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2002 DIGILAW 841 (KER)

Kamath Marbles v. ITO

2002-12-20

C.N.RAMACHANDRAN NAIR

body2002
Judgment :- 1. The petitioners in these Original Petitions are income-tax assessees engaged in business. They are challenging the provisions of S.40A(3) of the Income Tax Act which provides for 20% disallowance of expenditure in excess of Rs. 20,000-00 where such payments are made other than through account payee cheques or demand drafts drawn on a Bank. S.40A(3) prior to its amendment with effect from 1.4.1997 provided for disallowance of entire expenditure subject to R.6DD in excess of payments over Rs. 10,000-00 made other than through account payee cheques and demand drafts. However, until the amendment of Rs. 6DDO) with effect from 1.12.1995 the assessing officer was free to allow deductions on cash payments in excess of Rs. 10,000-00 if he was satisfied that such payments are made in unavoidable circumstances or it was not practical to make payment other than through cash or payment through account payee cheque or demand drafts would have caused genuine difficulty to the payee having regard to the nature of the transaction and the necessity for expeditious settlement thereof and on production of a proof in this regard. Consequent to amendment of S.40A(3) and substitution of sub-s, 0) and addition of sub-rr. (k) and (1) to R.6DD, any assessee who does not satisfy the conditions laid down in sub clauses (h), (k) and (1) will be subject to disallowance at 20% on the expenditure in excess of Rs. 20,000-00 which is not paid through account payee cheques or demand drafts. The petitioners, who are assessees engaged in business, are challenging the validity of S.40A(3) authorising disallowance to the extent of 20% of the expenditure made in cash. 2. I heard Sri C. Kochunni Nair and Sri. Premjit Nagendran, learned counsel for the petitioners and the learned Standing Counsel for the respondents. The petitioners contend that the Supreme Court upheld the constitutional validity of S.40A(3) prior to it's amendment, only by virtue of the then existing R.6DDO) of the Income lax Rules which authorised the officer to allow the claim of expenditure made in cash over the limit prescribed in S.40A(3), if the officer was satisfied about the genuineness of payment. They further contend that the present provision authorising disallowance of 20% of expenditure over Rs. 20,000-00 made other than through account payee cheque or demand draft after deletion of Rs. They further contend that the present provision authorising disallowance of 20% of expenditure over Rs. 20,000-00 made other than through account payee cheque or demand draft after deletion of Rs. 6DDO) as it stood prior to it's substitution by IT (21st Amendment) Rules, 1955 is arbitrary and violative of the petitioner's rights under Arts 14 and 19(1)(g) of the Constitution of India. Therefore, according to the counsel, the decision of the Supreme Court in Attar Singh Gurmukh Singh v. Income Tax Officer, Ludhiana (191 ITR 664) cannot be relied on by the Department to sustain validity of the Section as it stands now. Standing Counsel for the Department on the other hand contended that the Government of India has not deleted R.6DDO) as such but has refrained the entire Rules among others introducing new provisions, namely, (k) and (1) along with substituted Cl. 0). According to him, the safeguards provided in R.6DD after the amendment referred above will cover all practical difficulties for businessmen. His further contention is that S.40A(3) does not affect the petitioners' right to carry on business under Art.19(1)(g) of the Constitution as the petitioners are only subject to a disability of 20% disallowance if the expenditure is made in the form of payments in excess of Rs. 20,000-00 other than through account payee cheques or demand drafts except in cases covered by various clauses of R.6DD. The petitioners contend that the Department itself has recognised situations under R.6DD where payments have to be made by people engaged in business other than through account payee cheque or demand draft above Rs. 20,000-00 and therefore disallowance of 20% of the same is arbitrary. Their contention is that even without any proposal in the Finance Bill, 1996 the Minister on the basis of the representations from various trade organisations increased the limits of expenditure through cash other than through cheque or demand draft from Rs. 10,000-00 to Rs, 20,000-00. Therefore, according to them, business-exigencies which require payments in the form of cash is something accepted by the Government and therefore, there cannot be any further restriction in the form of disallowance of expenditure to the extent of 20% in such cases. 3. It has to be noted that the Supreme Court has upheld the constitutional validity of S.40A(3) in Attar Singh Gurmukh Singh's case referred above. 3. It has to be noted that the Supreme Court has upheld the constitutional validity of S.40A(3) in Attar Singh Gurmukh Singh's case referred above. Of course the Supreme court was dealing with S.40A(3) prior to its amendment vide Finance Act, 1996 wherein the provision was for complete disallowance of expenditure if the same was in excess of the limit provided then under S.40A(3) which was Rs. 10,000-00. While considering the validity of S.40A(3) the Supreme Court has also strongly relied on R.6DDO) as it stood then which is as follows: "(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 to the genuineness of the payment and the identity of the payee." Now the Rule is substituted. The Rule with the clauses relevant for the purpose of the petitioners' case is as follows: "6DD. The Rule with the clauses relevant for the purpose of the petitioners' case is as follows: "6DD. No disallowance under sub-s. (3) of S.40A shall be made where any payment in a sum exceeding twenty 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:- XXX XXX XXX XXX XXX XXX XXX XXX (f) where the payment is made for the purchase of -(i) agricultural or forest produce; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; 0) where the payment is made by an assessee by way of salary to his employee after deducting the income tax from salary in accordance with the provisions of S.192 of the Act, and when such employee? (A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (B) does not maintain any account in any bank