Crossed Cheque Vs. Account Payee Cheque - Sec 40A(3)

IT : So far as compliance with requirement of section 40A(3) is concerned, payment made by a crossed cheque cannot be considered as payment made by account payee cheque

■■■

[2013] 39 taxmann.com 130 (Rajkot - Trib.)

IN THE ITAT RAJKOT BENCH

Rajmoti Industries

v.

Assistant Commissioner of Income-tax, Central Circle -2, Rajkot*

T.K. SHARMA, JUDICIAL MEMBER 
AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER

IT APPEAL NOS. 1315 (RAJKOT) OF 2010 
& 433 (RAJKOT) OF 2011
[ASSESSMENT YEARS 2007-08 & 2008-09]

SEPTEMBER  30, 2013 

Section 40A(3) of the Income-tax Act, 1961 - Business disallowance - Cash payment exceeding prescribed limits [Payment by crossed cheque] - Assessment years 2007-08 and 2008-09 - Whether so far as compliance with requirement of section 40A(3) is concerned, payment made by a crossed cheque cannot be considered as payment made by account payee cheque - Held, yes - Whether, therefore, where assessee made payments for purchases in excess of Rs. 20,000 in one day by issuing a crossed cheque, there being no fulfilment of requirements of section 40A(3), authorities below were justified in disallowing said payments - Held, yes [Para 14] [In favour of revenue]

Circulars and Notifications : Circular No. 1/2007, dated 27-4-2007

FACTS

 

■		The assessee firm was engaged in the business of manufacturing and trading of edible oil. It filed return declaring certain taxable income.
■		During assessment proceedings, it was noticed that the assessee-firm had purchased oil for which payments exceeding Rs. 20,000 were made to 'S' otherwise than by an account payee cheque drawn on a bank or account payee bank draft.
■		The Assessing Officer thus invoked provisions of section 40A(3) and disallowed said payments.
■		The Commissioner (Appeals) confirmed said disallowance.
■		The assessee filed instant appeal contending that the provisions of section 40A(3) as they existed immediately before the assessment year 2007-08 required payments to be made by crossed cheque and not by account payee cheque. According to assessee, the purchases were genuine for which payments were made through crossed-cheques and, therefore, the impugned disallowance ought to be deleted.

HELD

 

