1975 (12) TMI 77 - HC - Income Tax

Dispute over Income-tax Act section 40A(3) payments upheld by Tribunal and Appellate Tribunal

Sajowanlal Jaiswal Versus Commissioner Of Income-Tax, Orissa

The case involved a dispute regarding the interpretation of section 40A(3) of the Income-tax Act, 1961, concerning payments made by a wholesale business ... Payments In Cash ISSUES PRESENTED AND CONSIDERED 1. Whether the term 'expenditure' in section 40A(3) is confined to expenditure claimable as a deduction under section 37 or extends to any payment made by the assessee and taken into account in computing total income under the Act. 2. Whether payments made in cash for purchase of goods (i.e., investments in the course of business such as stock purchases) fall within the mischief of section 40A(3). 3. The effect of the second proviso to section 40A(3) together with rule 6DD of the Income-tax Rules, 1962: (a) scope of prescribed exceptions; and (b) the onus and standards by which the Income-tax Officer may refrain from making a disallowance (exceptional/unavoidable circumstances, practicability, genuineness, identity of payee). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of 'expenditure' in section 40A(3) Legal framework: Section 40A(3) provides that where an assessee incurs any expenditure in respect of which payment is made after a prescribed date in a sum exceeding Rs. 2,500 otherwise than by a crossed cheque or crossed bank draft, such expenditure shall not be allowed as a deduction, subject to a second proviso permitting exceptions in prescribed cases. The term 'expenditure' is not statutorily defined. Precedent treatment: No authoritative precedent is cited or relied upon in the judgment; the Tribunal and departmental authorities applied the plain language of the provision and the corresponding rules. Interpretation and reasoning: In the absence of a statutory definition, the Court adopts the ordinary meaning of 'expenditure' - broadly, an act of expending or money spent - and holds that the word should be given its common parlance meaning. The Court also considers the content and scope of rule 6DD (which prescribes the limited exceptions) as interpretive aid, observing that the enumerated exceptions demonstrate the broader potential reach of subsection (3) if not so circumscribed. The Court rejects an argument that 'expenditure' must be read narrowly to mean only items deductible under section 37. Ratio vs. Obiter: Ratio - The term 'expenditure' in section 40A(3) is not confined to deductions claimable under section 37; it covers any payment made by the assessee and taken into account in computing total income. Obiter - reliance on dictionary meaning and the use of rule 6DD as an interpretive guide to legislative intent. Conclusions: The Court answers the question in the negative to the narrow contention and affirms that 'expenditure' has a wide ambit covering payments for purchases and other outgoings taken into account for computing total income. Issue 2 - Application to cash payments for purchase of goods (investments in business) Legal framework: Section 40A(3) operates whenever expenditure (as defined broadly above) is paid otherwise than by a crossed cheque or bank draft in sums exceeding the prescribed amount, subject to exceptions; rule 6DD sets out specific categories (e.g., agricultural produce, cottage industry products, areas without banking facilities) where non-crossed payments will not attract disallowance, and a residual clause where the assessee must satisfy the Income-tax Officer on practicability, exceptional circumstances, and genuineness. Precedent treatment: The Tribunal applied the statutory language and rule 6DD to disallow the cash payments because the assessee did not satisfy the requirements of the proviso/rule. Interpretation and reasoning: The Court reasons that if Parliament had intended to exclude payments for purchases of goods used in business (i.e., stock purchases) from the operation of subsection (3), it would have done so explicitly in the proviso or rules. The presence of clauses (f) and (g) in rule 6DD (which create targeted exceptions for certain types of purchases payable to producers or in specific circumstances) demonstrates that subsection (3) would, absent such explicit exceptions, apply to such purchases. Thus payments for purchases (including purchases of sugar in the facts) fall within the mischief of subsection (3) unless they satisfy an exception under rule 6DD or the residual proviso. Ratio vs. Obiter: Ratio - Cash payments for purchase of goods are within the scope of subsection (3) and are disallowable unless they fall within an enumerated or prescribed exception. Obiter - illustrative reference to clauses (f) and (g) showing Parliament anticipated coverage of business purchases absent exceptions. Conclusions: Payments made in cash for purchase of goods (investments in business) can be disallowed under section 40A(3) unless the payment falls within the exceptions prescribed by rule 6DD or the assessee satisfies the Income-tax Officer under the residual proviso. Issue 3 - Role and effect of the second proviso and rule 6DD; standards for relief from disallowance Legal framework: The second proviso to section 40A(3) saves payments made otherwise than by crossed cheque/bank draft in such cases and under such circumstances as may be prescribed, having regard to banking facilities, business expediency and other relevant factors. Rule 6DD enumerates specific categories where no disallowance shall be made and provides a residual clause (clause (j)) permitting relief where the assessee satisfies the Income-tax Officer that payment could not be made by crossed cheque/bank draft due to (1) exceptional or unavoidable circumstances, or (2) impracticability or genuine difficulty to the payee, coupled with evidence satisfying the Income-tax Officer as to genuineness of payment and identity of payee. Precedent treatment: The Tribunal applied the strict terms of rule 6DD and the residual standards to sustain addition where the assessee failed to satisfy the Income-tax Officer. Interpretation and reasoning: The Court views the proviso and rule as setting the conditions and standards for non-disallowance. The language is categorical: unless the assessee satisfies the Income-tax Officer as to exceptional/unavoidable circumstances or impracticability and furnishes evidence of genuineness and identity of payee, disallowance follows. This legislative scheme reflects an intent to prevent tax evasion by encouraging traceable bank payments and to permit limited, defined exceptions where practicable and justified. Ratio vs. Obiter: Ratio - The burden lies on the assessee to satisfy the Income-tax Officer under the proviso/rule 6DD residual clause; absent such satisfaction and evidence, disallowance under section 40A(3) is proper. Obiter - legislative purpose statement that the provision counters evasion by preventing untraceable cash payments. Conclusions: The Court upholds the Tribunal's approach: rule 6DD circumscribes exceptions, and the residual clause requires the assessee to prove exceptional/unavoidable circumstances or impracticability and the genuineness/identity of the payee to avoid disallowance. Cross-references and Outcome Interrelationship: Issues 1 and 2 are interlinked - the broad interpretation of 'expenditure' (Issue 1) directly governs the applicability of subsection (3) to cash purchases in the course of business (Issue 2). Issue 3 governs when such otherwise-catchable payments may nonetheless escape disallowance. Overall conclusion: The Court holds that subsection (3) of section 40A applies to any payment taken into account in computing total income (not limited to section 37 deductions); payments for purchase of goods are therefore within its scope unless falling within rule 6DD or the assessee satisfies the Income-tax Officer under the residual proviso. The Tribunal's disallowance was upheld on that basis.