2005 (2) TMI 99 - HC - Income Tax

Tribunal Erred in Applying Rule 6DD(j) to Unaccounted Cash Payments; Decision Ruled in Favor of Revenue Authority.

Commissioner of Income-Tax Versus Hynoup Food And Oil Ind. P. Limited.

Commissioner of Income-Tax Versus Hynoup Food And Oil Ind. P. Limited. - [2007] 290 ITR 702 Issues Involved1. Applicability of Section 40A(3) of the Income-tax Act, 1961 to unaccounted business transactions.2. Interpretation and application of Rule 6DD(j) of the Income-tax Rules, 1962.3. Requirement to establish genuineness of payment and identity of payee under Rule 6DD(j).4. Distinction between illegal business and lawful business using unlawful means.Detailed Analysis1. Applicability of Section 40A(3) of the Income-tax Act, 1961 to Unaccounted Business TransactionsThe court analyzed whether the provisions of Section 40A(3) apply to unaccounted business transactions. The Assessing Officer had disallowed a sum of Rs. 43,35,715 paid in cash for purchases related to unaccounted business detected during a search. The assessee argued that unaccounted transactions are always made in cash, and thus, Section 40A(3) should not apply. However, the court noted that Section 40A(3) aims to check tax evasion by ensuring payments exceeding a specified limit are made by crossed cheque or bank draft. The court emphasized that the provisions of Section 40A(3) are mandatory, even for unaccounted or illegal businesses, as held by the Andhra Pradesh High Court in S. Venkata Subba Rao v. CIT.2. Interpretation and Application of Rule 6DD(j) of the Income-tax Rules, 1962The Tribunal had concluded that the assessee's case was covered by the exceptions in Rule 6DD(j), which allows for cash payments under exceptional or unavoidable circumstances. However, the court found that the Tribunal failed to establish how the assessee met the criteria for exceptional or unavoidable circumstances. The court emphasized that Rule 6DD(j) requires proof of business expediency and the impracticability of payment by crossed cheque or draft. The Tribunal's reasoning that unaccounted business transactions inherently justify cash payments was deemed insufficient.3. Requirement to Establish Genuineness of Payment and Identity of Payee under Rule 6DD(j)The court highlighted that Rule 6DD(j) necessitates the assessee to furnish evidence of the genuineness of the payment and the identity of the payee. The Tribunal's interpretation that these requirements were not connected to sub-clause (1) of Rule 6DD(j) was rejected. The court stated that without establishing the genuineness of the payment and the identity of the payee, the exceptions under Rule 6DD(j) cannot be invoked. The court stressed that the Revenue must verify the destination of cash payments to ensure they remain within legal business and banking channels.4. Distinction between Illegal Business and Lawful Business Using Unlawful MeansThe court noted the distinction between an entirely illegal business and a lawful business that resorts to unlawful means to augment profits. The court cited the Supreme Court's observations in Maddi Venkataraman and Co. P. Ltd. v. CIT, which held that if the entire business is illegal, expenses incurred in illegal activities must be allowed as deductions. However, if a lawful business uses unlawful means, such expenses cannot be deducted. This distinction was crucial in determining the applicability of Section 40A(3) and Rule 6DD(j).ConclusionThe court concluded that the Tribunal erred in law by holding that the assessee's case was covered by the exceptions in Rule 6DD(j). The Tribunal's reasoning was found to be flawed, and the assessee failed to establish the genuineness of the payment and the identity of the payee. The question referred to the court was answered in the negative, in favor of the Revenue and against the assessee. The reference was disposed of with no order as to costs.