23 September 2008
Sec 40A(3) Where an assessee incurs any expenditure in respect of which payment in excess of Rs.20,000/- is made, otherwise than by an account payee cheque drawn on a bank or an account payee band draft, whole such expenditure shall not be allowed as a deduction. payment for produce of animal husbandry - No disallowance - Circular 4 / 2006 dt 29.03.06
23 September 2008
SPECIAL BENCH ITAT, KOLKATA ON EXEMPTION FROM APPLICABILITY OF SECTION 40A(3) OF THE INCOME-TAX ACT, 1961
RATIO DECIDENDI Assessee will get exemption from the rigors of section 40A(3) if he is able to establish that his case falls within any of the clauses of (a) to (m) of Rule 6DD of the Income-tax Rules, 1962; burden would be upon the assessee to establish under which particular clause his case falls.
IN THE ITAT, SPECIAL BENCH, KOLKATA
Kenaram Saha & Subhash Saha
ITA NO. 1545 (KOL) OF 2007
March 7, 2008
RELEVANT EXTRACTS FROM THE SPECIAL BENCH ITAT’S ORDER :
11. We have carefully considered the arguments of both the sides and perused the material placed before us. First we will deal with the arguments of Sri S. K. Tulsiyan, Advocate with regard to general applicability and scope of Sec. 40A(3). At the out set we agree with the contention of Mr. Tulsiyan that income-tax is a charge on the “income” as defined u/s. 2(24) of the Income-tax Act. The definition of ‘income’ under the Income-tax Act is an inclusive definition, clause (i) of sub-sec. (24) of Sec. 2 is “profits and gains”. Thus, income includes profits and gains. Sec. 28 of the Income tax Act provides various types of income which are chargeable to income-tax under the head “profits and gains of business or profession”. It is not in dispute that all the assessees in the appeals under consideration before us have income which is chargeable under the head “profits and gains of business or profession”. Sec. 29 of the Income-tax Act provides how the income under the head “profits and gains of business or profession” is to be computed. From the reading of section 29 it is evident that the income under the head “profits and gains of business or profession” is to be computed in accordance with the provisions contained in Secs. 30 to 43D of the Incoem-tax Act. Section 40A of the Act provides expenses or payments which are not deductible in computing the profits and gains of business or profession. Thus, the provisions of Sec. 40A have been given overriding effect upon the other provisions of this Act relating to the computation of income under the head “profits and gains of business or profession”. Sub-sec. (3) of Sec. 40A is a part of the computation provision while determining the profits and gains of business or profession. In view of the above, we are unable to accept the contention of the learned counsel for the assessee that disallowance of expenditure under section 40A(3) would be in violation of Article 265 of the Constitution of India which states “no tax shall be levied or collected except by authority of law”. Admittedly, Central Govt. enjoys the constitutional right to levy tax on income. The Income-tax Act also provides the levy of tax upon the income of the assessee. However, such income has to be computed in accordance with the provisions prescribed under the Income-tax Act which includes the disallowance under certain circumstances. The issue of constitutional validity of section 40A(3) has been settled long back by the Hon’ble Apex Court in the case of Attar Singh Gurmukh Singh v. ITO [191 ITR 667 (SC)].
12. After the amendment in Sec. 40A(3) by Finance Act, 1995 w.e.f. 1-4-1996 and the amendment in Rule 6DD of the Income-tax Rules by the I.T. (Fourteenth Amendment) Rules, 1995, again the constitutional validity of Sec. 40A(3) was challenged. However, the Hon’ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma v. Union of India [239 ITR 687 (AP)] upheld the constitutional validity of Section 40A(3).
13. Now we come to interpretation of Section 40A(3). It has been contended by the learned counsel Sri S.K. Tulsiyan that Section 40A(3) was introduced by Finance Act, 1968 with effect from 1-4-1968. He referred to the memorandum explaining the provisions in the Finance Bill, 1968 and pointed out that the purpose of introduction of Section 40A(3) was to curb wasteful or levish expenditure in the business or profession and to counter tax evasion. In the light of above submission it was claimed by him that section should be interpreted in a manner which fulfills the object for which Section 40A(3) was introduced and should not be interpreted in a manner by which a genuine business expenditure, where the identity of the payee is also established, can be disallowed. In contrast, it was claimed by the Revenue that the language of Section 40A(3) is clear and unambiguous and, therefore, the same should be interpreted literally.
15. While referring to the second proviso to Section 40A(3), it has been claimed by the learned counsel that this proviso provides certain exceptions where Section 40A(3) is not applicable. The exemption from applicability of Section 40A(3) is to be allowed having regards to the (i) nature and extent of banking facilities available, (ii) consideration of business expediency, and (iii) other relevant factors. He stated that the second proviso in Section 40A(3) is a substantive provision of the law full effect to which should be given. Therefore, even if the facts of the case of an assessee are not squarely covered by any of the clauses of Rule 6DD, still the exemption from the rigor of Section 40A(3) can be allowed in view of the provisions of second proviso to Section 40A(3). We are unable to agree with the contention of the learned counsel. From the second proviso to section 40A(3), it is evident that no disallowance under this sub-section shall be made where any payment in a sum exceeding Rs. 20,000 is made otherwise than by a crossed cheque/crossed bank draft in such cases and under such circumstances as may be prescribed. Thus, the mandate of the proviso is to exempt the payment in violation of provisions of Section 40A(3) in such cases and under such circumstances as may be prescribed. The last sentence of the proviso, i.e. “having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors” is the guideline for the authority who has to prescribe the cases and circumstances under which the disallowance under section 40A(3) will not be made despite the payment exceeding Rs. 20,000 other than by cross cheque/bank draft. In pursuance to this proviso, Rule 6DD has been brought into the Statute vide I.T. (Amendment) Rules, 1969 with effect from 1-4-1969. Rule 6DD prescribes the cases and the circumstances in which payment in a sum exceeding Rs. 20,000 may be made otherwise than by crossed cheque drawn on a bank or a crossed bank draft. Thereafter this rule has been amended from time to time. In view of the above, in our opinion, the assessee will get the exemption from the rigors of Section 40A(3) if he is able to establish that his case falls within any of the clauses of (a) to (m) of Rule 6DD. Burden would be upon the assessee to establish under which particular clause his case falls.