ATTAR SINGH GURMUKH SINGH VS INCOME-TAX OFFICER, LUDHIANA
1992 P T D 265
[Supreme Court of India]
Present: K Jagannatha Shetty and Yogeshwar Dayal, JJ
ATTAR SINGH GURMUKH SINGH
versus
INCOME-TAX OFFICER, LUDHIANA
Civil Appeals Nos.11 and 3331 of 1981 with Civil Appeals Nos.1105 and 1425 of 1976; 1032 and 2752 of 1979; 29 and 985 of 1981; 4950 of 1989 and S.L.P. (Civil) No.15 of 1980, 7th August, 1991.
Civil Appeal No.11 of 1981 was from the judgment and order dated October 15, 1979, of the Punjab and Haryana High Court in C.W.P. No.1009 of 1974. The judgment of the High Court is reported as Attar Singh Gurmukh Singh v. ITO (1982) 136 ITR 589 (P & H).
Civil Appeal No.1105 of 1976 was from the judgment and order dated November 11, 1975 of the Allahabad High Court in I.T.R. No.712 of 1973. The judgment of the High Court is reported as U.P. Hardware Store v. CIT (1976) 104 ITR 664 (All.).
Civil Appeal No.1425 of 1976 was by special leave from the judgment and order dated December 5, 1975, of the Orissa High Court in SJ.C. No.175 of 1974. The judgment of the High Court is reported as Sajowanlal Jaiswal v. CIT (1976) 103 ITR 706 (Orissa).
Civil Appeal No.1032 of 1979 was from the judgment and order dated March 9, 1978, of the Allababad High Court in I.T.R. No. 519 of 1974 (Chiranji Lai Om Prakash v. Addl. C.I.T.).
Civil Appeal No.2752 of 1979 was from the judgment and order dated March 31, 1978, of the Allahabad High Court in I.T.R. No.267 of 1975 (Chiranji Lai Om Prakash v. C.I.T.).
Civil Appeal No.29 of 1981 was by special leave from the judgment and order dated September 10, 1979, of the Punjab and Haryana High Court in I.T.R. No.46 of 1976. The judgment of the High Court is reported as C.I.T. v. Kishan Chand Maheshwari Dass (1980) 121 TTR 232 (P & H).
Civil Appeal No.985 of 1981 was by special leave from the judgment and order dated July 25, 1980, of the Punjab and Haryana High Court in I.T.R. No.60 of 1976. The judgment of the High Court is reported as C.I.T. v. Autar Singh & Sons (1981) 129 TTR 671 (P & H).
Civil Appeal No.3331 of 1981 was from the judgment and order dated February 8, 1980, of the Punjab and Haryana High Court in C.W.P. No.934 of 1975 (Attar Singh Gurmukh Singh v. I.T.O.).
Civil Appeal No.4950 of 1989 was by special leave from the judgment and order dated April 27, 1983, of the Punjab and Haryana High Court in I.T.R. No.7 of 1977 (S.B. Saini Bros. v. C.I.T.).
S.L.P. (Civil) No.15 of 1980 was against the judgment and order dated October 25, 1979, of the Punjab and Haryana High Court in C.W.P.No.1697 of 1972 (Attar Singh Gurmukh Singh v. I.T.O.).
(a) Income-tax--- ----Business expenditure---"Expenditure"--Meanings--Provision for disallowance if not made by crossed cheque or crossed Bank draft is valid and not arbitrary and does not infringe fundamental right to carry on business-- Provision applies to expenditure for stock-in-trade and raw materials-- "Expenditure", includes all outgoings and expenditure for purchasing stock-in -trade---Interpretation of taxing statutes---Court cannot be oblivious of proliferation of black money circulating in the country.---[C.I.T. v. Hardware Exchange (1991) 190 ITR 61 (Gauhati) overruled].
Section 40-A (3) of the Indian Income-tax Act, 1961, which provides that expenditure in excess of Rs.2,5 W (Rs.10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed Bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with Rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict 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 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 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.
The word "expenditure" in section 40A(3) 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 that all outgoings are brought under the word "expenditure" for the purpose of the section. The expenditure for purchasing stock-in-trade is one of such outgoings. Rule 6DD of the Income-tax Rules, 1962, also contemplates, payments made for stock-in-trade and raw materials. This rule is in accordance with the terms of section 40A(3). Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials. .
In interpreting a taxing statute, the Court cannot be oblivious of the proliferation of black money which is under circulation in India.
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.
Ratan Udyog v. I.T.O. [1977] 109 ITR 1(All.), P.R. Textiles v. C.I.T. (1980) 121 ITR 237 (Ker.); C.I.T. v. New Light Tin Manufacturing Co. (1980) 121 ITR 229 (P & H); Fakri Automobiles v. C.I.T. (1986)160 ITR 504 (Raj.) and Akash Films v. C.I.T. (1991) 190 ITR 32 (Ker.) approved.
C.I.T. v. Hardware Exchange (1991) 190 TTR 61(Gauhati) overruled.
