The judgment of the court was delivered by
K. JAGANNATHA SHETTY J. -The assessees in these appeals
have made payments in cash exceeding a sum of Rs. 2,500 for some of the
purchases of stock-in-trade. The payments are not allowed as deductions in the
computation of income under the head "Profits and gains of business".
The payments are held to be in contravention of the terms of section 40A(3) of
the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962. The
assessees have appealed to this court challenging the disallowance.
Two questions arise for consideration in these appeals :
(i) the validity of section 40A(3) of the Act; and (ii) the applicability of
Section 40A(3) to payments made for acquiring stock-in-trade.
Section 40A(3) so far as material provides :
"40A. Expenses or payments not deductible in certain
circumstances. - (1) The provisions of this section shall have effect
notwithstanding anything to the contrary contained in any other provision of
this Act relating to the computation of income under the head, 'Profits and
gains of business or profession.' . . .
(3) Where the assessee incurs any expenditure in respect
of which payment is made, after such date (not being later than the 31st day of
March, 1969) as may be specified in this behalf by the Central Government by
notification in the Official Gazette, in a sum exceeding ten thousand rupees
otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft,
such expenditure shall not be allowed as a deduction : ...
Provided further that no disallowance under this
sub-section shall be made where any payment in a sum exceeding ten thousand
rupees is made otherwise than by a crossed cheque drawn on a bank or by a
crossed bank draft, in such cases and under such circumstances as may be
prescribed, having regard to the nature and extent of banking facilities
available, considerations of business expediency and other relevant
factors."
Originally, section 40A(3) required payments in respect of
expenditure, which exceeded Rs. 2,500 to be made by a crossed cheque or a
crossed bank draft. On failure to do so, the payments made were disallowed in
the computation of income. In order to remove hardship to smaller assessees, the
Amending Act, 1987, has raised this ceiling to Rs. 10,000. Section 40A(3) begins
with a non-obstante clause. It is an overriding provision which operates in
spite of anything to the contrary contained in any other provision of the Act
relating to the computation of income under the head "Profits and gains of
business or profession". The Legislature has thus made it clear that the
provisions of section 40A will apply in super session of other contrary
provisions of the Act relating to the computation of income. Sub-section (3)
empowers the assessing officer to disallow, as deduction, any expenditure in
respect of which payment is made of any sum exceeding Rs. 10,000 otherwise than
by a crossed cheque or crossed bank draft.
Rule 6DD of the Income-tax Rules, 1962, refers to cases
and circumstances in which payment of a sum exceeding Rs. 10,000 may be made
otherwise than by a crossed cheque or by a crossed bank draft. The rule so far
as it is relevant reads:
"6DD. Cases and circumstances in which payment in a
sum exceeding ten thousand rupees may be made otherwise than by, a crossed
cheque drawn on a bank or by a crossed bank draft.-No disallowance under
sub-section (3) of section 40A shall be made where any payment in a sum
exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn
on a bank or by a crossed bank draft in the cases and circumstances specified
hereunder, namely: ...
(j) in any other case, where the assessee satisfies the
Assessing Officer 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
Assessing Officer as to the, genuineness of the payment and the identity of the
payee."
As to the validity of section 40A(3), it was urged that,
if the price of the purchased material is not allowed to be adjusted against the
sale price of the material sold for want of proof of payment by a crossed cheque
or crossed bank draft, then the income-tax levied will not be on the income but
it will be on an assumed income. It is said that the provision authorising levy
of tax on an assumed income would be a restriction on the right to carry on
business, besides being arbitrary.
In our opinion, there is little merit in this contention.
Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD.
