2003 (7) TMI 41 - HC - Income Tax

Whether Tribunal is right in law in confirming the order made by the Commissioner of Income-tax (Appeals) deleting the disallowance made by the Income-tax Officer attracting the provisions of section 40A(3)? - assessee found it practicable and expedient to entrust all her business transactions to the firm as her agent - If in such a set of circumstances the firm makes payment on behalf of the assessee by account payee cheques by no stretch of imagination it can be said that there was any cash transaction or there was any possibility of having chances and opportunities to use or create black money. Thus we answer the question in the affirmative i.e. in favour of the assessee and against the Revenue.

Issues Involved
1. Applicability of Section 40A(3) of the Income-tax Act, 1961.
2. Interpretation and application of Rule 6DD of the Income-tax Rules, 1962.
3. Understanding the term "pay order" in the context of the case.
4. Evaluation of the genuineness of the transactions and the method of payment.

Detailed Analysis

1. Applicability of Section 40A(3) of the Income-tax Act, 1961
The primary legal question was whether the Tribunal was correct in confirming the order of the Commissioner of Income-tax (Appeals), which deleted the disallowance made by the Income-tax Officer under Section 40A(3) of the Income-tax Act, 1961. Section 40A(3) mandates that any expenditure exceeding Rs. 2,500 must be made by a crossed cheque or crossed bank draft to be allowed as a deduction. The Income-tax Officer disallowed Rs. 12,000 on the grounds that payments were not made by crossed cheques or drafts.

2. Interpretation and Application of Rule 6DD of the Income-tax Rules, 1962
Rule 6DD provides exceptions to Section 40A(3), allowing payments exceeding Rs. 2,500 to be made otherwise than by crossed cheques or drafts under specific circumstances. The assessee argued that their case fell under these exceptions, particularly Rule 6DD(j), which allows for exceptions due to "exceptional or unavoidable circumstances" or where payment by crossed cheque or draft was impracticable. The Tribunal and Commissioner of Income-tax (Appeals) accepted this argument, noting that all payments were made by account payee cheques, not in cash.

3. Understanding the Term "Pay Order" in the Context of the Case
The term "pay order" was crucial in this case. The Income-tax Officer misunderstood it to mean a cash transaction. However, the term was clarified to denote an instruction from the assessee to the firm to make payments to creditors. These payments were made by account payee cheques, not in cash. The Tribunal and Commissioner of Income-tax (Appeals) recognized this clarification, leading to the deletion of the disallowance.

4. Evaluation of the Genuineness of the Transactions and the Method of Payment
The court emphasized the importance of verifying the genuineness of transactions. The firm acted as an agent for the assessee, managing financial transactions and making payments by account payee cheques. The Tribunal and Commissioner of Income-tax (Appeals) found no evidence of cash transactions or opportunities to create black money, fulfilling the legislative intent behind Section 40A(3) and Rule 6DD. The court also referred to the Supreme Court's judgment in Attar Singh Gurmukh Singh, which stated that genuine and bona fide transactions should not be disallowed under Section 40A(3).

Conclusion
The High Court affirmed the Tribunal's decision, confirming that the disallowance under Section 40A(3) was incorrect. The court held that the Tribunal and Commissioner of Income-tax (Appeals) rightly appreciated the facts and circumstances, recognizing that all payments were made by account payee cheques and not in cash. The court concluded that the transactions were genuine and complied with the legislative intent to prevent tax evasion and the use of black money. The question was answered in the affirmative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.

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