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PETITIONER: ATTAR SINGH GURMUKH SINGH

       Vs.

RESPONDENT: INCOME TAX OFFICER, LUDHIANA ETC.

DATE OF JUDGMENT07/08/1991

BENCH: SHETTY, K.J. (J) BENCH: SHETTY, K.J. (J) YOGESHWAR DAYAL (J)

CITATION:  1991 AIR 2109            1991 SCR  (3) 405  1991 SCC  (4) 385        JT 1991 (3)   352  1991 SCALE  (2)254

ACT:     Income  Tax  Act, 1961/Income Tax  Rules,  1962--Section 40A(3)/  Rule 6DD---Validity of--Applicability  to  payments made for acquiring stock-in-trade.

HEADNOTE:     The assesses in these appeals have made payments in cash exceeding  a  sum of Rs.2500 for some of  the  purchases  of stock-in-trade. So while computing the income of the  asses- sees  under  the head "profits and gains  of  business"  the assessing authority disallowed deduction on account of  such payments held to be in contravention of the terms of section 40A(3) of the Income Tax Act, 1961 read with the Rule 6DD of the Income Tax Rules, 1962.     The  assessees have challenged the same. So in  the  in- stant  case  the question under  consideration  before  this Court is (i) the validity of section 40A(3) of the Act  (ii) the  applicability  of section 40A(3) to payments  made  for acquiring stock-in-trade.     Originally  section 40A(3) required payments in  respect of  expenditure  which  exceeded Rs.2500 to  be  made  by  a crossed cheque or crossed bank draft and by the Amending Act 1987  to  remove  hardships to smaller  assessees  the  said amount has been raised to Rs. I0,000, Section 40A(3)  begins with  a non-obstante clause so the legislature has  made  it clear  that the provisions of section 40A(3) are  overriding and  operate inspite of any thing to the contrary  contained in any other provisions of the Act relating to the  computa- tion of income under the head "profits and gains of business or  profession".  Sub-section  (3)  empowers  the  assessing authority  to  disallow as deduction of any  expenditure  in respect  of  which  payment is made in  cash  exceeding  Rs. 10,000  otherwise than by a crossed cheque or  crossed  bank draft.     Rule  6DD of Income Tax Rules, 1962 provides  for  cases and  circumstances in which payment of a sum  exceeding  Rs. 10,000 may be made otherwise than by crossed cheque or by  a crossed demand draft. The  assessees challenged on the ground that  provisions  of section 406

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40A(3) intend to restrict the business activities. Dismissing  the  appeals  and Special  Leave  Petition,  the Court,      HELD: That section 40A(3) must not be read in isolation or  to the exclusion of Rule 6DD. This section must be  read along  with  the Rule 6DD and if read together it  is  clear that  the  provisions  of the section are  not  intended  to restrict  the  business  activities. It  only  empowers  the assessing  officer  to disallow the  deductions  claimed  as expenditure  in  respect  of which payment is  not  made  by crossed  cheque or crossed bank draft. The same is  insisted only to enable the assessing authority to ascertain  whether it was out of the income from disclosed sources and even the terms of section 40A(3) are not absolute. Considerations  of business  expediency  and  other relevant  factors  are  not excluded,  since it is open to the assessee to  furnish  the circumstances under which the payment was not practicable or would have caused genuine difficulty to the payee. Rule  6DD provides that an assessee can be exempted from the  require- ment  of payment by a crossed cheque or crossed  bank  draft in the circumstances specified under the rule. Thus  section 40A(3)  and Rule 6DD are intended to regulate  the  business transactions and to prevent the use of unaccounted money  or reduce  the chance to use black money for business  transac- tions.  Moreover  while interpreting a  taxing  statute  the Court  cannot  be oblivious of the  proliferation  of  black money  which  is  in circulation in our  country-  Thus  any restraint  intended  to use or create black  should  not  be regarded  as  curtailing the freedom of trade  or  business. [409G-410E]       The term expenditure as per section 40A(3), means  all outgoings including the expenditure incurred for  purchasing the stock-in-trade. Since to determine the gross profits the value of the stock-in-trade has to be taken into account. So payments  can be disallowed if they are made in cash in  the sums exceeding the amount specified under section 40A(3) and also not provided for exemption under Rule 6DD. Thus section 40A(3)  is attracted to payments made for  acquiring  stock- intrade and other materials. [410G-411A]        Sajowanlal Jaiswal v. CIT, [1976] 103 ITR 706 Orissa; U.P.  Hardware Store v. CIT, [1976] 104 ITR 664;  Allahabad; Ratan  Udyog  v. ITO, [1977] 109 I.T.R.  1  Allahabad;  P.R. Textiles  v. CIT Kerala, [1980] 121 ITR 237 Kerala;  CIT  v. Kishan Chand Maheswari Dass, [1980] 121 ITR 232 P & H; Kanti Lal purshottam & Co. v. CIT, [1985] 155 ITR 519 Raj; CIT  v. New  Light  Tin Mfg. Co., [1980] 121 ITR 229 P  &  H;  Fakri Automobiles v. CIT, [1986] 160 ITR 504 Raj; 407 Venkata  Satayanarayana Timber Depot v. ITR, [1987] 165  ITR 253  AP.  and Akash Films v. CIT, [1991] ITR  32  Karnataka, approved. CIT v. Hardware Exchange, [1991] 190 ITR 61, reversed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11 of 1991.     From  the  Judgment and Order dated  15.10.1979  of  the Punjab and Haryana High Court in C.Q.P. No. 1009 of 1974.                              WITH Civil  Appeal Nos. 2752/79, 1105/76, 29 &  985/87,  4950/89, 1032/79, 3331/83, SLP (Civil)No. 15/80, CMP. No. 1350/80 and C.A. No. 1425 of 1976.