■		Section 40A(3) deals with expenses not deductible in certain circumstances. Prior to assessment year under appeal, i.e., AY 2007-08, section 40A(3)/(4) mandated disallowance of 20 per cent of any expenditure if payment exceeding twenty thousand rupees was made, against such expenditure, otherwise than by "a crossed cheque drawn on bank or by a crossed bank draft".
■		The aforesaid provisions were amended with effect from 13-7-2006 to substitute the expression 'a crossed cheque drawn on a bank or by a crossed bank draft' in sub-sections (3) and (4) of section 40A, by 'an account payee cheque drawn on a bank or account payee bank draft'.
■		The reasons for amendments made in section 40A(3) and the purpose that they seek to achieve have been explained in Circular No. 1/2007 dated 27-4-2007 issued by the Central Board of Direct Taxes. [Para 10]
■		The amendments made in section 40A(3) are intended to enable the Income tax authorities to track the transactions between the assessee and the payee in order to ensure that they are properly recorded and accounted for not only by the assessee but by the payee also.
■		The aforesaid object would be completely frustrated if an assessee claiming deduction of expenditure was allowed to make payments in respect thereof in a manner different from the one prescribed in section 40A(3). The legislative policy, which is so clearly and unambiguously expressed in section 40A(3), cannot be allowed to be diluted so as to frustrate the object that it seeks to achieve.
■		Unquestionably, the amendments have been carried out in section 40A(3) for strict enforcement and compliance. The fact that they are intended for strict compliance is also evident from the fact that they are not subject to any reasonable cause or exception.
■		If an assessee seeks to claim deduction of any expenditure involving payments exceeding Rs. 20,000, he must ensure that such payments are made as per prescription of section 40A(3) else the amount claimed as deduction would not qualify for deduction.
■		It is well-established that when law requires a particular thing to be done in a particular manner, it should then be done in that manner else it should be ignored. [Para 11]
■		It was contended by the assessee that the term 'account payee cheque' used in section 40A(3) has neither been defined in the Act nor in the Negotiable Instruments Act and hence 'crossed cheques' issued by the assessee in the name of 'S' should be taken as sufficient compliance of the requirement of section 40A(3).
■		The aforesaid submission cannot be accepted. Circular issued by the CBDT (supra) refers to the instructions issued by the Reserve Bank of India to the banks in which the difference between a crossed cheque and account payee cheque has been brought out. While account payee cheque is credited by the drawee bank to the bank account of the payee and none else, crossed cheque can be negotiated and thus can be credited by the drawee bank to the bank account of a person other than the payee. Account payee cheque is well covered by the definition of 'cheque' as given in section 6 of the Negotiable Instruments Act read with section 5 thereof.
■		In this view of the matter, payments made by a crossed cheque cannot be considered as payment by account payee cheque. Law requires payments to be made by an account payee cheque and not by a crossed cheque. In this view of the matter, all the arguments taken by the assessee in this behalf are rejected. [Para 12]
■		Another submission of the assessee was that the purchases in respect of which impugned payments have been made were genuine and, therefore, section 40A(3) cannot be invoked. Such a plea cannot be accepted for the detailed reasons given by a co-ordinate bench of this Tribunal in T.G. Mutha v. ITO [1995] 54 ITD 460 (Pune).
■		Besides, section 40A(3) is neither subject to any reasonable cause nor to any exception. Once payment exceeding Rs. 20,000 is shown to have been made otherwise than by account payee cheque drawn on a bank or account payee bank draft, the expenditure in respect of which such payment has been made cannot be allowed as deduction. [Para 13]
■		The assessee-firm has made impugned payments exceeding Rs. 20,000 in a day for purchases made by it from 'S' and claimed deduction in respect thereof while computing its profits. It is admitted by the assessee that the impugned payments exceeding Rs. 20,000 were made otherwise than by account payee cheque drawn on a bank or account payee bank draft.
■		Thus, all the conditions for the applicability of section 40A(3) are fully satisfied. Therefore, the order passed by the Commissioner (Appeals) confirming the impugned disallowance in both the assessment years under appeal, cannot be interfered with. The appeal filed by the assessee is accordingly dismissed. [Para 14]

CASES REFERRED TO

 

T.G. Mutha v. ITO [1995] 54 ITD 460 (Pune) (para 13).

R.D. Lalchandani for the Appellant. Dr. Jayant B. Jhaveri for the Respondent.

ORDER

 

D.K. Srivastava, Accountant Member - The appeal bearing ITA No. 1315/Rjt/2010 filed by the assessee relating to assessment year 2007-08 arises out of the order passed by the ld. Commissioner of Income-tax (Appeals)-III, Rajkot on 26.06.2010 while the other appeal bearing ITA No.433/Rjt/2011 filed by the assessee arises out of another order passed by the ld. Commissioner of Income-tax (Appeals)-IV, Ahmedabad on 05.09.2011 relating to assessment year 2008-09. Facts, issues and the grounds of appeal in both the appeals are common. It is therefore convenient to dispose of both the appeals by a consolidated order.

2. In ITA No.1315/Rjt/2010, the assessee has taken the following grounds of appeal:—

"1.

The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 2672198/- under the provisions of section 40(A)3 of the Act. The disallowance is not justified."

3. In ITA No. 433/Rjt/2011, the assessee has taken the following grounds of appeal:—

"1.

The Commissioner of Income Tax [Appeals] erred in confirming the disallowance of Rs. 80,00,384/- under the provisions of section 40(A)3 of the Act.

The confirmation of the disallowance is not justified."

