2002 (12) TMI 69 - HC - Income Tax

Payments in Cash - The petitioners in these original petitions are income-tax assessees engaged in business. They are challenging the provisions of section 40A(3) of the Income-tax Act, 1961, which provides for 20 per cent. disallowance of expenditure in excess of Rs. 20,000 where such payments are made other than through account payee cheques or demand drafts drawn on a bank. The computation of income has to be therefore subject to statutory provisions and Parliament is absolutely competent to fix ceiling on expenditure and lay down conditions for allowance. Therefore, I do not find any merit in the contentions raised by the petitioners and the original petitions are accordingly dismissed.

Summary

Issues:
Challenge to the validity of section 40A(3) of the Income-tax Act, 1961 authorizing disallowance of 20 per cent. of expenditure made in cash.

Analysis:
The petitioners, income-tax assessees engaged in business, challenged the provisions of section 40A(3) of the Income-tax Act, 1961, which allows for a 20 per cent. disallowance of expenditure exceeding Rs. 20,000 if payments are made in cash. The petitioners argued that the amendment to the rule after the deletion of rule 6DD(j) was arbitrary and violated their rights under articles 14 and 19(1)(g) of the Constitution of India. They contended that the Supreme Court's decision upholding the constitutional validity of section 40A(3) prior to the amendment could not be relied upon by the Department to support the current version of the section. The Department, on the other hand, argued that the safeguards provided in the amended rule 6DD covered practical difficulties for businessmen and that section 40A(3) did not impede the petitioners' right to carry on business. The petitioners highlighted instances where the Government recognized the need for cash payments in business transactions, suggesting that the disallowance of 20 per cent. on such payments was arbitrary.

The Court noted that the Supreme Court had previously upheld the constitutional validity of section 40A(3) before its amendment, emphasizing the importance of rule 6DD(j) at that time. The current rule, with relevant clauses for the petitioners, provided exceptions for certain types of payments made in cash, such as for agricultural produce or cottage industry products. The Court observed that the new rules under challenge did not alter the position declared by the Supreme Court and that the provisions in clause (h) of rule 6DD offered liberalization to address practical difficulties under section 40A(3). It was emphasized that the statute and rules required payments through account payee cheques or demand drafts where banking services were available, ensuring transparency in transactions. The Court concluded that the amendment to the rule did not affect the validity of the statute upheld by the Supreme Court.

Furthermore, the Court highlighted that the Income-tax Act contained various restrictions and conditions for deductions and allowances, which had been upheld by multiple High Courts and the Supreme Court. It was noted that Parliament had the authority to set ceilings on expenditure and establish conditions for allowances. The Court dismissed the contentions raised by the petitioners, stating that section 40A(3) did not impose restrictions on expenditure but required adherence to specific payment methods to avoid a 20 per cent. disallowance. Ultimately, the original petitions challenging the validity of section 40A(3) were dismissed by the Court.