2019 (1) TMI 37 - HC - Income Tax

Disallowance u/s 40A(3) - drafts have not been crossed - Held that - The main purpose of crossing a demand draft is to ensure that the payment is cleared by means of an account i. e. the payment is deposited in the Bank Account of the person in whose favour the demand draft has been drawn. It ensures the payee receives the payment and it is routed through bank channels. In the facts of this case both have been proved. The Bank report would indicate that demand drafts were admittedly not crossed. However the payments were credited into the accounts of the payees. Therefore the object with which Section 40A(3) was promulgated stands satisfied with such material. The only objection was as to why payments have not been made through crossed demand drafts. In fact in its order a question was asked as to why the payments were not made in crossed demand drafts. The same is answered by the assessee who stated that generally suppliers require demand drafts for quick realisation. For purchasing the demand drafts normally yourself cheque will be issued to the bankers. The Bank may not have crossed the demand draft. It did not come to his notice. Expecting a answer for a specific question as to why the demand draft has not being crossed would not be appropriate. The Bank report would indicate that payees have received the said amounts with the concerned drafts the finding of the Tribunal on this issue with regard to unsatisfactory answer given by the assessee falls into insignificance. The substantial question of law is answered by holding that the Tribunal was not justified in confirming the disallowance u/s 40A(3)- decided in favour of assessee

Summary

Issues:
Disallowance under Section 40A(3) of the Income Tax Act for payments made to certain parties.

Detailed Analysis:

1. Background: The assessee, a company engaged in manufacturing oils, filed its income tax return for the Assessment Year 2005-06. The Assessing Officer disallowed a significant amount under Section 40A(3) of the Income Tax Act related to payments made to certain parties, leading to a refund dispute.

2. Substantial Question of Law: The main issue considered was whether the Tribunal was justified in confirming the disallowance under Section 40A(3) of the Act, totaling &8377; 27,31,483, based on the facts and circumstances of the case.

3. Appellant's Argument: The appellant's counsel argued that the Authorities erred in applying Section 40A of the Act. They contended that although the drafts were not crossed, the end sources were provided, supported by bank reports. Citing a Supreme Court judgment, they emphasized the need to satisfy the Assessing Officer regarding the payment circumstances.

4. Respondent's Argument: The respondent's counsel countered, stating that no satisfactory explanation was given for the uncrossed drafts. They highlighted the violation of Section 40A(3) and Rule 6 DD, asserting the correctness of the Authorities' decision.

5. Court's Analysis: Section 40A(3) mandates payments exceeding &8377; 20,000 to be made via crossed cheques or bank drafts. The Court noted the absence of compliance by the assessee but emphasized the importance of material presented. The Commissioner of Income Tax verified the existence of parties and transactions through valid documents.

6. Judicial Precedent: The Court referenced a Supreme Court judgment emphasizing that Section 40A(3) and Rule 6DD aim to regulate transactions and prevent black money usage. Business expediency and genuine transactions are not excluded, allowing for exemptions under specific circumstances.

7. Decision: Relying on the Supreme Court's interpretation, the Court held that the Tribunal erred in confirming the disallowance under Section 40A(3). The purpose of the provision was met as payments were routed through bank channels, even though the demand drafts were not crossed. The Court allowed the appeal, setting aside the Tribunal's decision and directing the Assessing Officer to grant relief accordingly.