Ellora Paper Mills Ltd vs Commissioner Of Income ...
2017 Latest Caselaw 3005 Bom

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      IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                          NAGPUR BENCH : NAGPUR

                  INCOME TAX APPEAL No.3 OF 2002
                               ...


Ellora Paper Mills Ltd.,
A Company Registered under
Provisions of Indian Companies Act,
Having Registered Office at:
379, Pt. Jawahar Lal Nehru Marg,
Sitabuldi, Nagpur 440 012.                       ..             APPELLANT
                                                                (ASSESSEE)

                               .. Versus ..

1. Commissioner of Income Tax,
   Ayakar Bhavan, M.K. Road,
   Mumbai 400 020.

2. Income Tax Officer, Ward 1 (1),
   Ayakar Bhavan, M.K. Road,
   Mumbai -20.                                   ..          RESPONDENTS


Mr. N.S. Bhattad, Advocate for Appellant(Assessee).
Mr. A.J. Bhoot, Advocate for Respondents.

                               ....


              CORAM :               M.S. Sanklecha & Manish Pitale, JJ.

DATED : June 09, 2017.

ORAL JUDGMENT (per M.S. Sanklecha, J.)

1. This appeal from the order dated 18.08.2000 of the

Income Tax Appellate Tribunal (Tribunal) under Section 260-A

2 ITL3-2002.odt

of the Income Tax Act, 1961 (Act) was admitted on 26.04.2002

on the following substantial question of law:-

"Can the Tribunal, without deciding whether the

claim of appellant is covered is covered by Rule 6

DD(h) of the I.T. Rules, on merit, proceed to

adjudicate the claim under Rule 6 DD (j) of I.T.

Rules ?"

2. At the joint request of the Counsel, the substantial

question of law is being reformulated for consideration as

under:-

"Whether on the facts and in the circumstances of

the case and in law, the Tribunal was correct in

applying Rule 6DD(j) of the Income Tax

Rules,1962 (Rules) to disallow the claim of the

appellant in respect of Rs.21.37 lakhs in respect of

payments made in excess of Rs.10,000/- in cash?"

3. This appeal relates to Assessment Year 1991-92.

4. The appellant has its factory at village Devada in

Bhandara district. The village Devada has no banking facilities.

In that view of the matter, the appellant had occasion to make

3 ITL3-2002.odt

cash payments to contractors, labourers etc. Some of the

payments made were in excess of Rs.10,000/- (the upper limit

during the subject assessment year). The above payment in

excess of Rs.10,000/- in cash aggregated to Rs. 21.37 lakhs to

labourers, contractors etc. Hence the appellant claimed that

the above payments would be entitled to deduction even under

Section 40A(3) of the Act as it satisfied the second proviso

thereto. Therefore, along its return of income for the subject

Assessment Year, the appellant submitted a Chartered

Accountant's audit report which indicated the fact that village

Devada is not served by the Bank and that the payment in

excess of Rs.10,000/- made in cash was exempted as it

satisfied the condition under Rule 6DD(h) of the Rules in

accord with the second proviso to Section 40A(3) of the Act.

5. By an assessment order dated 30.03.1993, the

Assessing Officer held that the benefits of Rule 6DD(h) of the

Rules would not be available to the appellant. This is so as it

is available only in respect of the payments made in cash in

excess of the prescribed limit to the persons ordinarily

resident in village Devada or who carried on business at

village Devada, as there ware no banking facilities available at

Devada. The Assessing Officer disallowed the entire

4 ITL3-2002.odt

expenditure to the extent of Rs.21.37 Lakhs on the ground that

the assessee has failed to prove the expenditure as no

bills/vouchers were produced. Therefore the payments were

not excluded from the application of Section 40A(3) of the Act

as the Rule 6DD(h) and (j) of the Rules was not satisfied. Thus

the assessment order dated 30.03.1993 added the aforesaid

sum of Rs.21.37 lakhs to the income of the appellant-assessee.

6. Being aggrieved, the appellant carried the issue in

appeal to the Commissioner of Income Tax (Appeals) (CIT(A)).

