TaxTMI 
TaxTMI 
2014 (4) TMI 677
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....see carried the matter in appeal. CIT(Appeals)dismissed the assessee's appeal. CIT(Appeals) examined further facts as urged by the assessee for which remand report was called for from the assessing officer. 4. He highlighted such facts as under:- 4.5 All this factual matrix clearly establishes that the cheques were otherwise than Account Payee Cheques. There were "&Co." cheques, and is found during the course of investigation, one of the partners of Shree Swaraj Oil Mill, JamKhambhalia in his statement on oath, has also admitted that they have encashed the entire payment received from M/s. Shree Rajmoti Industries though different Shroffs, vis. Pari Pankajkumar Jasubhai, Kishan Enterprise and others. On verification of Ch.Nos.196277, 195523, 195579, 195625, 195691, 195800 as mentioned above, there is a clear acceptance of the endorsement by the Partner/Proprietor of M/s. Shree Swaraj Oil Mill, JamKhambhalia in favour of Kishan Enterprise. Therefore, the evidences in the form of endorsement and acceptance noted down on the overleaf side of the above Ch.196277, 195523, 195579,195625,195691,195800 category confirmed that these cheques were not A/c. Payee cheques. Further on the reve....
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....Virendra Paul vs. CIT 140 ITR 148. The provisions section 40A(3) are construed strictly as has been held by various courts." 5. The assessee carried the matter in further appeal before the Tribunal. The Tribunal in the impugned judgment held and observed as under:- "10. We have heard both the parties and carefully considered their submissions. Section 40A(3) deals with expenses not deductible in certain circumstances. Prior to assessment year under appeal, i.e., AY 2007-08, section 40A(3)/ (4) mandated disallowance of 20% of any expenditure if payment exceeding twenty thousand rupees was made, against such expenditure, otherwise than by "a crossed cheque drawn on bank or by a crossed bank draft." The aforesaid provisions were amended with effect from 13th July 2006 to substitute the expression ' a crossed cheque drawn on a bank or by a crossed bank draft' in subsections (3) and (4) of section 40A, by 'an account payee cheque drawn on a bank or account payee bank draft'. The reasons for amendments made in section 40A(3) and the purpose that they seek to achieve have been explained in Circulation No.1/2007 dated 27.4.2007 issued by the Central Board of Direct Taxes as under:- "14.....
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....be done in a particular manner, it should then be done in that manner else it should be ignored. 12. At the time of hearing, it was contended by the ld.counsel for the assessee that the term " account payee cheque" used in section 40A(3) has neither been defined in the Incometax Act nor in the Negotiable Instruments Act and hence "crossed cheques" issued by the assessee in the name of M/s Shree Swaraj Oil Mill should be taken as sufficient compliance of the requirement of section 40A(3). We are unable to agree with the aforesaid submissions. Circular issued by the CBDT (supra) refers to the instructions issued by the Reserve Bank of India to the banks in which the difference between a crossed cheque and account payee cheque has been brought out. While account payee cheque is credited by the drawee bank to the bank account of the payee and none else, crossed cheque can be negotiated and thus can be credited by the drawee bank to the bank account of a person other than the payee. Account payee cheque is well covered by the definition of "cheque" as given in section 6 of the Negotiable Instruments Act read with section 5 thereof. In this view of the matter, payments made by a crossed....
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....amount consideration of legislature for enactment of section 40A(3) of the Act, disallowance would not be justified. He further submitted that there is no distinction in law between a crossed cheque and an account payee cheque. Term "an account payee cheque" is not defined either under the Act or under the Negotiable Instruments Act and is, therefore, not capable of a precise meaning. He also drew our attention to the decision of this Court dated 22.1.2014 in the case of Anupam Tele Services vs. Income Tax Officer passed in Tax Appeal No.556 of 2013, in which though it was found that the assessee had made payment in breach of section 40A(3) of the Act, disallowance was deleted. 8. Section 40A(3)(a) of the Act as it stood at the relevant time provided that where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or account payee bank draft to the extent of 20% of such expenditure, shall not be allowed in respect of such expenditure. In subsequent year this disallowance of deduction was increased to 100% of the expenditure. 9. Previously the language used in the said provis....
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....re the Tribunal, the Tribunal did take note of RBI directives in this respect. We notice that the circular provides as under:- "As banks are aware an account payee cheque is required to be collected for the payee constituent. As regards, account payee cheques drawn in favour of the banks, it had been indicated, vide our circular DBOD.No.BC.23/21.01.001/92 dated September 9, 1992, that banks which credit cheques drawn in their favour by other banks marked 'A/c. Payee' to the accounts of constituents who are not named payees therein, without proper mandate of the drawer do so at their own risk and will be responsible for the unauthorized payment. 2. In view of the recent misuse of Initial Public Officer (IPO) process by certain individuals/entities and reports received in this regard from SEBI, the Reserve Bank of India took up detailed investigations at some banks to ascertain the modus operandi adopted by different parties in manipulating the system. It was observed that despite the abovementioned instructions, banks had credited the proceeds of individual account payee refund orders into the accounts of the brokers instead of to the individual accounts on the request of the asso....
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....ctions came to be issued. Such directions clearly mandate that the banks would be prohibited from crediting account payee cheque to the account of any person other than the payee named therein. RBI further directed the banks that they should not collect account payee cheques for any person other than the payee constituent. It is further provided that where the drawer/payee instructs the bank to credit the proceeds of collection to any account other than that of the payee,the bank must ask the drawer/payee to have the cheque or the account payee mandate thereon withdrawn by the drawer. 14. These directions thus in no uncertain terms mandate the banks to credit the amount of an account payee cheque only in the account of the payee and no other person and conversely not to accept any cheque from any source other than the person named in the account payee cheque except after requiring the drawer of the cheque to withdraw the mandate in this respect. 15. Thus, by virtue of the clear understanding of an account payee cheque in commercial parlance further amplified by RBI guidelines noted above, it cannot be said that there is no distinction between a crossed cheque and an account payee....
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....t should be reconsidered and there is no reason why we should blindly follow the English law on the point. However, the position seems to have been so uniformly accepted by text book writers, both in England and India, that I am unable to depart from that view on the strength of my own feelings about it. The matter should however be corrected by legislation. I therefore hold that according to the law as it stands at present, a cheque payable to order or bearer and crossed "a/c payee" or "a/c payee only" but without the endorsement, "not negotiable", is a negotiable instrument, and may be negotiated, but the collecting banker has a duty to put the money, when collected, into the account of the payee indicated, and into no other account." 18. It may be that insofar as legal implication is concerned, even an account payee cheque may still retain its negotiability unless it carries a further endorsement "non-negotiable". To this aspect of the matter we are neither called upon nor intended to give any conclusive opinion. We, however, cannot resist referring to the decision of the Calcutta High Court in the case of Messrs. Tailors Priya, a firm vs. Messrs. Gulabchand Danraj, a firm (sup....