Business expenditure—Disallowance under s. 40A(3)

Order K. R. DIXIT, J. M.: In this case an amount of Rs. 11,646 has been disallowed on the basis of s. 40A(3) of the IT Act. The assessee was carrying on business in silver ornaments. In the course of that business the assessee used to purchase silver ornaments from the customers, melted them and made new ornaments out of them for sale. The CIT (A) has stated what the ITO has done as follows : "The ITO examined the books and found that Rs. 38,420 was shown as old ornaments purchased from different persons. The assessee had issued memos to the parties on the purchase. However, on no occasion the signature of the persons was taken nor stamped receipts was given. The AO did not accept the contention that the quantity records maintained by the assessee would do, when it was not able to establish the genuineness of the purchases made by it from its customers as above, It was not able to obtain confirmation from the parties for having sold the assessee their silver ornaments. The ITO found that four purchase form Shri R.L. Soni, Bherumal Shamaldas and Ratansingh Kahaassing, the assessee had paid in case over Rs. 2,500 and therefore, such amounts could not be allowed in view of the statutory provisions of s. 40(3). However, as he was disallowing Rs. 38,420 out of purchase for want of verification, no sparate addition under s. 40A(3) was made". 2. In respect of certain transaction which totalled up to Rs. 11, 646 the details as stated by the CIT (A) are as follows : Cash Memo number Date Name of party Description of the ornaments Amount 531 20th April 1980 Ratansingh Khadasing Rupa Kalla (ornaments worn in feet) 1685 532 24th April 1980 -do- Rupa Kantia (foot ornaments) 1685 746 7th Oct. 1980 Bherumal Shamaldas Silver glass & Diwi 2257 747 7th Oct. 1980 -do- Silver idol & Diwi 2257 764 19th Oct. 1980 R. L. Soni Silver waist chain & 2393silver Cheda 765 19th Oct. 1980 -do- Lingur-Pair 1369 . . . Total : 116463. The assessee claimed that no single cash purchase exceeded Rs. 2500 and that therefore s. 40A(3) was not applicable. The CIT (A)’s order shows that on the basis of assessee’s books and the prevailing custom in the assessee’s trade, the entire amount disallowed by the ITO could be explained. He has however sustained the disallowance in respect of the aforesaid amount of Rs. 11,646 on the basis of s. 40A(3), by aggregating the amounts paid to the same party on the same date, bearing two consecutive Cash memo numbers. 4. Shri N. R. Divatia’s first contention was that each bill was a separate expenditure and so the amount mentioned in the bills of the same date not be totalled up so as to exceed Rs. 2500. He also argued that but for that application of the said s. 40A(3) no disallowance should have been made, In this connection he invited our attention to the observation at. p 142 in the judgment in the case Hasanand pinjomal vs. CIT 1977 CTR (Guj) 486 : (1978) 112 ITR 134 (Guj). The observations are to the effect that the purpose of the said provision was to check tax evasion by payments made with unaccounted money posed by the assessee. Since, according to him in the present case the assessee’ books were accepted there was no such possibility of tax evasion and so the said disallowance was not justified. He then stated that in the assessee’s case r. 6DD was fully applicable and so the disallowance under the said section could not be made. 5. The ld. Departmental Representative replied that separate bills were made only in order to get over the said s. 40A(3). He also argued that under r. 6DD there should be exceptional circumstances whereas in the present case the difficulties of the assessee were everyday difficulties. He also argued that under that rule the assessee had to prove the genuineness of the payment and identity of the seller which the assessee had failed to do. He also pointed out that the bills which the assessee had, were not signed by the seller in receipt of payment. 6. So far as the first contention of Shri Divatia is concerned, we do not agree with him. It is too much to say that each bill should be treated as a separate expenditure. This would brush aside all the evidence here when we are required to identify the expenditure. If such an argument was to be accepted then the expenditre would be split up into various bills and the purpose of the section would be defeated. The position is not that every bill is a separate expenditure. The position is that every expenditure should be reflected by a separate bill. Therefore, we have to identify every separate expenditure independently of the bills. 7. That brings us to the question whether acceptance of the assessee’s accounts by the CIT would be conclusive so as to preclude the applicability of s. 40A(3). We do not think that this proposition can be accepted. The requirements of the said section have to be satisfied independently. However, the acceptance of the assessee’s books can be considered as a factor in the total circumstances. We have therefore to take into account the said r. 6DD. the relevant part of it is as follows : (i) in any other case, where the assessee satisfies the ITO 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 ITO as to the genuineness of the payment and the identity of the payee." Clause (1) mentions not only exceptional but also unavoidable circumstances. In this case the sellers come from the members of public from anywhere. They cannot be expected to trust the assessee and so they would ask for cash. The assessee cannot avoid paying by cash if he is to do his business. Sub-cl. (2) also would apply because cheque payment would not be practicable. 8. That brings us to the question of furnishing of evidence regarding genuineness of the payments and identity of the payee. It is true that the assessee had not taken receipts of the payment made to the seller nor was he able to obtain any confirmatory letters from them. But these things would hardly makes any difference. How would it be possible to know the genuineness of the signatures on the receipts or on "confirmation letters". In considering the nature of the trade and the fact that the customers would be many from public at large, this approach is not realistic. The assessment order shows that in some case the detailed addressees have been taken while in others the name of the town is mentioned. In these circumstances it is not realistic to expectannoying more by way of proof regarding the genuineness of the payments or the identity of the payee. The requirements as to evidence should be according to the circumstances. Thanking into account the fact that the assessee’s accounts have been accepted by the CIT and the requirements of r. 6DD (J) being satisfied, we cancel the addition. 9. The appeal is allowed.