By an order dated 22.03.1995, CIT(A) dismissed the claim of

the appellant while recording the fact that the appellant had

failed to prove the genuineness of the payments, as no

bills/vouchers in support of the payment made in cash, were

produced. Thus upholding the order dated 30.03.1993 of the

Assessing Officer.

7. Being aggrieved, the appellant filed a further appeal

to the Tribunal. By the impugned order dated 18th August,

2000 which incidentally is a common order, passed for

Assessment Year 1986-87 and 1991-92, the order of the CIT(A)

for the subject assessment year was upheld. The impugned

order holds that payments made in cash by the appellant

5 ITL3-2002.odt

-assessee to persons residing in village Devada were exempted

from complying with Section 40A(3) of the Act by virtue of Rule

6DD(h) of the Rules. However, the payments which were made

to transporters, contractors etc. who had business

establishments at places outside the village Devada where

banking facilities were available, were not entitled to the

benefits of Rule 6DD(h) of the Rules. In these circumstances,

the payments made to transporters, contractors, suppliers etc.

was tested on the touchstone of Rule 6DD(j) of the Rules. On

examination of the claim it found that the appellant-assessee

was unable to prove the identity of the people or the

genuineness of the transaction, as the necessary bills in

support of the payment were also not produced. As a result,

for the subject assessment year, the claim of Rs.21.37 lakhs

was disallowed under Section 40A(3) of the Act by the

Assessing Officer and confirmed by the CIT (A) and the Tribunal

for the subject Assessment Year.

8. Before dealing with the rival submissions, it would be

useful to reproduce the statutory provisions and the Rules as

in force during the subject assessment year, as under:-

"40A(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

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specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand 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:-

Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to 1.4.1969, 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 ten thousand 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 Assessing 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 ten thousand 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".

Rule 6DD. Cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise than by a crossed cheque drawn on a

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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 ten thousand 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:-

(a) .................

(b) ................

(c) .................

(d) ...................

(e) ...................

(f) ..................

(g) ....................

(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;

(i) ...................

(j) in any other case, where the assessee satisfies the Assessing 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 Assessing Officer as to the genuineness of the payment and the identity of the payee".

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9. Mr. Bhattad, learned counsel appearing in support of

the appeal submits as under:-

(A) The payments made in cash in excess of Rs.10,000/-

to transporters, contractors and suppliers of rice straw were

excluded from the rigour of Section 40A(3) of the Act by virtue

of Rule 6DD(h) of the Rules. This is so as even though these

people did not have a permanent place of establishment in the

village, they were carrying on business in village Devada

which did not have the facility of banking. Consequently these

payments were also covered by Rule 6DD(h) of the Rules.

(B) The impugned order has incorrectly invoked Rule

6DD(j) of the Rules to disallow the benefits of payments made

in excess of Rs.10,000/- in cash. This for the reason that Rule

6DD(j) is a residuary clause and would only apply when the

payments made in cash are not covered by the earlier clauses.

In view of the above, it is submitted that the substantial

question as raised herein be answered in the negative, in

favour of the appellant-assessee as recourse to Rules 6DD(j) of

the Rules cannot be taken, unless the application of Rule

6DD(h) of the Rules is exhausted.

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10. As against the above, Mr. Bhoot, learned counsel

appearing for the Revenue submits as under:-

(A) That the order of the Tribunal is a common impugned

order relating to Assessment Year 1986-87 and 1991-92. The

impugned order refers to the fact that wherever the

genuineness of the payments were established, the benefit of

Rule 6DD(j) of the Rules was made available to the appellant-

assessee. For the subject assessment year, the appellant-

assessee was not able to establish the genuineness of the

payments of Rs.21.37 lakhs made to transporters, contractors

and suppliers of rice straw. Thus the benefit of exclusion from

Section 40A(3) of the Act was rightly not extended by the

Authorities under the Act.

