BANKING FOR TRANSPERANCY AND AVOIDANCE OF TAX BY BETTER USE OF CHEQUE,BANK DRAFT, ECS AND E-CHEQUES

[DEV KUMAR KOTHARI]

Fiscal policies:

HELP OF BANKING FOR TRANSPERANCY AND AVOIDANCE OF TAX BY BETTER USE OF CHEQUE,BANK DRAFT, ECS AND E-CHEQUES. 

As discussed in details in subsequent paragraphs to check tax evasion more effectively, use of instruments like cheques and bank drafts needs to be more stringent than it is at present. Considering inflation since the limits were fixed last time and also genuine difficulties to small businessman and others it is desirable to raise thresh hold limits for compulsory use of cheque and DD. In view of discussion hereafter, the following are suggestions:

A. Section 40A (3) - Limit may be raised to Rs.50000/- from Rs.20000/- (which was last revised  w.e.f. 01.04.1997) and requirement may be prescribed for use of specially crossed cheque giving details of account number, bank branch and bank and also for writing not negotiable on the cheque or within the crossing.

B. Section 269SS - the limit may be raised to Rs.100000/- from Rs.20000/-  (which is unchanged since 01.04.1989) and requirement should be to make loan or deposit only by specially crossed cheque or bank draft in favor of the person who is taking loan or deposit. His account number, bank branch and bank details must be written on the cheque / draft with writing not negotiable on the cheque or within the crossing itself.

C. Section 269T - the limit may be raised to Rs. 100000/- from Rs.20000/- (which continue since 01.04.1989) and repayment should be permitted by way of specially crossed cheque or bank draft with details of account number, bank branch and the bank of the payee (the person who deposited the money or his nominees or legal heirs may be prescribed), not negotiable on the cheque or within the crossing.

D. Section 269TT- requirement of special crossing with details of bank account number, bank branch, and bank may be prescribed along with not negotiable.

E. In section 80D, for payment of insurance premium of medical insurance the requirement is of payment by cheque. It is not necessary to pay by A/c payee cheque. Some other person can draw the cheque also. But a bank draft cannot be used. It can be provided that the assessee who wants to claim deduction should issue the cheque and it should be A/C payee cheque, for uniformity of provisions.

The above amendments will effectively check possible misuse of existing lacunae in the provisions, which permit more or less freely negotiable instruments - cheque and bank draft, depending on faith in the drawer and holder of the instrument. As per present provisions an A/c payee crossed cheque or a/c payee bank draft may be used in rotation just like cash and without being actually deposited in the bank. Cheque drawn by a reputed party in name of a reputed party can be used just like cash payment, for effecting un-recorded transactions.

To effectively implement the above aspects it is necessary to amend the Income-tax Act, the Negotiable Instruments Act, and also instructions to banks regarding issue of A/c Payee cheques and other cheques in separate books. Instructions to bank shall also be necessary to accept cheques above certain limit of amount only with special crossing on the cheques.

PAYMENT BY CHEQUE / DEMAND DRAFT:

Payment by cheque /demand drafts are considered more authentic and verifiable when they are crossed A/c. Payee.  Authenticity can further be improved by making cheque / demand draft specially crossed to a particular account in a particular bank and further by writing not negotiable. In the Income Tax Act 1961 use of cheque and demand drafts has been prescribed with A/c Payee crossing for some type of transactions. The purpose for these provisions are mainly to check evasion of tax by exercising better control over certain payments and loan / deposit transactions.

DEFINITION OF CHEQUE AND DRAFT:

In the Income Tax Act there is no definition of "cheque" or "draft", crossed cheque, A/c. payee cheque /bank draft etc. Therefore the definition and meaning given under the Negotiable Instruments Act are applicable in the context of Income Tax Act also. The term cheque is defined in the Negotiable Instruments Act 1881 vide Section 6 which was substituted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 w.e.f. 06.02.2003 and reads as follows: -

6. Cheque - A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Explanation I - For the purposes of this section, the expressions -

a) "A cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

b)  "A truncated cheque " means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Explanation II - For the purposes of this section, the expression-clearingclearing house" means the clearinghouse managed by the Reserve Bank of India or a clearinghouse recognized as such by the Reserve Bank of India.

