AMIT BAJAJ ADVOCATE

Madras High Court in CIT vs Venkatadhri Constructions has held that Cash payment exceeding prescribed limits u/s 40A(3) by directly depositing the amount to supplier's bank account, would be treated as cash payment and provisions of section 40A(3) would be applied in such case.

The assessee contended that the payee was having regular accounts with the assessee as regards the supply of cement and that in some of the cases, cash payments were deposited by the assessee directly into the account of the supplier. Apart from this, the assessee also pointed out to the payment to labour.

Thus, on a consideration of the facts, the Assessing Officer granted the relief in respect of those cases where payment in cash was made. However, as regards the payment made by way of advance for purchase of cement and credited to the account of vendor, the Assessing Authority rejected the assessee's plea.

Thus, out of cash payment of Rs. 4,44,803 the Assessing Officer held that a sum of Rs. 64,720 alone would not fall for consideration under section 40A(3) and balance sum of Rs. 3,80,083 was liable to be disallowed under section 40A(3).

On appeal, the Commissioner (Appeals) accepted the assessee's plea that since the amount of Rs. 3,26,813 was directly paid into the account, the same was not liable to be considered as covered by section 40A(3) for disallowance.

The Commissioner (Appeals) also granted further relief on payment of Rs. 25,000 and odd. On further appeal, the Tribunal confirmed the order of the Commissioner (Appeals).

Held:  A reading of section 40A(3) would point out that whenever the assessee incurred expenditure in respect of which payment is made in cash in excess of Rs. 10,000, the expenditure should not be allowed as a deduction. The proviso to sub-section (3) of section 40A carries out the exception that before rejecting such claim for deduction, the officer shall take into account the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors.

Rule 6DD of the Income-tax Rules specify circumstances under which the payment for a sum exceeding Rs. 10,000 may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. Thus, except on those circumstances, narrated under rule 6DD and as given under section 40A(3), unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs. 10,000 by cash would not escape the rigour of section 40A(3).

As far as the instant case was concerned, none of the circumstances were narrated by the assessee either before the Assessing Officer or before the appellate authority concerned in support of the contention that the claim for allowance should not be disallowed. The mere circumstance, that the amount had been remitted to the account of the payee, would not be a good ground to accept the case of the assessee that section 40A(3) will not be applied to the case.

In the light of the provisions as it stood, there being no exceptional circumstances for remitting the amount to the credit of payee's amount, there is no good ground to upheld the order of the Tribunal.

It may be pointed out that the deposit of the amount to the bank does not make the case any shade better than a cash payment for the purpose of condoning the conduct of the assessee. Consequently, Tribunal was not justified in holding that payment of cash amounting to Rs. 3,14,600/- by the assessee to the supplier's bank account is not a violation of the provisions of section 40A(3).

T.R. Senthil Kumar for the Appellant. V.S. Jayakumar for the Respondent.

JUDGMENT

Mrs. Chitra Venkataraman, J. - The Revenue has filed the above appeals as against the order of the Income Tax Appellate Tribunal for the assessment years 1993-94 and 1995-96. The T.C.(A). No. 122 of 2003 was admitted on the following substantial question of law:-

"Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment of cash amounting to Rs. 3,80,083/- by the assessee to the supplier's bank account is not a violation of the provisions of Section 40A(3)?"

The T.C.(A). Nos. 1430 and 1431 of 2005 were admitted on the following substantial question of law:-

"Whether in the facts and circumstances of the case, the Tribunal was right in holding that payment of cash amounting to Rs. 3,14,600/- by the assessee to the supplier's bank account is not a violation of the provisions of Section 40A(3)?"

