TaxTMI 
TaxTMI 
1988 (3) TMI 109
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....ks of Ganesh Flour Mills Ltd. the account of the assessee was credited with the deposits made and debited with the bills raised against the supplies made. The amounts deposited was in round sums whereas the amounts raised for the bills were for the actual value of the goods supplied. The deposits made by the assessee to Ganesh Flour Mills Ltd. against supplies were regarded by the ITO as amounts paid towards purchases and as they were more than Rs. 2,500 in each case made in cash, the provisions of s. 40A(3) were applied. Under this provision any payment made in excess of Rs. 2,500 towards expenditure incurred by an assessee must be made either by a crossed cheque drawn on a bank or by a crossed bank draft. Since it is not possible to make payments in excess of Rs. 2,500 always by crossed cheques drawn on banks or crossed bank drafts, exceptions were provided in r. 6-DD of the IT Rules. The CBDT also gave circulars explaining the circumstances in which payments made in cash under exceptional circumstances, could be allowed as expenditure. In response to the enquiries made by the ITO as to why the payments to Ganesh Flour Mills Ltd. were made always in cash and not by crossed cheque....
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....cash payments should not be doubted and the provisions of s. 40A(3) should not be invoked if regard is to be had to the objects with which the provisions of s. 40A(3) were inserted. Reliance was also placed on a circular issued by the CBDT and also some decisions of the High Court. Distinguishing these circulars and the decisions of the High Courts, the Commissioner(A) confirmed the additions made by the ITO. The points taken up by the ITO and the Commissioner(A) in support of the confirmation of these additions was that Ganesh Flour Mills Ltd. had not stated that it would accept only cash for supplies. It stated by way of a certificate that it would accept even bankdrafts. Such being the case and there being no prohibition for making payments by bankdrafts, the assessee should not have made payments only in cash and this violated the provisions of s. 40A(3) and no exceptional circumstance was shown to exist forcing the assessee to make the payments in cash. In other words, when there was no compulsion from the side of Ganesh Flour Mills Ltd. to make payments only in cash, the assessee should not have made payments in cash in violation of s. 40A(3). Further, the assessee did make s....
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.... make the payments in cash and that exceptional circumstances to take the case of the assessee out of the provisions of s. 40A(3) existed. 5. The learned Departmental Representative, on the other hand, submitted that when bank facilities were available in the neighbourhood the assessee cannot be heard to argue that it would not take advantage of those facilities and would persist in making payments only in cash in flagrant violation of the statutory requirements. A requirement placed by the Statute must be observed by every assessee and it is no argument to say that the observance of those conditions would force the assessee to some difficulties and that he should be permitted to violate those stipulations. Then no law can be enforced. The state itself recognised the difficulties that an assessee would face if this provision is to be rigorously implemented. It therefore provided for several exceptions. The assessee could get the benefit of the exceptions only when it could satisfy those conditions. The finding of the authorities below was that the assessee did not satisfy those conditions. There was no explanation worth considering as to why the assessee could not get bank draft....
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....gus purchases by showing as having been made in cash. Because a cash purchase made will not afford an opportunity of tracing the person for cross-examination. So if the identity of the person and the genuineness of payments are established, then the rigours of s. 40A(3) should be very much reduced. This aspect has been provided for in r. 6-DD(j) of the IT Rules, which provided that no disallowance under s. 40A(3) be made if the assessee is able to satisfy the ITO that the payments could not be made by a crossed cheque or crossed bank draft due to exceptional or unavoidable circumstances or the payment 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 ITO as to the genuineness of the payment and the identity of the payee. Thus the emphasis was on paying having regard to the nature of the transaction, the necessity for expeditious settlement, presence of unavoidable circumstances, impracticability of the payment in cash (sic) and above all establishment of the genuineness of the payment and the identity of th....