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TMI Blog2014 (4) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Tax Appeal No. 105 of 2014, Tax Appeal No. 106 of 2014 - - - Dated:- 1-4-2014 - Akil Kureshi And Sonia Gokani,JJ. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, have been encashed. The above fact proves the statement of the partners of Shree Swaraj Oil Mill, JamKhambhalia that they have encashed the entire payment received from M/s. Shree Rajmoti Industries through different Shroffs viz. Pari Pankajkumar Jasubhai, Kishan Enterprise and others. As mentioned earlier, Account Payee Cheques cannot be transferred or encashed. The credit for that cheque is to be given into the account of drawee only, in whose name the cheque is drawn. On the basis of these facts and the investigation made during the course of remand, it clearly proves that the continuance claim of the appellant during the course of assessment proceedings and appellate proceedings that the payment to M/s.Shree Swaraj Oil Mill, JamKhambhalia have been made through an Account Payee cheque is false. Further, in remand report, the Assessing Officer has also pointed out that certificate filed by the appellant has not been issued by the Bank. This fact also shows that the appellant has tried to place a false claim by submitting the documents which he knew that are not true. On the basis of all above facts and in the circumstances, there is enough evidence to point out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceeding 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 substitute the expression a crossed cheque drawn on a bank or by a crossed bank draft , in both the sub-sections, by an account payee cheque drawn on a bank or account payee bank draft . 14.3 These amendments take effect from 13th July, 2006. 11. The amendments made in section 40A(3) are intended to enable the Income-tax authorities to track the transactions between the assessee and the payee in order to ensure that they are properly recorded and accounted for not only by the assessee but by the payee also. The aforesaid object would be completely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission 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 other. 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, the expenditure in respect of which such payment has been made cannot be allowed as deduction. 14. The assessee-firm has made impugned payments exceeding Rs.20,000/- in a day for purchases made by it from M/s. Shree Swaraj Oil Mill and claimed deduction in respect thereof while computing its profits. It is admitted by the ld. Counsel for the assessee that the impugned payments exceeding Rs.20,000/- were made otherwise than by account payee cheque drawn on a bank or account payee bank draft. Thus all the conditions for the applicability of section 40A(3) are fully satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange in the phraseology used in the said provision and the expression a crossed cheque drawn on a bank was replaced by an account payee cheque drawn on a bank . Likewise, expression a crossed bank draft was replaced by an account payee bank draft . The reasons for such amendments were explained in CBDT Circular No.1 of 2007 dated 27.4.2007 providing inter alia that a crossed cheque or a crossed bank draft is not a nonnegotiable instrument. This, at times, results in crossed cheques being endorsed making it difficult to trace final payee and thus defeating the provisions of section 40A(3). As per RBI instructions to 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 was accordingly amended to substitute the said expressions. 10. It is true that the terms an account payee cheque or account payee bank draft have not been defined either in the Act or under the Negotiable Instruments Act. This by itself would not mean that the term is not possible of specific understanding nor would a statutory provision cease to have effect merely because an important term contained therein is not defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account payee cheques. The deviations can also not be sanctified as a prudent market practice since it has the potential to expose the banks to various risks. 3. Being satisfied that in consonance with the legal requirements and in particular the intent of the Negotiable Instruments Act, and with a view to protect the banks being burdened with liabilities arising out of unauthorized collections, and in the interest of the integrity and soundness of the payment and banking systems, and in order to prevent recurrence of deviations observed in the recent past, the Reserve Bank has considered it necessary to prohibit the banks from crediting account payee cheque to the account of any person other than the payee named therein. The Reserve Bank accordingly directs the banks that they should not collect account payee cheques for any person other than the payee constituent. 4. Where the drawer/payee instructs the bank to credit the proceeds of collection to any account other than that of the payee, the instruction being contrary to the intended inherent character of the account payee cheque, bank should ask the drawer/payee to have the cheque or the account payee mandate there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t such directions issued by the RBI in exercise of powers under section 35A of the Banking Regulations Act. 16. As we have noted, previously the expression used in section 40A(3)(a) was a crossed cheque or a crossed bank draft. With specific purpose in mind, the same was amended by the legislature to be replaced by the expression an account payee cheque or account payee bank draft . This was done in the background of the experience that even crossed cheques were being endorsed in favour of a person other than the drawee making it difficult to trace the constituent of the money. To plug this possible loophole the requirement of section 40A(3) was made more stringent. If we accept the contention of the counsel for the assessee that there was no distinction between a crossed cheque and an account payee cheque, we would be obliterating this amendment brought in the statute with specific purpose in mind. 17. Learned Senior Counsel Mr. Soparkar further contended that in law, Courts have recognized no such distinction. Our attention was drawn to the decision of Privy Council in the case of Universal Guarantee Pty. Ltd. vs. National Bank of Australasia,Ltd. reported in [1965] 2 All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat according to the law as it stands at present a cheque even if it is account payee without the endorsement not negotiable would still be negotiable instrument. 19. In the present case, 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. 20. For the purpose of section 40A(3) of the Act, thus there is really a clear distinction which exists, must be recognised and implemented as required in the plain language used therein. 21. Learned Senior Counsel Mr. Soparkar as we may recall, has also placed reliance on the judgment of this Court in the case of Anupam Tele Services vs. Income Tax Officer (supra). It was, however, a peculiar case where the payments other than by way of account payee cheques were made under compulsion. Various peculiar facts noticed by the Court were as under:- [b] In the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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