(B) Further the application of Rule 6DD(j) of the Rules in

the present facts cannot be found fault with for the reason that

the appellant-assessee had not established that the payments

made of Rs.21.37 lakhs to transporters, contractors and

suppliers of rice straw were carrying on business in village

Devada. Thus Rule 6DD(h) of the Rules can have no

application. In the absence of the appellant establishing the

applicability of Rule 6DD(h) of the Rules, the Tribunal had no

option but to examine the case of the appellant on touchstone

of Rule 6DD(j) of the Rules. On the above test, the appellant

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had failed to establish the genuineness of the payments.

Consequently no interference with the order of the Tribunal is

called for and the substantial question be answered in favour

of the respondent-Revenue.

11. We find that in terms of Section 40A(3) of the Act no

expenditure would be allowed as a deduction, where the

payment in excess of Rs.10,000/- is made otherwise than by a

crossed cheque drawn on a bank or by a crossed bank draft.

However, second proviso thereto provides that the payments

made in excess of Rs.10,000/- otherwise than by a crossed

cheque drawn on a bank or by a crossed bank draft, would be

allowed as an expenditure under such circumstances as may

be prescribed, having regard to the nature and extent of

banking facilities available at the place where payment is

made. The prescribed conditions which allows an expenditure

in excess of Rs.10,000/-, otherwise then by way of a crossed

cheque drawn on a bank or by a crossed bank draft, are

provided in Rule 6DD of the Rules. Therefore, only on

satisfaction of the same, will such a payment be allowed.

12. In terms of Rule 6DD(h) of the Rules, a person who

makes the payment in a village, which does not have the

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facility of banking, to a person who ordinarily resides therein or

is carrying on business therein, will be allowed the benefit of

deduction even when the expenditure is not paid by a crossed

cheque drawn on a bank or by a crossed bank draft. However,

it is for the assessee who seeks to claim the benefit of the

second proviso of Section 40A(3) of the Act and Rule 6DD of

the Rules to establish that its case falls within the precincts of

Rule 6DD(h) of the Rules. Admittedly, the appellant-assessee

has led no evidence before the Authorities under the Act to

show that the transporters, contractors and suppliers of rice

straw to whom the payment is made in cash, were carrying on

business in village Devada.

13. Mr. Bhattad, learned counsel for the applicant-

assessee states that the transporters, contractors and suppliers

of rice straw who carried on business in village Devada, when

the goods are supplied or taken from the appellant's factory

premises. Therefore, the payment made in cash to such

persons would be payments which are made to persons

carrying on business under Rule 6DD(h) of the Rules. To our

own mind the carrying on of business in the context of having

banking facilities would mean, where the main office or the

administrative head of the business is situated. That then

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would be the place where a person could be said to be

carrying on business. Therefore, where the head office or the

place from where all the business operations are controlled or

directed is a village or town which has a banking facilities, even

such transporter would not be covered by Rule 6DD(h) of the

Rules. Therefore, in the present case the benefit of Rule

6DD(h) was not available and could not be extended to the

appellant-assessee. Thus the claim had to be examined in

terms of the residuary clause. Rule 6DD (j) of the Rules are

satisfied to allow the appellant's claim.

14. A plain reading of Rule 6DD(h) of the Rules indicate

that the Assessee has to furnish evidence so as to satisfy the

Assessing Officer about the genuineness of the payments and

the identity of the payee. In this case, the undisputed position

is that Assessee was not able to satisfy the Assessing Officer

with regard to the genuineness of the payment made to the

transporters, contractors etc. inasmuch as the evidence in the

form of bills etc. was not produced. Consequently, the claim

of the appellant-assessee was denied by the Authorities under

Section 40A(3) of the Act read with Rule 6DD(h) of the Rules.

15.           Therefore, in the context of the present facts,                    no





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fault can be found with the impugned order of the Tribunal.

Accordingly the substantial question of law is answered in

favour of the respondent-Revenue and against the appellant-

assessee.

16. Appeal dismissed. No order as to costs.

(Manish Pitale, J. ) (M.S. Sanklecha, J.) ...

halwai/p.s.