2. The assessee herein admittedly made cash payment exceeding Rs. 10,000/- in respect of certain business expenditure incurred by him. On the proposal to apply Section 40A(3) of the Income Tax Act, the assessee furnished the details which are extracted in the assessment order itself. The assessee contended that the payee was having regular accounts with the assessee as regards the supply of cement and that in some of the cases, cash payments were deposited by the assessee directly into the account of the supplier. Apart from this, the assessee also pointed out to the payment to labour. Thus, on a consideration of the facts, the Assessing Authority granted the relief in respect of those cases where payment in cash was made. However, as regards the payment made by way of advance for purchase of cement and credited to the account of the vendor, the Assessing Authority rejected the assessee's plea. Thus, out of cash payment of Rs. 4,44,803/-, the Assessing Authority held that a sum of Rs. 64,720/- alone would not fall for consideration under Section 40A(3) of the Act and balance sum of Rs. 3,80,083/- was liable to be disallowed under Section 40A(3) of the Act. The facts thus stated above related to assessment year 1993-94. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who accepted the assessee's plea that since the amount of Rs. 3,26,813/- was directly paid into the account, the same was not liable to be considered as covered by Section 40A(3) for disallowance. The Commissioner of Income Tax (Appeals) also granted further relief on payment of Rs. 25,000/- and odd. Thus, partly allowed the appeal.

3. Aggrieved by this, the Revenue went on appeal before the Income Tax Appellate Tribunal, who confirmed the assessee's case in a single line that after hearing the parties and on going through the order of the Commissioner of Income Tax (Appeals)'s, the order could not found fault with. We may record herein that absolutely there is no recording of the reasons independently by the Tribunal as a finding fact body by considering the provisions under Section 40A(3) of the Act to the facts of the case. Aggrieved by the view of the Tribunal, the Revenue has come on appeal before this Court.

4. Section 40A(3) as it existed relevant to the assessment year under consideration reads thus, Section 40A(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 that .........................................................

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.

5. A reading of the above said section would point out that whenever the assessee incurred expenditure in respect of which payment is made in cash in excess of Rs. 10,000/-, the expenditure should not be allowed as a deduction. The proviso to sub section (3) of Section 10A carries out the exception that before rejecting such claim for deduction, the officer shall take into account the nature and extent of the banking facilities available, considerations of business expediency and other relevant factors.

6. Rule 6DD of the Income Tax Rules specify circumstances under which the payment for a sum exceeding Rs. 10,000/- may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. In fact on a representation made by a Trade, the Central Board of Direct Taxes has also issued circular No. 1 dated 11.1.1979, wherein in considering difficulties in clearance of cheques issued on banks, the Central Board of Direct Taxes stated that,

"............... Accordingly, any payment for business expenditure made during the period when the cheque clearing operations are suspended or other similar circumstance as aforesaid exists, will not be covered by the provisions of Section 40A(3) of the Income Tax Act provided the assessee furnishes evidence to the satisfaction of the Income Tax Officer as to the genuineness of the payment and the identity of the payee."

7. Thus, except on those circumstances, narrated under Rule 6DD of the Income Tax Rules and as given under 40A(3) of the Income Tax Act, unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs. 10,000/- by cash would not escape the rigour of Section 40A(3) of the Income Tax Act.

8. As far as the present case is concerned, none of the circumstances were narrated by the assessee either before the Assessing Officer or before the Appellate Authority concerned in support of the contention that the claim for allowance should not be disallowed. The mere circumstance, that the amount had been remitted to the account of the payee, would not be a good ground to accept the case of the assessee that Section 40A(3) of the Act will not applied to the case.

9. In the light of the provisions as it stood, there being no exceptional circumstances for remitting the amount to the credit of payee's amount, we do not find any good ground to uphold the order of the Tribunal. It may be pointed out that the deposit of the amount to the bank does not make the case any shade better than a cash payment for the purpose of condoning the conduct of the assessee. Consequently, the order of the Tribunal is set aside and the Tax Case (Appeal) No. 122 of 2003 is allowed. No costs.

10. The facts in respect of other cases are not different from what had been noted above since the questions of law raised on other Tax Case (Appeals) are identical. Accordingly, the orders of the Tribunal passed in other two Tax Case (Appeals) are set aside and we allow Tax Case (Appeal) Nos. 1430 and 1431 of 2005. No costs.