TaxTMI 
TaxTMI 
2003 (7) TMI 41
X X X X Extracts X X X X
X X X X Extracts X X X X
....r: The assessee had appointed a firm, named, M/s. Chidambaram (hereinafter referred to as "the firm"), as an agent, who used to look after the financial affairs of the assessee and the said firm also used to make and receive payments on behalf of the assessee as per instructions given by the assessee. Very often when the assessee had to make payment to a particular person and had also to receive money from that particular person, the said firm used to make necessary adjustments in the account of the assessee and the final resultant figure was either paid on behalf of the assessee or was received on behalf of the assessee by the said firm. An instruction given by the assessee to the firm for making payment on behalf of the assessee was known as "pay order". It is pertinent to note that the term "pay order" used by the assessee would not denote or mean a cheque or any such other instrument. In pursuance of the aforesaid arrangement made by the firm, the firm used to look after the financial affairs of the assessee. For the assessment year 1981-82, with which we are concerned, the assessee had given certain instructions to the firm for making some payments and in pursuance of the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hri M.R. Bhatt, has submitted that the amount of expenditure was rightly disallowed by the Income-tax Officer under the provisions of section 40A(3) of the Act. It has been submitted by him that there were plenty of chances of having underhand dealings by virtue of the arrangement made by the assessee as observed by the Income-tax Officer. It has been also submitted by him that the arrangement of making payment in pursuance of "pay order" was not proper and, therefore, the Income-tax Officer was absolutely justified in disallowing the sum of Rs. 12,000 under section 40A(3) of the Act. It has been also submitted by him that the explanation given by the assessee was rightly not accepted by the Income-tax Officer. It has been submitted by him that the assessee could not satisfy the Income-tax Officer that the payments could not be made by a "crossed cheque drawn on a bank or by a crossed bank draft" due to exceptional or unavoidable circumstances or because the payment, except in the aforestated manner, was not practicable or would have caused genuine difficulty to the payee. According to senior standing counsel, the said method was also not adopted by the assessee for expeditious se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h to anybody by the assessee or by the firm. In the circumstances, it has been submitted by him that as all payments had been made by account payee cheques, the Income-tax Officer was in error while disallowing the expenditure under the provisions of section 40A(3) of the Act. It has been submitted by him that the Commissioner of Income-tax (Appeals) and the Tribunal had rightly corrected the mistake committed by the Income-tax Officer by deleting the disallowance. Learned advocate, Shri Patel, has referred to paras. 76 to 80 of Circular No. 6-P (LXXVI-66) of 1968, dated 6th July, 1968 (Chaturvedi and Pithisaria's Income Tax Law, fifth edition, p. 2443). Para. 76 of the said circular reads as under: "76. Sub-section (3) of new section 40A of the Income-tax Act makes a provision for the disallowance of expenditure incurred in businesses and professions for which payment is made in an amount exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. This provision will apply in respect of payments made after a date to be notified by the Government, being a date not later than March 31, 1969. This provision is designed to counter evasion of tax t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." "6DD. No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely;--... (d) where the payment is made by-- (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank. Explanation.--For the purposes of this clause...which is established outside India. (e) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;... (j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could no....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... behalf of the assessee. If a particular payment was to be made to a particular person, and if from the same person the assessee had to recover some amount, the firm, which used to keep ledger accounts of the assessee as well as of the debtors and creditors of the assessee, used to adjust the amount payable to or recoverable from the concerned persons and used to pay or receive the final resultant amount on behalf of the assessee. The aforestated practice was duly revealed before the Income-tax Officer. Somehow, the Income-tax Officer believed that the said system can give "chances and opportunities to use or create black money" and, therefore, merely on such an apprehension he disallowed expenditure of Rs. 12,000. Upon perusal of the entire facts, it is very clear that whatever final payments had been made by the firm as an agent of the assessee, they were made by account payee cheques. If the ultimate payment in respect of the expenditure was made by a crossed cheque drawn on a bank, in our opinion, the transaction cannot be hit by the provisions of section 40A(3) of the Act. In our opinion, the Tribunal and the Commissioner of Income-tax (Appeals) had rightly appreciated the sa....