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of <h1>s.40A(3) allows disallowance of cash payments over Rs.2,500; exceptions if impracticable or payee identified and Rule 6DD exemptions recognized</h1> SC held that s.40A(3) authorises the AO to disallow expenditure paid in cash exceeding Rs.2,500, and that payments for acquisition of stock-in-trade and ... Validity of section 40A(3) - Payments in cash exceeding a sum of ₹ 2,500 for some of the purchases of stock-in-trade - Applicability of Section 40A(3) to payments made for acquiring stock-in-trade - HELD THAT:- 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 unaccounted money or reduce the chances to use black money for business transactions. 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. 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 specified 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 payments made for acquiring stock-in-trade and other materials. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials. Appeals and petitions dismissed. Issues:1. Validity of section 40A(3) of the Income-tax Act, 1961.2. Applicability of Section 40A(3) to payments made for acquiring stock-in-trade.Analysis:Validity of section 40A(3):The judgment addresses the contention that section 40A(3) of the Income-tax Act, 1961, which disallows deductions for payments exceeding a specified amount made in cash, is arbitrary and restricts the right to carry on business. The court clarifies that section 40A(3) must be read in conjunction with rule 6DD, which provides exceptions and circumstances where payments exceeding the specified amount can be made in cash. The court emphasizes that the provision aims to regulate business transactions, prevent the use of unaccounted money, and curb black money circulation. It highlights that genuine transactions can still be claimed as deductions if the assessee satisfies the Assessing Officer regarding the impracticability of making payments through crossed cheques or bank drafts. The court underscores that such regulations do not impede the freedom of trade or business but rather aim to ensure transparency and accountability in financial transactions.Applicability of Section 40A(3) to payments for acquiring stock-in-trade:The judgment interprets the term 'expenditure' under section 40A(3) as encompassing all outgoings, including payments for purchasing stock-in-trade. It explains that payments made for stock-in-trade fall within the purview of 'expenditure' and can be disallowed if made in cash exceeding the specified limit. The court highlights the alignment of rule 6DD with section 40A(3), which exempts certain transactions from the requirement of crossed cheques or bank drafts. It cites various High Court decisions supporting the view that payments for acquiring stock-in-trade are considered as expenditure under section 40A(3). The judgment rejects the dissenting opinion of the Gauhati High Court, which argued that payments for stock-in-trade do not qualify as 'expenditure incurred.' Ultimately, the court dismisses the appeals and special leave petition, upholding the applicability of section 40A(3) to payments made for acquiring stock-in-trade.This comprehensive analysis of the judgment highlights the court's interpretation and application of section 40A(3) of the Income-tax Act, 1961, addressing both its validity and applicability to payments for acquiring stock-in-trade.
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