2010 (4) TMI 236 - HC - Income Tax

High Court affirms Tribunal decision on Income-tax Act interpretation, backing legitimate payments via banking instruments.

Commissioner of Income-tax Versus Vijay Kumar Goel

The High Court upheld the Tribunal's decision in a case concerning the interpretation of section 40A(3) of the Income-tax Act, 1961. The Court found that ... Business Expenditure- The assessee filed a return declaring total income of Rs. 1,93,950. The Assessing Officer completed the assessment u/s 143(3) of the Act, by making addition of Rs. 61,51,028. The Assessing Officer disallowed the payments on the ground that the payments were made by the assessee for stock otherwise than by crossed cheque drawn on a bank or crossed demand draft and added the payment to the total income of the assessee. The Commissioner (Appeals) deleted the addition and this was upheld by the Tribunal. Held that- sub clause (iv) of clause (d) of amended rule 6DD of the Rules, provide that “no disallowance shall be made where the payment is made by bill of exchange made payable only to a bank”. From a reading of the definition of bill of exchange u/s 5 and cheque under section 6 of the Negotiable Instrument Act, 1881, it is clear that the banker’s cheques/pay orders/ call deposit receipts are instruments which fall within the definition of bill of exchange. The Assessing Officer has not doubted the genuineness of the transactions. The payment could not be disallowed. Issues:Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding payments made through banking instruments.Consideration of exceptions under rule 6DD in relation to section 40A(3) disallowances.Detailed Analysis:Issue 1: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding payments made through banking instruments:The case involved an appeal by the Revenue against the order of the Income-tax Appellate Tribunal regarding disallowance of payments made by the assessee through instruments like pay orders, banker's cheques, and call deposit receipts. The Assessing Officer disallowed these payments under section 40A(3) of the Act, contending that they were not made through crossed cheques or demand drafts. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that these payments were legitimate as they were made through regular banking channels and were fully accounted for. The Tribunal emphasized that the genuineness of the transactions was not in doubt, and the instruments were issued by banks in favor of a Government undertaking. The Tribunal's decision was based on the premise that the provisions of section 40A(3) should not be narrowly interpreted, as the purpose is to ensure transactions through banking channels to prevent unaccounted dealings.Issue 2: Consideration of exceptions under rule 6DD in relation to section 40A(3) disallowances:The appellant/Revenue contended that the assessee failed to prove exceptional and unavoidable circumstances for making payments through instruments other than crossed cheques or demand drafts as per rule 6DD. On the other hand, the respondent/assessee argued that rule 6DD provides exceptions to section 40A(3) disallowances, particularly sub-rule (d) clause (iv) allowing payments by a bill of exchange payable only to a bank. The Tribunal's decision was supported by the fact that the payments were made through banker's cheques, pay orders, and call deposit receipts issued by banks in favor of a Government undertaking. The Tribunal's conclusion was further reinforced by the legal definitions of bill of exchange and cheque under the Negotiable Instruments Act, 1881, indicating that such instruments fell within the purview of rule 6DD exceptions.In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the Assessing Officer did not doubt the genuineness of the transactions, and the payments were made through legitimate banking instruments. The Court found that the Commissioner of Income-tax (Appeals) and the Tribunal correctly applied the provisions of the Act and the rules, particularly sub-clause (iv) of clause (d) of rule 6DD, thereby dismissing the appeal.