 

4. The assessee is a firm. It is engaged in the business of manufacturing and trading of edible oil. Return of income was filed by the assessee for the assessment year 2007-08 on 31.10.2007 returning total income at Rs. 83,28,780/-. Perusal of the assessment order for assessment year 2007-08 shows that the Investigation Wing of the Income-tax Department had carried out investigations in the case of M/s. Shree Swaraj Oil Mill, Jam-Khambhalia, during which it was noticed that the assessee-firm had purchased oil for which payments exceeding Rs. 20,000/- were made by the assessee otherwise than by an account payee cheque drawn on a bank or account payee bank draft. The Assessing Officer invoked section 40A(3) and called upon the assessee to explain as to why a sum of Rs. 26,72,198/- should not be disallowed u/s 40A(3). After considering the submissions of the assessee, the Assessing Officer disallowed the said sum u/s 40A(3) with the following observations:—

'4.5 I have carefully considered the reply of the assessee and the submissions made by them earlier. The reply and the arguments placed before me during the assessment proceedings are not acceptable. The assessee's argument that the cheques issued to M/s. Swaraja Oil Mill (Seller) were A/c Payee, which were deposited in A/c of Seller. However, one of the partner of M/s. Swaraja Oil Mill admitted before the ADIT (Inv) that they have encashed the entire payment received from M/s. Shree Rajmoti Industries through different Shroffs. Since M/s. Swaraj Oil Mill has received the payment, encashing the cheques through Shroff clearly shows that cheques were not A/c Payee cheques because the A/c Payee cheques can not be encashed through Shroffs. Also the cheques allegedly issued by the assessee have not been credited in the account of M/s. Shree Swaraj Oil Mill.

4.6 As per the provisions of Section 40A(3)(a) as applicable before 13.07.2006;

"Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by a crossed cheques drawn on a Bank or by a crossed payee Bank Draft, twenty percent of such expenditure shall not be allowed as an expenditure."

As per the provisions of Section 40A(3)(a) as applicable after 13.07.2006;

"Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an Account Payee cheque drawn on a Bank or by a Account payee Bank Draft, twenty percent of such expenditure shall not be allowed as an expenditure."

4.7 Analysing the above sections before and after 13.07.2006, I find that the assessee Firm has violated the provisions of section 40A(3)(a) by making payment otherwise than by A/c. payee cheque after 13.07.2006. The details submitted by the assessee do not conclusively substantiate the claim of the assessee that the payments were made by an A/c Payee cheques. The report of the ADIT(Inv) also support the stand of the Department.

4.8 Therefore, the payments made by the assessee to M/s. Shree Swaraj Oil Mill, Jam-Khambhalia after 13.07.2006 amounting to Rs. 1,33,60,988/- are otherwise than by a A/c. Payee cheque and thereby violate the provisions of Section 40A(3)(a) of the Act. Since the submission made by the assessee in response to the show cause notice dtd. 18.12.2009 is not acceptable and considering the findings made by the ADIT (Investigations)-2, Rajkot, I, therefore, disallow 20% of the payments made, which comes to Rs.26,72,198/- and add to the total income of the assessee. Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars/concealment of income are initiated.'

 

5. Return for assessment year 2008-09 was filed by the assessee on 30.09.2008 returning total income at Rs.84,49,900/- The investigations carried out by the Investigation Wing of the Income-tax Department in the case of M/s Shree Swaraj Oil Mill revealed that a sum of Rs.80,00,384/- was paid by the assessee to the said firm, namely, M/s. Shree Swaraj Oil Mill on account of purchases made from the said firm, otherwise than by account payee cheque drawn on a bank or account payee bank draft. The impugned sum was therefore disallowed by the Assessing Officer u/s 40A(3) in assessment year 2008-09 also with the following observations:—

'5.4 On the basis of all above facts and in the circumstances, there is enough evidence to point out that there is a violation of provisions of section 40A(3)(a) of the Act and therefore the payment made to M/s. Shree Swaraj Oil Mill, Jam Khambhalia amounting the Rs. 80,00,384/- are otherwise than by Account Payee Cheques, and thereby, there is a violation of provisions of section 40A(3)(a) of the Act. It is also noticed that the legislature in terms has removed the provisions of Rule 6DD(j) keeping in view the intention that main purpose of introducing provisions of section 40A(3) was to curb proliferation of black money. The payment for purchase of goods is covered by section 40A(3) of the Act as has been held by the Hon'ble Punjab & Haryana High Court in the case of Hari Chand Virendra Paul v. CIT 140 ITR. The provisions of section 40A(3) are construed strictly as has been held by various courts. The Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh etc. v. ITO (SC) 191 ITR 667 (PP. 673) has held as under:—

"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."

