P.C.JAIN, J. - (1.) IN this reference under s. 256(1) of the IT Act, 1961 (hereinafter referred to as the "Act"), the following question of law has been referred to this Court for its opinion, pertaining to the asst. yr. 1971-72, at the instance of the assessee: "Whether, on the facts and in the circumstances of this case, the Tribunal was justified in holding that payments in sums exceeding Rs. 2,500 made for the purchase of the commodities are hit by the provisions of sub-s. (3) of s. 40A of the IT Act, 1961, and that, therefore, such payments should be added to the total income of the assessee in terms of the aforesaid sub-section ?"
(2.) THE facts which are admitted and/or have been found by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as the "Tribunal"), are stated hereinafter: THE applicant is a firm. THE assessee deals in agricultural commodities at Kota. During the accounting year 1971-72, which ended on Diwali, 1970, it made payments to various parties for the purchase of goods in sums exceeding Rs. 2,500, aggregating Rs. 46,203. THE ITO pointed out to the assessee that the said payments contravened the mandatory provisions of sub-s. (3) of s. 40A of the Act and, therefore, the ITO added the sum of Rs. 46,203 to the total income of the assessee. THE case of the Revenue was that all the payments in question were not made by crossed cheques and, therefore, there was contravention of sub-s. (3) of s. 40A of the Act. THE assessee submitted that its case is covered under r. 6DD(j). THE order of assessment dt. 6th March, 1974, passed by the ITO was assailed in an appeal before the AAC, Kota Range, Kota. THE learned AAC did not accept the said contention and held that the assessee had not been able to show any exceptional or unavoidable circumstances under which it had made the payments in cash exceeding Rs. 2,500. Aggrieved by the order of the learned AAC dt. 1st Aug., 1974, the matter was further carried in appeal to the Tribunal, Jaipur Bench, Jaipur. THE case before the Tribunal was that the word "expenditure" as used in sub-s. (3) of s. 40A of the Act does not include "purchases" and, therefore, the payments made for purchases were not hit by the aforesaid provisions. THE learned Tribunal rejected the contention and dismissed the appeal, vide its order dt. 29th Dec., 1975. The assessee moved an application before the Tribunal requiring it to refer some questions which according to it were questions of law arising out of the order of the Tribunal in ITA No. 574/Jp/1974-75 dt. 29th Dec., 1975, in respect of the asst. yr. 1971-72. In these circumstances, the question has been referred to us for our opinion. The following are the admitted facts on record: (1) The payments have been made by the assessee to the traders at Kota who are themselves maintaining bank accounts and the payments have been made after a time lag of six to seven days of the transaction in all the cases. (2) No exceptional or unavoidable circumstances were brought to the notice of the assessing authority. The assessee had filed confirmation from the seller and so there was no dispute about the genuineness of the payments and the identity of the payee. Shri Kasliwal and Shri Bapna, learned counsel for the applicant, urged before us the following submissions to substantiate the case of the assessee while assailing the order of the assessing authority and the appellate authorities: (1) That the AAC rejected the appeal on the basis of the decision of the Tribunal in the case of Kanti Lal Purshottam & Co. vs. ITO (ITA No. 800/Jp/1971-72; Asst. yr. 1970-71), in which the Tribunal disallowed the payments made to the traders and also held that the purchases were part of expenditure. The submission of learned counsel is that the said decision in the case of Kanti Lal Purshottam & Co. vs. ITO (supra) has been set aside by a Division Bench of this Court in Kanti Lal Purshottam & Co. vs. CIT (1985) 155 ITR 519 (Raj) : TC18R.534. In the premises aforesaid, it was submitted by learned counsel that consequent upon the reversal of the decision of the Tribunal in the said case, the case of the assessee should be decided in its favour. (2) That the case of the assessee is covered by r. 6DD(j) and the circulars issued by the CBDT which are binding on all the officers and persons employed in the execution of the IT Act. (3) That the provisions of s. 40A(3) of the Act are not mandatory. (4) That the word "expenditure" as used in sub-s. (3) of s. 40A of the Act does not include purchases and, therefore, the payments made for purchases would not be within the inhibition of s. 40A(3) of the Act. Shri Surolia, learned counsel for the Revenue, submitted that the Tribunal did not commit any error of law in confirming the disallowance of the said amount of Rs. 46,203. Shri Surolia also urged that no question of law arises when the Tribunal had taken into consideration the material on record and found that there were no exceptional circumstances for making payments. Learned counsel for the Revenue also submitted that though the decision of the Tribunal in Kantilal's case has been reversed by a Division Bench of this Court in (1985) 155 ITR 519 (Raj) : TC18R.534, still the merits of the case remains unaffected as that case is distinguishable on facts.