The section must be read along with the rule. If read together, it will be clear
that the provisions are not intended to restrict the business activities. There
is no restriction on the assessee in his trading activities. Section 40A(3) only
empowers the Assessing Officer to disallow the deduction claimed as expenditure
in respect of which payment is not made by crossed cheque or 'crossed bank
draft. The payment by crossed cheque or crossed bank draft is insisted on to
enable the assessing authority to ascertain whether the payment was genuine or
whether it was out of the income from undisclosed sources. The terms of section
40A(3) are not absolute. Considerations of business expediency and other
relevant factors are not excluded. Genuine and bona fide transactions are not
taken out of the sweep of the section. It is open to the assessee to furnish to
the satisfaction of the Assessing Officer the circumstances under which the
payment in the manner prescribed in section 40A(3) was not practicable or would
have caused genuine difficulty to the payee. It is also open to the assessee to
identify the person who has received the cash payment. Rule 6DD provides that an
assessee can be exempted from the requirement of payment by a crossed cheque or
crossed bank draft in the circumstances specified under the rule. It will be
clear from the provisions of section 40A(3) and rule 6DD that they are intended
to regulate business transactions and to prevent the use of unaccounted money or
reduce the chances to use black money for business transactions. ( Mudiam Oil
Company v. ITO [1973] 92 ITR 519 (AP)). If the payment is made by a crossed
cheque drawn on a bank or crossed bank draft, then it will be easier to
ascertain, when deduction is claimed, whether the payment was genuine and
whether it was out of the income from disclosed sources. In interpreting a
taxing statute, the court cannot be oblivious of the proliferation of black
money which is under circulation in our country. Any restraint intended to curb
the chances and opportunities to use or create black money should not be
regarded as curtailing the freedom of trade or business.
As for the second question it may be stated that the word
"expenditure" has not been defined in the Act. It is a word of wide
import. Section 40A(3) refers to the expenditure incurred by the assessee in
respect of which payment is made. It means that all outgoings are brought under
the word "expenditure" for the purpose of the section. The expenditure
for purchasing stock-in-trade is one of such outgoings. The value of the
stock-in-trade has to be taken into account while determining the gross profits
under section 28 on principles of commercial accounting. The payments made for
purchases would also be covered by the word "expenditure" and such
payments can be disallowed if they are made in cash in the sums exceeding the
amount specified under section 40A(3). We have earlier observed that rule 6DD
has to be read along with section 40A(3). The rule also contemplates payments
made for stock-in-trade and raw materials. This rule is in accordance with the
terms of section 40A(3). The rule provides that an assessee can be exempted from
the requirement of payment by crossed cheque or a crossed bank draft where
purchases are made of certain agricultural or horticultural commodities or from
a village where there is no banking facility. Section 40A(3) is, therefore,
attracted to payments made for acquiring stock-in-trade and other materials.
This is also the view taken by several High Courts. See : (1) Sajowanlal Jaiswal
v. CIT [1976] 103 ITR 706 (Orissa); (2) U. P. Hardware Store v. CIT [1976] 104
ITR 664 (All) ; (3) Ratan Udyog v. ITO [1977] 109 ITR 1 (All) ; (4) P. R.
Textiles v. CIT [1980] 121 ITR 237 (Ker) ; (5) CIT v. Kishan)Chand Maheshwari
Dass [1980] 121 ITR 232 (P & H) ; (6) Kanti Lal Purshottam and Co. v. CIT
[1985] 155 ITR 519 (Raj) ; (7) CIT v. New Light Tin Mfg. Co. [1980] 121 ITR 229
(P & H) ; (8) Fakri Auto mobiles v. CIT [1986] 160 ITR 504 (Raj) ; (9)
Venkata Satya Narayana Timber Depot v. CIT [1987] 165 ITR 253 (AP) and (10)
Akash Films V. CIT [1991] 190 ITR 32 (Kar). The decisions of the High Courts of
Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab and Haryana,
Rajasthan and Patna are to the effect that the payments made for purchasing
stock-in-trade or raw materials should also be regarded as expenditure for the
purpose of section 40A(3). The only discordant note struck on this aspect is by
the Gauhati High Court in CIT v. Hardware Exchange [1991] 190 ITR 61. The
Gauhati High Court has observed that section 40A(3) applies only to payments
made on account of "expenditure incurred" and that the payment made
for purchase of stock-in-trade cannot be termed as "expenditure
incurred" since money does not go out irretrievably in such cases. We are
unable to agree with the view taken by the Gauhati High Court.
In this view of the matter, we dismiss all these appeals
and the special leave petition with costs.
Appeals and petitions dismissed
