1979 (10) TMI 17 - HC - Income Tax

Summary

Issues:
Challenge to notice under section 143(3) of the Income Tax Act based on ultra vires nature of section 40A(3) of the Act.

Analysis:
The petitioner, a firm engaged in buying and selling electroplating material, challenged a notice dated March 7, 1974, issued by the Income Tax Officer (ITO) under section 143(3) of the Income Tax Act. The notice raised concerns about unvouched purchases exceeding Rs. 2,500 and proposed disallowance under section 40A(3) of the Act. The petitioner contended that section 40A(3) was ultra vires. Section 40A(3) restricts deductions for expenditures exceeding Rs. 2,500 not made via crossed cheques or bank drafts, with exceptions outlined in Rule 6DD of the Income Tax Rules, 1962.

The petitioner argued that the provision was arbitrary as it could lead to arbitrary taxation on assumed income. However, the court disagreed, viewing the provision as a procedural rule rather than a substantive hindrance to genuine deduction claims. Rule 6DD provides for exceptional circumstances where non-compliance with section 40A(3) is justified. The court held that the provision aimed to prevent tax evasion and regulate business activities, serving the interest of revenue and the national economy. The Andhra Pradesh High Court had previously upheld the validity of this provision in a similar case.

The court concluded that section 40A(3) was not ultra vires and upheld its validity. The petitioner was advised to demonstrate eligibility for exceptions under Rule 6DD to claim deductions. The court dismissed the petition, allowing the authority to proceed with the case in accordance with the law. No costs were awarded in this matter.

In summary, the court rejected the challenge to the notice under section 143(3) based on the ultra vires argument against section 40A(3) of the Income Tax Act. The court upheld the validity of the provision, emphasizing its role in preventing tax evasion and regulating business transactions. The petitioner was directed to establish eligibility for exceptions under Rule 6DD to claim deductions, and the petition was dismissed without costs.