(3.) WE have given our thoughtful consideration to the submissions made by learned counsel for the assessee as well as learned counsel for the Revenue and have perused the record of the case. The case of Kantilal (supra), is distinguishable. In that case, the learned Division Bench of this Court held as under: 1. That there was no mens rea or any mala fide intention and the payments were found to be genuine and the identity of the payee was not disputed and that there was no mischief of tax evasion on the part of the assessee: 2. Sec. 40A(3) came into force from 1st April, 1969, and the period during which the cash payments were made ranged between 3rd April, 1969 to 2nd June, 1969. The Division Bench pointed out that every assessee does not subscribe to the Gazette and, therefore, the matters which are published in the Gazette come to the knowledge of the public after some time only. The said section came into force w.e.f. 1st April, 1969, and the first cash payment was made by the said firm on 3rd April, 1969. In such circumstances, the learned Division Bench was of the opinion that the assessee was entitled to the benefit of cl. (j) as this circumstance was taken as an exceptional or unavoidable circumstance. 3. The learned Division Bench also held that the rigours of the whole restrictions imposed by s. 40A (3) of the Act were loosened by the proviso to the said section. By making r. 6DD, it further stands loosened. In the case on hand, the facts are quite different. The relevant assessment year is 1971-72, during the previous year for which such payments were made. Cash payments were made much after the coming into force of s. 40A(3) of the Act and the amended rules were made applicable and after issuance of the Circulars dt. 2nd May, 1969, and 19th April, 1970, by the CBDT. The learned Division Bench of this Court, in the case of Kantilal Purshottam & Co. vs. CIT (supra), held that the assessee was entitled to exemption under cls. (f) and (j) of r. 6DD on account of peculiar circumstances of that case, as those peculiar circumstances were taken as exceptional or unavoidable circumstances entitling the assessee to the benefit of cl. (j). In the instant case, the assessee submitted before the ITO that the assessee purchased goods from Kachha Aratias and Kachha Aratias, in turn, purchased goods from agriculturists or producers and he had to make payment to the agriculturists in cash on the same day. The submission made by the assessee before the ITO was found to be erroneous as it was found that in almost all the cases there was a time lag of six to seven days between the date of purchase of the goods and the date of actual payment. The ITO observed that had there been any pressing demand on behalf of Kachha Aratias to make payment on the same day, there could not have been much time lag between the date of purchase of the goods and the date of actual payment. Learned counsel for the assessee who appeared before the ITO also submitted that the case of the assessee-firm was covered by the residuary clause of r. 6DD, but no exceptional or unavoidable circumstances warranting payment otherwise than by crossed cheque or crossed bank draft were pointed out by the assessee to the ITO. Consequently, the ITO observed that the assessee had not been able to establish that the payments by cheque or bank draft were not possible or the same would have caused genuine difficulty to the payee, or there were any exceptional or unavoidable circumstances due to which payments could not be made by crossed cheques. The learned ITO, in the assessment order, also held that the payments were made by the assessee to other traders at Kota, who were themselves maintaining bank accounts and the payments were made after a time lag of six to seven days practically in all the cases. Thus, the finding recorded by the ITO is a finding of fact. In Registhan P. Ltd. vs. CIT (1984) 40 CTR (Raj) 340 : (1984) 146 ITR 620 (Raj), a Division Bench of this Court dismissed the application for reference under s. 256(2) filed by the assessee on the ground that no question of law arose as the Tribunal had taken into consideration the material on record and found that there were no exceptional circumstances for making payment in cash. Another limb of argument of learned counsel for the assessee was that the word "expenditure" as used in s. 40A(3) of the Act does not include purchases and, as such, disallowance was erroneous and illegal. We are not impressed by the arguments advanced by learned counsel for the assessee. The word "expenditure", as used in the aforesaid section, in our opinion, includes expenditure incurred on purchases also. There is nothing in the context of the aforesaid section to restrict the meaning of the word "expenditure" to payment like wages, salaries, etc., as submitted by learned counsel for the assessee. A perusal of r. 6DD, which has been framed in terms of the second proviso to sub-s. (3) of s. 40A, vires of which have not been challenged, would reveal that purchases are covered by the word "expenditure". Clause (f) of r. 6DD is as follows: "(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." This makes the entire position clear that the "expenditure" includes expenditure incurred in purchase also. In the application under s. 256(1) of the Act, the assessee desired the following questions of law to be referred for the opinion of this Court: "1. Whether the word `expenditure' occurring in s. 40A(3) of the IT Act, includes expenditure on purchase of stock-in-trade also ? 2. Whether the word `expenditure' occurring in s. 40A(3) of the IT Act is to be interpreted in the light of the Supreme Court decision in the case of Indian Molasses Co. vs. CIT (1959) 37 ITR 66 (SC) ?" But the Tribunal referred the question to this Court as referred to above. Shri Surolia, learned counsel for the Revenue, submitted that the question raised, viz., that the word "expenditure" does not include within it "purchases" does not require to be answered by this Court. The submission made by Shri Surolia is not correct. A look at the question referred for our opinion, in a broad spectrum, would reveal that the question referred to includes the determination of the said question also. Therefore, we have considered the submission made by learned counsel for the assessee and have answered it accordingly. ;