (Amendment) Rules, 1969, amending Rule (f) as under--See ([1969] 72 ITR (St.) 20) : "(f) where the payment is made for the purchase of- (i) agricultural or forest produce ; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;" It was published in the Gazette of India, Extraordinary, Part II Section 3(ii), page 393, dated March 25, 1969, and, therefore, he has submitted that even the Board of Direct Taxes thought it necessary to issue a corrigendum so as to amend Clause "(f)" of Rule 6DD so that the words "to the cultivator, grower or purchaser of such articles, produce or products" govern all the four clauses of Clause (f), and, therefore, it was obvious that the assessee's contention, that the words govern only Sub-clause (iv) of Clause (f) was perfectly justified and there was nothing wrong if on the basis of that interpretation, he thought that it was not necessary for him to make the payment through crossed cheque or crossed draft as he was dealing in agricultural produce, was fully justified. Even Clause (j) was substituted, vide Notification No. S.O. 3769 dated November 18, 1970, " with effect from April 1, 1970 ", and the substituted Clause (j) runs as under ([1971] 79 ItR (St.) 29); "(j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft-- (1) due to exceptional or unavoidable circumstances, or (2) 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 Income-tax Officer as to the genuineness of the payment and the identity of the payee." ;