2014 (4) TMI 677 - HC - Income Tax

Disallowance u/s 40A(3)(a) of the Act Payment made otherwise than by account payee cheque - endorsement of crossed cheques - Held that - It is indisputable that the term an account payee cheque is well understood and signifies cheque which carries a mandate to have the amount mentioned in the cheque to be paid to the drawee of the cheque. In common parlance and as per RBI directives, it would, thereafter, not be open to the drawee of the cheque to endorse the cheque in favour of another person. RBI directions 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. When RBI directives command the banks not to deposit the cheque amount in favour of any person other than the drawee of the cheque and correspondingly prohibit the banks from accepting any cheque, which is account payee cheque from a source other than the drawee, lack of any distinction between a crossed cheque and an account payee cheque without a further endorsement not negotiable would be of no further relevance. Genuineness of the payments and receipts of the amounts by the payee was one of the factors, however by no means a sole factor - Several other peculiar facts went into the Court taking a decision that it had taken - no such additional facts emerge - CIT(Appeals) noted a futile attempt on part of the assessee to show that the cheques were A/c payee - Assessee relied on documents which were not genuine - there was no other additional ground, compelling reason or commercial expediency, which would have left no choice, would have compelled the assessee to make payment other than by account payee cheques - It was this overwhelming consideration of impossibility of making the payments through the mode other than by account payee cheque - the Tribunal has correctly interpreted the provisions of section 40A(3) of the Act Decided against Assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3)(a) of the Income Tax Act, 1961.
2. Definition and compliance of "account payee cheque" versus "crossed cheque."
3. Applicability of Rule 6DD(j) in exceptional circumstances.

Detailed Analysis:

1. Disallowance under Section 40A(3)(a) of the Income Tax Act, 1961:
The primary issue in these appeals is the disallowance of Rs. 26,72,198/- under Section 40A(3)(a) of the Income Tax Act, 1961. The assessee had made payments exceeding Rs. 20,000/- otherwise than by account payee cheques, which led to the disallowance of 20% of the total payment of Rs. 1,33,60,988/-. The Assessing Officer, CIT(Appeals), and the Tribunal all upheld this disallowance, emphasizing the strict compliance required by Section 40A(3) to curb black money proliferation.

2. Definition and Compliance of "Account Payee Cheque" versus "Crossed Cheque":
The Tribunal and the High Court both underscored the distinction between "account payee cheque" and "crossed cheque." The amendments to Section 40A(3) effective from 13th July 2006 replaced "crossed cheque" with "account payee cheque" to ensure that payments are traceable and credited only to the payee's account. The Tribunal rejected the assessee's argument that there is no legal distinction between the two, referencing the RBI's directives and CBDT Circular No. 1/2007, which clarify that an account payee cheque cannot be endorsed to another party, unlike a crossed cheque.

The High Court further elaborated on the RBI's guidelines, which mandate that banks must credit the amount of an account payee cheque only to the payee's account, thereby preventing any misuse. The Court emphasized that the legislative intent behind the amendment was to make the provisions more stringent and to prevent the endorsement of cheques to third parties, which could obscure the transaction trail.

3. Applicability of Rule 6DD(j) in Exceptional Circumstances:
The assessee cited the case of Anupam Tele Services vs. Income Tax Officer, where the High Court had lifted the rigors of Section 40A(3) due to compelling circumstances that necessitated cash payments. However, the High Court distinguished the present case from Anupam Tele Services, noting that there were no such compelling reasons or commercial expediency in the current scenario. The Tribunal found that the assessee had attempted to show compliance with Section 40A(3) using non-genuine documents, and there were no additional grounds to justify the non-compliance.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the disallowance under Section 40A(3)(a) was justified. The Court reiterated the importance of strict compliance with the provision to ensure traceability and prevent black money proliferation. The distinction between "account payee cheque" and "crossed cheque" was crucial, and the Court dismissed the appeals, confirming that the legislative intent behind the amendment was to ensure stringent compliance. The case of Anupam Tele Services was deemed inapplicable due to the lack of similar compelling circumstances in the present case.