Account payee payment rule under section 40A(3): crossed cheques routed through shroffs do not satisfy the mandatory mode.

For purposes of section 40A(3)(a) of the Income-tax Act, payment must be made by an account payee cheque or account payee bank draft; a crossed cheque routed through shroffs does not satisfy that statutory mode. The provision was amended to tighten traceability and prevent endorsement of crossed instruments, and the commercial meaning of an account payee cheque is that it can be credited only to the payee's account. The genuineness of the underlying purchases does not override this mandatory payment requirement, and disallowance follows where the prescribed mode is not used.

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Issues: Whether payments made by crossed cheques routed through shroffs, instead of by account payee cheques or account payee bank drafts, satisfied section 40A(3)(a) of the Income-tax Act, 1961 and could avoid disallowance.

Analysis: The amendment to section 40A(3) substituted the earlier reference to a crossed cheque or crossed bank draft with the stricter requirement of an account payee cheque or account payee bank draft. The object was to prevent endorsement of crossed cheques and to ensure traceability of payments to the payee. The expression account payee cheque, though not separately defined in the Act or the Negotiable Instruments Act, has a settled commercial meaning reinforced by RBI directions, under which such a cheque can be credited only to the payee's account. A crossed cheque is not the same as an account payee cheque for this purpose. The genuineness of the underlying purchases by itself does not override the statutory mandate, and the exceptional facts that justified relief in a different case were absent here.

Conclusion: The assessee's payments did not comply with section 40A(3)(a), and the disallowance was rightly sustained.

Final Conclusion: The statutory requirement of payment by account payee instrument was held to be mandatory and the assessee's appeals failed.

Ratio Decidendi: For the purposes of section 40A(3)(a), a crossed cheque is not equivalent to an account payee cheque, and payments made otherwise than in the prescribed mode attract disallowance notwithstanding the genuineness of the expenditure.

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