Further, the Hon'ble ITAT, Pune Bench in T G Mutha v. ITO (ITAT, Pune) 54 ITD 460 has held as under:

"It would amount to defeating objective of enactment, if claim allowed on the basis of transaction is genuine, identity of party established etc."

The decision of Hon'ble ITAT Pune Bench makes it clear that only because of transaction is genuine, and identity of party is established, if claim is allowed, it would amount to defeating the objective of enactment. Keeping in view the objectives of the enactment as discussed above, which is to curb proliferation of black money, no concession can be granted to the appellant on the grounds of commercial expediency.

To highlight the issue, further observations of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh are re-produced hereunder:—

"The Tribunal in Sri Renukeswara Rice Mills v. ITO (2005) 93 TTJ (Bang) 912 referring to the decision of the Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC), observed:—

The Hon'ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted that section 40A(3) is intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of black money for business transactions. In the present case, it is seen that the assessee for purchase of rice, paid the amount directly to the bank account of the payee. The effect of issue of crossed cheques/DD is that the payee named therein receives the payment ;through banking channels. The purpose is dual. In the first instance, it is to see that the payee and payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transaction."

6. In view of the above, 100% of the purchases made otherwise than by account payee cheque, to the tune of Rs.80,00,384/- is disallowed and added to the assessee's total income.'

 

6. Aggrieved by the impugned disallowances/additions made by the Assessing Officer, the assessee carried the matter in appeal before the ld CIT(A). The ld CIT(A) however confirmed the impugned disallowances/additions made by the Assessing Officer for the detailed reasons given by him in his appellate orders separately passed for both the assessment years under appeal.

 

7. Aggrieved by the orders passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal.

 

8. At the time of hearing, the ld. counsel for the assessee fairly submitted that the impugned sums in both the assessment years were paid by the assessee-firm otherwise than by account payee cheque drawn on a bank or account payee bank draft. He however submitted that the provisions of section 40A(3) as they existed immediately before the assessment year 2007-08 required payments to be made by crossed-cheque and not by account payee cheque. He contended that account payee cheques have not been defined in the Income-tax Act or in the Negotiable Instruments Act. He also submitted that the genuineness of purchases, for which impugned payments have been made, has not been doubted by the Assessing Officer or by the ld. CIT(A). According to him, the purchases were genuine for which payments were made through crossed-cheques and therefore the impugned disallowance ought to be deleted.

 

9. In reply, the ld. Departmental Representative supported the order passed by the Assessing Officer and the ld. CIT(A).

 

10. We have heard both the parties and carefully considered their submissions. Section 40A(3) deals with expenses not deductible in certain circumstances. Prior to assessment year under appeal, i.e., AY 2007-08, section 40A(3)/(4) mandated disallowance of 20% of any expenditure if payment exceeding twenty thousand rupees was made, against such expenditure, otherwise than by "a crossed cheque drawn on bank or by a crossed bank draft". The aforesaid provisions were amended with effect from 13th July 2006 to substitute the expression 'a crossed cheque drawn on a bank or by a crossed bank draft' in sub-sections (3) and (4) of section 40A, by 'an account payee cheque drawn on a bank or account payee bank draft'. The reasons for amendments made in section 40A(3) and the purpose that they seek to achieve have been explained in Circular No. 1/2007 dated 27.4.2007 issued by the Central Board of Direct Taxes as under:

"14. Expenses or payments not deductible in certain circumstances - Section 40A(3)

14.1 The existing provisions contained in sub-section (3) and sub-section (4) of section 40A provide that twenty per cent. of the expenditure shall not be allowed as a deduction if payment in a sum exceeding twenty thousand rupees is made, against such expenditure, otherwise than by a crossed cheque or crossed bank draft.

