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TMI Blog2013 (12) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... wance is not justified." 3. In ITA No. 433/Rjt/2011, the assessee has taken the following grounds of appeal:- "1. The Commissioner of Income Tax [Appeals] erred in confirming the disallowance of Rs. 80,00,384/- under the provisions of section 40(A)3 of the Act. The confirmation of the disallowance is not justified." 4. The assessee is a firm. It is engaged in the business of manufacturing and trading of edible oil. Return of income was filed by the assessee for the assessment year 2007-08 on 31.10.2007 returning total income at Rs. 83,28,780/-. Perusal of the assessment order for assessment year 2007-08 shows that the Investigation Wing of the Income-tax Department had carried out investigations in the case of M/s. Shree Swaraj Oil Mill, Jam-Khambhalia, during which it was noticed that the assessee-firm had purchased oil for which payments exceeding Rs. 20,000/- were made by the assessee otherwise than by an account payee cheque drawn on a bank or account payee bank draft. The Assessing Officer invoked section 40A(3) and called upon the assessee to explain as to why a sum of Rs. 26,72,198/- should not be disallowed u/s 40A(3). A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 4.8 Therefore, the payments made by the assessee to M/s. Shree Swaraj Oil Mill, Jam-Khambhalia after 13.07.2006 amounting to Rs. 1,33,60,988/- are otherwise than by a A/c. Payee cheque and thereby violate the provisions of Section 40A(3)(a) of the Act. Since the submission made by the assessee in response to the show cause notice dtd. 18.12.2009 is not acceptable and considering the findings made by the ADIT (Investigations)-2, Rajkot, I, therefore, disallow 20% of the payments made, which comes to Rs.26,72,198/- and add to the total income of the assessee. Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars/concealment of income are initiated.' 5. Return for assessment year 2008-09 was filed by the assessee on 30.09.2008 returning total income at Rs.84,49,900/- The investigations carried out by the Investigation Wing of the Income-tax Department in the case of M/s Shree Swaraj Oil Mill revealed that a sum of Rs.80,00,384/- was paid by the assessee to the said firm, namely, M/s. Shree Swaraj Oil Mill on account of purchases made from the said firm, otherwise than by account payee cheque drawn on a bank or account payee bank draft. The impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Gurmukh Singh are re-produced hereunder:- "The Tribunal in Sri Renukeswara Rice Mills v. ITO (2005) 93 TTJ (Bang) 912 referring to the decision of the Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC), observed:- The Hon'ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted that section 40A(3) is intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of black money for business transactions. In the present case, it is seen that the assessee for purchase of rice, paid the amount directly to the bank account of the payee. The effect of issue of crossed cheques/DD is that the payee named therein receives the payment ;through banking channels. The purpose is dual. In the first instance, it is to see that the payee and payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transaction." &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reasons for amendments made in section 40A(3) and the purpose that they seek to achieve have been explained in Circular No. 1/2007 dated 27.4.2007 issued by the Central Board of Direct Taxes as under: "14. Expenses or payments not deductible in certain circumstances - Section 40A(3) 14.1 The existing provisions contained in sub-section (3) and sub-section (4) of section 40A provide that twenty per cent. of the expenditure shall not be allowed as a deduction if payment in a sum exceeding twenty thousand rupees is made, against such expenditure, otherwise than by a crossed cheque or crossed bank draft. 14.2 A crossed cheque or crossed bank draft is not a non-negotiable instrument. This has, at times, resulted in crossed cheques being endorsed making it difficult to trace final payee and thus defeating the provisions of section 40A(3). However, as per the RBI's instructions to commercial banks, an account payee cheque or account payee bank draft cannot be credited to any account other than the account of the payee. The Act has accordingly amended the aforementioned sub-section (3) and sub-section (4) to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negotiated and thus can be credited by the drawee bank to the bank account of a person other than the payee. Account payee cheque is well covered by the definition of "cheque" as given in section 6 of the Negotiable Instruments Act read with section 5 thereof. In this view of the matter, payments made by a crossed cheque cannot be considered as payment by account payee cheque. Law requires payments to be made by an account payee cheque and not by a crossed cheque. In this view of the matter, all the arguments taken by the assessee in this behalf are rejected. 13. Another submission of the assessee at the time of hearing was that the purchases in respect of which impugned payments have been made were genuine and therefore section 40A(3) cannot be invoked. Such a plea cannot be accepted for the detailed reasons given by a co-ordinate bench of this Tribunal in T G Mutha v. ITO 54 ITD 460 and other decisions referred to by the AO in the assessment order. Besides, section 40A(3) is neither subject to any reasonable cause nor to any exception. Once payment exceeding Rs. 20,000/- is shown to have been made otherwise than by account payee cheque drawn on a bank or account payee bank draft ..... X X X X Extracts X X X X X X X X Extracts X X X X
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