Kand Lal Purshottam & Co. v. C.I.T. (1985) 155 ITR 519 (Raj.) and Venkata Satyanarayana Timber Depot v. CIT (1987) 165 TTR 253 (AP) ref.
(b) Words and phrases--
----- Expenditure"---Connotation of---"Expenditure" includes all outgoings and expenditure for purchasing stock-in-trade.
Attar Singh Gurumukh Singh v. C.I.T. (1982 136 ITR 589. C.I.T. v. Kishan Chand Maheshwari Dass (1980) 121 ITR 232 & C.I.T. v. Avtar Singh; Sons (1981) 129 ITR 671; U.P. Hardware Store v. C.I.T. (1976) 104 ITR 664 and Sajowanlal Jaiswal v. C.I.T. (1976) 103 ITR 706 affirmed.
G.C. Sharma, Senior Advocate with S.K. Mehta, Advocate for Appellant (in CAs. Nos.11 of 1981 and 3331 of 1983) and for Petitioner (in S.L.P. (Civil) No.15 of 1980).
B. Sen, Senior Advocate with Umesh Khaitan, Darshan Singh and Praveen Kumar, Advocates for Appellant (in CA. No.985 of 1981).
C.S. Aggarwal, Senior Advocate with B.V. Desai and Radha Rangaswamy, Advocates for Appellant (in CA. No. 29 of 1981).
Vinod Bhagat, Advocate for Appellant (in CA. No. 1425 of 1976).
K.C. Dua, Advocate for Appellant (in CA. Nos.1032 and 2752 of 1979).
M.M. Kashyap, Advocate for Appellant (in CA. No.1105 of 1976).
S.K. Bagga, Advocate for Appellant (in CA. No.4950 of 1989).
J. Ramamurthy, Senior Advocate with B.B. Ahuja and Ms. A. Subhashini, Advocates for Respondents (in all Matters).
JUDGMENT
K. JAGANNATHA SHETTY, J.---The assessees in these appeals have made payments in cash exceeding a sum of Rs.2,500 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 rule 61313 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 acquiring stock-in-trade.
Section 40p(3) so far as is material provides:--
"40-A. Expenses or payments not deductible in certain circumstances.--(l) 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 underthe head, Profits and gains of business or profession' .....
(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 further that no disallowance 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 circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors."
Originally, section 40A(3) required payments in respect of expenditure, which exceeded 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 m spite of anything 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 Legislature 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. Subsection (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 than by a crossed cheque drawn on a bank or by a crossed bank draft.--No disallowance under subsection (3) of section 40A 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 the cases and circumstances specified hereunder, namely...
(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 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 as to the genuineness 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 against the sale price of the material sold for want of proof of payment by a crossed cheque or a 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 of tax on an assumed income would be a restriction on the right to carry on business, besides being arbitrary.
In our opinion, there is little merit in this contention. 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 provisions 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 assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations 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 un accounted money or reduce the chances to use black money for business transactions. (See Mudiam Oil Company v. I.T.O. (1973) 92 ITR 519 (AP). 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 for 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 that all outgoings are brought under the word "expenditure" for the purpose of the section. The expenditure for purchasing stock-in-trade is one of such outgoings. 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 "expenditure" and such payments can be disallowed if they are made in cash in the sums exceeding the amount speed under section 40A(3). We have earlier observed that rule 6DD has to be read along with section 40A(3). The rule also contemplates 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 requirement of payment by crossed cheque or a crossed bank draft where purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payment made for acquiring stock-in-trade and other materials. This is also the view taken by several High Courts. See: (1) Sajowanlal Jaiswal v. C.I.T. (1976) 103 ITR 706 (Orissa); (2) U.P. Hardware Store v. C.I.T. (1976) 104 ITR 664 (All.); (3) Ratan Udyog v. I.T.O. (1977) 109 ITR 1 (All.); (4) P.R. Textiles v. C.I.T. (1980) 121 ITR 237(Ker.); (5) C.I.T. v. Kishan Chand Maheshwari Dass (1980) 121 ITR 232 (P & H); (6) Kanti Lal Purshottam & Co. v. C.I.T. (1985) 155 ITR 519 (Raj); (7) C.I.T. v. New Light Tin Mfg. Co. (1980) 121 ITR 229 (P & H); (8) Fakri Automobiles v. C.I.T. (1986) 160 ITR 504 (Raj.); (9) Venkata Satya Narayana Timber Depot v. C.I.T. (1987) 165 ITR 253 (AP) and (10) Akash Films v. C.I.T. (1991) 190 ITR 32 (Ker.). The decisions of the High Courts of Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab and 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 C.I.T. v. Hardware Exchange (1991) 190 ITR 61. The Gauhad High Court has observed that section 40A(3) applies only to payments made on account of "expenditure incurred" and that the payment made for purchase of stock-in-trade cannot be termed as "expenditure incurred" since money does not go out 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 the special leave petition with costs.
M.BA./1223/T
Appeals and petition dismissed.