at such place or ship; (k) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (1) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;" In view of the above binding decision of the Supreme Court, the question now to be considered is whether the amendment to the Act and Rules under challenge will make any change in the law as declared by the Supreme Court. In principle, the Supreme Court held that S.40A(3) does not violate of Art.14 or 19(1)(g) of the Constitution. In principle, the Supreme Court held that S.40A(3) does not violate of Art.14 or 19(1)(g) of the Constitution. Any restriction on expenditure in the Income Tax Act cannot be said to be violative of petitioners' right to carry on business and therefore, the allegation of violation of Art.14 and 19(1)(g) of the Constitution is baseless. The Madras High Court in the decision reported in Dollar Co. Private Ltd. v. Union of India and Ors. (204 ITR 103) held that ceiling fixed on expenditure by Income Tax Act cannot be held to be unconstitutional. The Court held that determination of taxable income is in accordance with the statute and the Legislature was free to put any ceiling on expenditure and the assessee has no other right to claim deduction of such expenditure unless the same is permissible by the Statute. The Standing Counsel for the Department argued that the Andhra Pradesh High Court in Smt. Ch. Mangayamma v. Union of India and Ors. (239 ITR 687) upheld the validity of S.40A(3) even after the amendment of the Act and Rules which is now under challenge in this Court. It was held by the Andhra Pradesh High Court that the mere fact that rule making authority did not retain the old Rule, does not make the main section itself unconstitutional. Learned counsel for the petitioners on the other hand contended that the Andhra Pradesh High Court does not lay down the correct position of law, but relies on the decision of the Supreme Court whereunder S.40A(3) was upheld in view of the then prevailing R.6DDO). It has, therefore, to be examined as to the scope of the new Rules which have come in the place of earlier Rule based on which the Supreme Court rendered its decision. Now even after the amendment to the Rules by IT (21st Amendment) Rules, 1995 and IT (24th Amendment) Rule there is provision for complete deduction of expenditure over Rs .20,000-00 incurred in cash under Cl. (f) of R.6DD for payment made for the purchase of agricultural or forest produce or the produce of animal husbandry or dairy or poultry farming or fish or fish products or the products of horticulture or apiculture to the cultivator, grower or producer of such articles, produce or products. Similarly, exemption is provided for payment on purchase of products of cottage industry. Similarly, exemption is provided for payment on purchase of products of cottage industry. Cl.(h) of R.6DD, specifically excludes payments made in cash from the scope of disallowance under S.40-A(3) where, such payment is made in a Village or town, which is not served by any bank or to any person who ordinarily resides or is carrying on any business in any such village or town. Cl.(k) provides complete immunity from the restriction of S.40-A(3) for payments in cash in excess of Rs. 20,000-00 made on a day on which the Banks are closed either on account of holiday or strike. Lastly, Cl.(1) of the R.6DD provides that S.40A(3) does not apply to a case of payment made by a person to his agent who is required to make payment in cash for goods or services on behalf of such person. Relying on these clauses the Standing Counsel for the Department contended that the Government has taken sufficient care to prescribe Rules under proviso to R.40A(3) to cover all cases where assessees have genuine difficulty to pay through cheque or demand draft. I feel, Cl.(h) of R.6DD read with Cl.(k) itself provides sufficient liberalisation of the rigor of S.40A(3) which entitle the parties to claim full deduction on cash payments over Rs. 20,000-00 where banking services are not available in the place where the expenditure is incurred or on the day the expenditure is incurred. In other words, the statute and the rules insist for payment through account payee cheques or demand drafts only in cases where banking services are available to the parties. It cannot be said that insistence of money transactions through the Bank where the facilities are available which is to ensure transparency in the transactions any way affects the rights of the parties to carry on any trade or business. In fact I am of the view that Cls. (h) and (k) of R.6DD are sufficient liberalisation to get over the practical difficulties of S.40A(3) and clause T only provides a leverage to the unscrupulous to get over the discipline of S.40A(3) of the Act. In the circumstances, I do not think, the amendment to the Rule any way changes the position declared by the Supreme Court and therefore, the petitioners are not entitled to succeed in the challenge against the statute. In the circumstances, I do not think, the amendment to the Rule any way changes the position declared by the Supreme Court and therefore, the petitioners are not entitled to succeed in the challenge against the statute. Therefore, I agree with the decision of the Andhra Pradesh High Court referred above that the amendment to the Rule does not affect the validity of the statute sustained by the Supreme Court. Above all, S.40A(3) does not cause any restriction in regard to expenditure. The only limitation is that those who do not conform to the discipline introduced, that is payments over Rs.20,000-00 other than through account payee cheques or drafts except in the justifiable circumstances provided under R.6DD and the section itself, invites disallowance of 20% thereof. The Income Tax Act contains various restrictions and conditions for deductions and allowances which have been upheld by several High Courts and the Supreme Court on various occasions. The decision of the Madras High Court referred above is one such decision on the ceiling of disallowance in respect of expenditure in the form of advertisement. The computation of income has to be therefore subject to statutory provisions and Parliament is absolutely competent to fix ceiling on expenditure and lay down conditions for allowance. Therefore, I do not find any merit in the contentions raised by the petitioners and the Original Petitions are accordingly dismissed.