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   B.  Sen,  G.C. Sharma, S.K. Mehta,  C.S.  Aggarwal,  BV. Desai,  Ms. Radha Rangaswamy, K.C. Dua, Umesh Khaitan,  Dar- shan  Singh. Praveen Kumar, M.M. Kashyap and S.K. Bagga  for the Appellants.     J. Ramamurthy, B.B. Ahuja and Ms. A. Subhashini for  the Respondents. 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.2500  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 the 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 acquir- ing 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.                              XXX     XXX    XXX    XXX               408                         (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  speci-               fied 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:                              XXX      XXX      XXX                         Provided  further that no  disallow-               ance under this subsection 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  circum-               stances as may be prescribed, having regard to               the  nature and extent of  banking  facilities               available, considerations of business  expedi-               ency and other relevant factors."     Originally, Section 40A(3) required payments in  respect of  expenditure,  which  exceed 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 inspite  of  any- thing  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  legisla- ture  has thus made it clear that the provisions of  Section 40A will apply in supersession of other contrary  provisions of  the Act relating to the computation of income.  Sub-sec-

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tion  (3) empowers the assessing officer to disallow,  as  a 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               409               than by a crossed cheque drawn on a bank or by               a  crossed bank draft--No  disallowance  under               sub-section (3) of Section 40 A shall be  made               where  any  payment  in a  sum  exceeding  ten               thousand  rupees  is made  otherwise  than  by               crossed cheque drawn on a bank or by a crossed               bank  draft  in the  cases  and  circumstances               specified hereunder, namely:                            XXX     XXX      XXX      XXX               (j)  in  any other ease,  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  circum-               stances; 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  satisfac-               tion of the Assessing Officer as to the  genu-               ineness 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 as 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 tax on an assumed income would be a restriction on the right to carry on the business  besides being arbitrary.     In  our opinion, there is little merit in  this  conten- tion. 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 provi- sions 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 asses- 410 sing authority to ascertain whether the payment was  genuine or whether it was out of the income from disclosed  sources. The terms of Section 40A(3) are not absolute.  Consideration of  business expediency and other relevant factors  are  not excluded.  The  genuine and bona fide transactions  are  not taken  out  of the sweep of the Section. It is open  to  the

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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  asses- see  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  provi- sions of Section 40A(3) and rule 6DD that they are  intended to regulate the business transactions and to prevent the use of  unaccounted  money or reduce the chances to  use  black- money for business transactions. See: Mudiam Oil Company  v. ITO,  [1973]  92 ITR 519 A.P. If the payment is  made  by  a crossed cheque drawn on a bank or a 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 to 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 all outgoings are brought  under  the  word ’expenditure’  for the purpose of the Section. The  expendi- ture for purchasing the stock-in-trade is one of such outgo- ings.  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  ’expendi- ture’  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  contem- plates  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 requirements of payment by crossed cheque or a crossed  bank draft where the purchases are 411 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 acquir- ing  stock-in-trade  and other materials. This is  also  the view  taken by several High Courts. See’ Sajowanlal  Jaiswal v.  CIT, [1976] 103 ITR 706 Orissa; U.P. Hardware  Store  v. CIT,  [1976]  104  ITR 664 Allahabad; Ratan  Udyog  v.  ITO, [1977]  109 ITR 1 Allahabad; P.R. Textiles v.  CIT,  Kerala, [19801  121 ITR 237 Kerala; CIT, v. Kishan  Chand  Maheswari Dass, [1980] 121 ITR 232 P & H; Kanti Lal Purshottam and Co. v.  CIT, [1985] 155 ITR 519 Raj; CIT, v. New Light Tin  Mfg. Co.,  [1980]  121 ITR 229 P & H; Fakri Automobiles  v.  CIT, [1986] 160 ITR 504 Raj; Venkata Satayanarayana Timber  Depot v.  ITR,  [1987] 165 ITR 253 AP.; and Akash  Films  v.  CIT, [1991] ITR 32 Karnataka. The decisions of the High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab &  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

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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 the payment made purchase of stock-in-trade cannot be termed as  ’expenditure incurred  since  money  does not go  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 special leave petition with costs. S.B.                                                 Appeals dismissed. 412