The burden of proof lies with the assessee to demonstrate the capacity of the creditor to advance the loan, and exceptional or unavoidable circumstances are required to justify non-compliance with the provisions of Section 40A(3) of the Income Tax Act.

S.P.Goyal, J.

1. The following three questions have been referred to this court by the Tribunal under Section 256(1) of the I.T. Act, 1961 (for short called "the Act"):

"(1) Whether there was any material before the Tribunal to confirm the addition of Rs. 6,000 which had been sustained by the Appellate Assistant Commissioner out of the cash credit of Rs. 12,000 in the account of Hem Raj as the assessees income from undisclosed sources ?

(2) Whether the payments made for purchase of goods forming stock-in-trade can be termed as expenditure within the meaning of Section 40A(3) of the Income-tax Act, 1961 ?

(3) If the answer to question No. 2 is in the affirmative, whether the Tribunal was justified in maintaining the disallowance and/or addition of Rs. 28,231 in computing the taxable income of the assessee ?"

2. It was frankly conceded by the learned counsel for the assessee that second question stands concluded by three judgments of this court in CIT v. Grewal Group of Industries [1977] 110 ITR 278, CIT v. New Light Tin Manufacturing Company [1980] 121 ITR 229 and CIT v. Kishan Chand Maheshwari Dass [1980] 121 ITR 232. The question is accordingly answered in favour of the Revenue.

3. As regards question No. (1), the claim of the assessee was that the amount of Rs. 12,000 entered in the name of Hans Raj in the account books was advanced by way of interest-free loan by the latter. The ITO rejected this plea and added the whole of this amount as income from undisclosed sources while computing the taxable income of the assessee. On appeal, the addition was reduced to Rs. 6,000 which was upheld by the Tribunal.

4. It is not disputed by the learned counsel that to show the genuineness of the transaction of loan the assessee has to prove the capacity of the alleged creditor as well as the actual advance. From the evidence led, the AAC found that the capacity of Hans Raj to advance the loan had not been proved beyond Rs. 6,000. The Tribunal affirmed that finding. The question framed, however, proceeds on the basis as if it was for the Revenue to produce the material showing that the creditor did not have the capacity to advance the alleged loan. The burden of proving the capacity of the creditor to advance the loan was on the assessee and he having failed to prove the capacity of the creditor to make an advance beyond Rs. 6,000 it cannot be said that there was no material to sustain the addition of Rs. 6,000 ordered by the AAC. The question is accordingly answered in the affirmative, against the assessee.

5. The amount of Rs. 28,231, the subject-matter of question No. (3), was disallowed because of the violation of the provisions of Section 40A(3) of the Act as it had not been paid through crossed cheque drawn on a bank or by a crossed bank draft. The assessee, however, took shelter behind Rule 6DD of the I.T. Rules which enumerates the circumstances exempting the assessee from compliance with the provisions of Sub-section (3) of Section 40A of the Act. The assessee, for seeking the exemption, relies on Clause (j) of this rule which provides that no disallowance shall be made in any 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 due to exceptional or unavoidable circumstances. The exceptional circumstances stated by him were that the seller made a demand for payment after banking hours and insisted on cash payment. Admittedly, the goods were purchased on credit basis a number of days earlier to the date on which the alleged pay ment was made. The assessee, therefore, had ample opportunity to make payment by crossed cheque drawn on a bank or crossed bank draft and need not have waited till the demand was made for payment. There was, therefore, no such exceptional or unavoidable circumstance which could justify non-compliance with the provisions of Sub-section (3) of Section 40A of the Act and as such the Tribunal rightly maintained the d