Deposit in bank account

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

13 July 2010 Dear All,
I would like to know whether direct deposit of cash more than 20,000.00 by customer against purchase is valid or not in income tax act with reference section.

Its is case of sale where customers are depositing cash in my client`s account directly. After cash is deposited, my client is dispatching the goods.Thus can this sale be disallowed?

Thanks a lot for your valuable suggestion, but few person has given reply for purchase, whereas my question is regarding sale, my client`s customer are depositing amount in his bank account.
Few more lighting in this scenario will help me to guie him. Thanks a lots once again.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
Follow

13 July 2010 depositing cash into the party bank account also attract sec.40A(3)

Rahul Gupta

Rahul Gupta (Expert)
Follow

13 July 2010 Agree with Mr. Ramesh. It s not valid i.e deduction will not be allowed for the purchases made for this amount and it will be added back to your income as per Income Tax Act.

Upgrade to CAclubindia Pro. Subscribe Now!

CA Shiv

CA Shiv (Expert)
Follow

13 July 2010 Section 40A(3) is not applicable where payment in cash is directly deposited in payee's bank account.

Citation:- Sri Renukeswara Rice Mills Vs. ITO (2005) 278 ITR(AT) 77 (Bang-Tri).

CA Shiv

CA Shiv (Expert)
Follow

13 July 2010 For certain cases it is allowed.. Please refer to the case....

Also if the other party is paying to you, than you dont need to worry at all.. You are out of everything..

mohinder kansal

mohinder kansal (Expert)
Follow

13 July 2010 ramesh krishnan is right

sivadas chettoor

sivadas chettoor (Expert)
Follow

14 July 2010 I support CA Shivang. The Hon' Tribunal, according to me, is correct in its legal analysis. The exceptional rule permits payment through an agent and since the bank acts as the agent of the seller, the direct deposit of the cash into the account does not violate the law. The Tribunal made a purposive interpretation of law and the mischief which led to the enactment of Section 40A(3) is absent in your case.

siva208@yahoo.com

mohinder kansal

mohinder kansal (Expert)
Follow

14 July 2010 The case is related to AY 1998-99. there have been drastic changes in rule 6DD since then. Bank is not agent for the purchaser. in plain words, it can be said that payment deposited in bank directly by purchaser is in contravention of section 40A(3)

Upgrade to CAclubindia Pro. Subscribe Now!

sivadas chettoor

sivadas chettoor (Expert)
Follow

16 July 2010 Mr.Kansal is right that the rule has under gone a change. But that has given rise to a new cause of action for the assesees aggrieved by the arbitrary rule. According to me the Hon' Supreme court sustained the constitutional validity of Sec 40A (3) only because the then rule 6DD provided for granting exemption on exceptional and other grounds. Now that the new rule is silent, the validity of the section itself is open to challenge.

Regarding the query I am of the opinion that direct remittance is excluded by rule 6DD. Payment to a bank is exempt and hence directly covered. Payments thro electronic clearing system and debit/credit cards etc are also exempt. If that be so I do not find any reason why the exemption should not be extented to direct remittence.

it may further be noted that when a customer opens an account with a bank, normally the relationship is that of a debtor/creditor and no fiduciary relationship or trust is created. But the dealings with a bank shall give rise to so many legal relationships and when a bank collects cheque on behalf of a customer the bank acts as an AGENT. Like that when a third part remits cash into the account from another branch, the bank collects the amount and credits the same to the account as an agent. The word agent is of wider import and the meaning assigned under the Indian Contract Act 1872 would apply. Therefore whenever a person is authorized to do anything on behalf of another person it amounts to agency.Hence in the instant case the bank acts on behalf of the seller and Section 40A(3) is not attracted.

siva208@yahoo.com

sivadas chettoor

sivadas chettoor (Expert)
Follow

16 July 2010 Attention of the querist is also invited to the important observations relating to the interpretation of the objects and scope of section 40A(3).The Hon' Supreme court in Attar singh's case observed as follows

"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 upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of section 40A(3) are not absolute. Consideration 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 Co. v. ITO [1973] 92 ITR 519 (AP) approved.

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.

Thus adopting the line of interpretation by the highest court of the land I am of the firm opinion that the disallowance cannot be made under Section 40A(3). I wish to add that the legal position remains in tact even after the amendment in the section/rule 6DD. I believe that the apex court has clearly laid down certain priciples of law which are of fundamental importance while interpreting a provision like 40A(3).

siva208@yahoo.com

sivadas chettoor

sivadas chettoor (Expert)
Follow

17 July 2010 Attention is invited to the following decison of the House of lords relating to banker customer relationship.
Barclays Bank plc -v- Quincecare Ltd [1992] 4 All ER 363
"The relationship of banker and customer is that of agent and principal: "Primarily, the relationship between a banker and customer is that of debtor and creditor. But quoad the drawing and payment of the customer's cheques as against the money of the customer's in the banker's hands the relationship is that of principal and agent." and "In my judgment it is an implied term of the contract between the bank and its customer that the bank will observe reasonable skill and care in and about executing the customer's orders. Moreover, notwithstanding what was said in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 at 107, a banker may in a case such as the present be sued in tort as well as contract: see Midland Bank v Hett Stubbs & Kemp [1979] Ch 384. But the duties in tort and contract are coextensive, and in the context of the present case nothing turns on the question whether the case is approached in contract or tort."

siva208@yahoo.com