Prior to the amendment the definition was as follows:

6. Cheque - A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

ACCOUNT PAYEE CHEQUE IS ALSO NEGOTIABLE:

A cheque is by it nature, definition and character a negotiable instrument being a bill of exchange. An account payee cheque can be negotiated by endorsement by the holder of the same. Therefore cheque drawn in favour of  "A" can be endorsed by "A" to any other person and thereafter such person can endorse it in favour of some other person.  In practice blank endorsement may be used .The only legal check is that such cheque has to be cleared through a bank and money will be deposited in the account of payee and the payee of the cheque will be the ultimate payee in whose favour there is a valid endorsement. To make these provisions more effective, the requirement can be made for use of account payee cheque with a special crossing for giving name of bank or bank draft not negotiable by use of special crossing. For example:

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ACCOUNT PAYEE, Saving A/c no.  ……

STATE BANK OF INDIA 

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Now a days in many of banks the account number itself contain code  of the branch, and type of account, therefore , in such cases simply writing the name of bank is enough and the branch and city need not be mentioned.

In case the cheque is crossed like above the cheque will have to be deposited in the particular account mentioned on the cheque.

In this regard it can be observed that in most of cases cheques for refunds of share application money, dividend, interest on bonds and debentures are paid by specially crossed cheques and once a habit is developed, there will be lot of convenience in payments and chances of misappropriation and frauds will be reduced.

Cheque Vis a Vis bank draft:

In view of the definition, of cheque bank draft may not be regarded a cheuqe for the reason that generally the drawer and the drawee are the same person (bank) though the branch may be different. This appears to be the reason that in sections 40A(3), 269SS, 269T and 269TT cheque and bank draft both have been provided. Whereas, in section 80D, bank draft has not been provided. Therefore, it is necessary that to be eligible to claim deduction u/s 80D, one should have a bank account with cheque facility either in own name or in name of other eligible persons who intend to claim the benefit. Some one else also on account of some other person may issue a cheque for medical claim, but care has to be taken that there is no violation of section 269SS or 269T.

E-CHEQUE

Under the Negotiable Instruments Act, electronic cheque has been recognized as a cheque by amending of the definition of the cheque. Use of electronic cheques shall also avoid possibility of use of such cheques as cash. Because in case of electronic cheque the money will be credited to the credit of the payee electronically, instantly or at scheduled date of payment. Therefore, there is no chance of endorsement by delivery as is possible in case of a physical cheque.

ECS PAYMENTS:

In case of payments under ECS also there is full transparency- the person paying and person receiving are bank a/c holders and movement of money is through banking channels.

REQUIREMENT RELATING TO TAX AUDIT REPORT:

In tax audit report, there are clauses requiring reports from the Tax Auditor in relation to payment made, loan or deposit received, repayment of loan or deposit made otherwise than by A/c. payee cheque in the circumstances mentioned in section 40A(3), 269SS and 269T. The Tax Auditors faces problem in ascertaining whether in fact account payee cheque has been given or not. Therefore generally tax audit report is qualified with remark that tax auditor is not in a position to verify this aspect and he relies on certificate given by the management.

How to ensure use of a/c payee cheques:

 To ensure use of A/c. payee cheque, it is advisable that the banks may be instructed to issue separate cheque books containing account payee cheque and ordinary cheques and in case of a/c. payee cheque alteration in name , deletion of crossing and words "A/C payee should" not be permitted. If these measures are taken then not only the above-mentioned provisions can be fully effective, otherwise there are chances that some misuse of these provisions may be made.

For these purposes amendments to relevant provisions and guidelines may be made by the Central Government, CBDT and the RBI.