2006 (1) TMI 61 - HC - Income Tax

(a) Whether Tribunal was right in interpreting the provisions of section 40A(3) with regard to the word sum used therein i.e. as to whether it would indicate total sum or would it refer to each payment? (b) Whether Tribunal was right in holding that there was no violation of section 40A(3) even though the payments in respect of each invoice exceeded Rs. 20, 000? - held that section 40A(3) of the Act only says that the amount exceeding Rs. 2, 500 as then should not be paid except by way of cheque drawn on a bank or by a cross bank draft and if it exceeds that amount then such expenditure shall not be allowed as deduction. It does not say that the aggregate of the amount should not exceed Rs. 2, 500. The words used are in a sum i.e. single sum has been used. Therefore irrespective of any number of transactions where the amount does not exceed Rs. 2, 500 as above the rigours of section 40A(3) will not apply. Now the amount should not exceed Rs. 20, 000. That apart practicability of the payment has also to be judged from the point of view of a businessman

Summary

Issues:
Interpretation of provisions of section 40A(3) regarding the word 'sum' and violation of section 40A(3) when payments exceed Rs. 20,000.

Analysis:
The judgment pertains to a tax case appeal challenging the Income-tax Appellate Tribunal's order. The main issues raised were the interpretation of section 40A(3) regarding the term 'sum' and whether the Tribunal was correct in ruling on the violation of section 40A(3) when payments exceeded Rs. 20,000. The assessee, engaged in the business of sanitary fittings and tiles, faced disallowance of certain expenditure under section 40A(3) for cash payments exceeding Rs. 20,000. The Commissioner of Income-tax (Appeals) allowed the appeal, leading to the Revenue's appeal before the Tribunal, which upheld the Commissioner's decision.

The court examined section 40A(3) of the Act, emphasizing the restriction on cash payments exceeding a specified amount and the consequences of non-compliance. The Revenue argued citing a previous court decision that each item of expenditure in a single bill should not exceed a certain limit. However, the court distinguished the current case involving cash payments for separate invoices from the cited case involving cash payments for individual items within a single bill. The court highlighted that the cash payments in the present case were for each invoice separately, not for each item within the same invoice.

Referring to a decision by the Madhya Pradesh High Court, the court reiterated that section 40A(3) focuses on the individual sum exceeding the specified limit, not the aggregate amount. The court emphasized that the provision aims to regulate payments exceeding the limit, irrespective of the number of transactions. Additionally, the court noted that the practicality of payments should be considered from a business perspective. Ultimately, the court dismissed the appeal, finding no merit in the arguments presented by the Revenue.

In conclusion, the judgment provides a detailed analysis of the issues raised regarding the interpretation and application of section 40A(3) in the context of cash payments exceeding a specified limit. The court's decision underscores the importance of adhering to the statutory provisions and clarifies the scope of application of section 40A(3) concerning individual sums exceeding the prescribed threshold.