14.2 A crossed cheque or crossed bank draft is not a non-negotiable instrument. This has, at times, resulted in crossed cheques being endorsed making it difficult to trace final payee and thus defeating the provisions of section 40A(3). However, as per the RBI's instructions to commercial banks, an account payee cheque or account payee bank draft cannot be credited to any account other than the account of the payee. The Act has accordingly amended the aforementioned sub-section (3) and sub-section (4) to substitute the expression 'a crossed cheque drawn on a bank or by a crossed bank draft', in both the sub-sections, by 'an account payee cheque drawn on a bank or account payee bank draft'.

14.3 These amendments take effect from 13th July, 2006."

 

11. The amendments made in section 40A(3) are intended to enable the Income-tax authorities to track the transactions between the assessee and the payee in order to ensure that they are properly recorded and accounted for not only by the assessee but by the payee also. The aforesaid object would be completely frustrated if an assessee claiming deduction of expenditure was allowed to make payments in respect thereof in a manner different from the one prescribed in section 40A(3). The legislative policy, which is so clearly and unambiguously expressed in section 40A(3), cannot be allowed to be diluted so as to frustrate the object that it seeks to achieve. Unquestionably, the amendments have been carried out in section 40A(3) for strict enforcement and compliance. The fact that they are intended for strict compliance is also evident from the fact that they are not subject to any reasonable cause or exception. If an assessee seeks to claim deduction of any expenditure involving payments exceeding Rs. 20,000/-, he must ensure that such payments are made as per prescription of section 40A(3) else the amount claimed as deduction would not qualify for deduction. It is well-established that when law requires a particular thing to be done in a particular manner, it should then be done in that manner else it should be ignored.

 

12. At the time of hearing, it was contended by the ld. counsel for the assessee that the term "account payee cheque" used in section 40A(3) has neither been defined in the Income-tax Act nor in the Negotiable Instruments Act and hence "crossed cheques" issued by the assessee in the name of M/s Shree Swaraj Oil Mill should be taken as sufficient compliance of the requirement of section 40A(3). We are unable to agree with the aforesaid submissions. Circular issued by the CBDT (supra) refers to the instructions issued by the Reserve bank of India to the banks in which the difference between a crossed cheque and account payee cheque has been brought out. While account payee cheque is credited by the drawee bank to the bank account of the payee and none else, crossed cheque can be negotiated and thus can be credited by the drawee bank to the bank account of a person other than the payee. Account payee cheque is well covered by the definition of "cheque" as given in section 6 of the Negotiable Instruments Act read with section 5 thereof. In this view of the matter, payments made by a crossed cheque cannot be considered as payment by account payee cheque. Law requires payments to be made by an account payee cheque and not by a crossed cheque. In this view of the matter, all the arguments taken by the assessee in this behalf are rejected.

 

13. Another submission of the assessee at the time of hearing was that the purchases in respect of which impugned payments have been made were genuine and therefore section 40A(3) cannot be invoked. Such a plea cannot be accepted for the detailed reasons given by a co-ordinate bench of this Tribunal in T G Mutha v. ITO 54 ITD 460 and other decisions referred to by the AO in the assessment order. Besides, section 40A(3) is neither subject to any reasonable cause nor to any exception. Once payment exceeding Rs. 20,000/- is shown to have been made otherwise than by account payee cheque drawn on a bank or account payee bank draft, the expenditure in respect of which such payment has been made cannot be allowed as deduction.

 

14. The assessee-firm has made impugned payments exceeding Rs. 20,000/- in a day for purchases made by it from M/s Shree Swaraj Oil Mill and claimed deduction in respect thereof while computing its profits. It is admitted by the ld. counsel for the assessee that the impugned payments exceeding Rs. 20,000/- were made otherwise than by account payee cheque drawn on a bank or account payee bank draft. Thus all the conditions for the applicability of section 40A(3) are fully satisfied. We are therefore unable to interfere with the order passed by the CIT(A) confirming the impugned disallowance in both the assessment years under appeal. His orders in this behalf are confirmed. Both the appeals filed by the assessee are dismissed.

 

Source: Taxmann