TMI Blog2002 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... the case, the Appellate Tribunal is correct in holding that the amended provisions of section 40A(3) is not applicable to the facts of the case and that the entire amount added has to be sustained and not only 20 per cent. of the amount paid? 2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amendment to the provisions of section 40A(3) is not a procedural one but a substantive one?" The following facts would be necessary to appreciate the controversy involved. The assessee-company, which was incorporated on December 9, 1992, is engaged in production and distribution of motion pictures mainly in Tamil language. There was a search under section 132 of the Income-tax Act at the business premises of the assessee on September 13, 1996, during which, certain books of account and documents were found and seized. Till the date of search, the assessee-company had produced five Tamil films and distributed a few Hindi films. In this search, a number of notebooks were seized which were in the form of cash book and ledger. They were in respect of three films produced. It was apparent that the assessee had maintained another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be so allowed practically all the payments were hit by the provisions of section 40A(3) as each of the payments was more than Rs. 10,000 and was paid by cash. The assessing authority, therefore, disallowed all the expenses though he agreed that otherwise the expenses could have been allowed as they were the expenses during the course of profession or business. The assessing authority also pointed out that there was no question of the application of rule 6DD(j) so as to condone the payments in cash and not by cheque. Ultimately, the assessing authority noted: "while the payments outgoings recorded in the seized notebooks are allowed as deductions against the income of....in the names of the directors and others recorded in the seized notebooks, the payments mentioned hereinabove are disallowed in accordance with the provisions of section 40A(3). Thus the income assessed gets absorbed by allowance of the expenses in the first instance while the disallowance...undisclosed income of the assessee in the respective financial year which is brought to tax account for assessment." Ultimately, the total undisclosed income was arrived at Rs. 1,26,84,400 and, therefore, the tax liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of search was September 13, 1996, and the part of the block assessment period falls, it would be applicable to all the assessment years under the block period. Though we would have ordinarily not allowed this point to be raised, this being a tax appeal, which could be entertained only on a substantial question of law, we permitted the argument only in view of the fact that the said amendment itself came in the year 2002 by the Finance Act, 2002. The argument is quite incorrect. If the argument is accepted, it would lead to the absurd result that even if the assessee is found to have suppressed certain expenditure which became unearthed during the search proceedings, merely because the assessee is able to show that he has actually spent the amount, the whole expenditure has to be ignored. Such cannot be the import of the law. What is provided is that if some expenditure is falsely claimed to be the expenditures made in pursuance of the business or profession then, such expenditure would become the undisclosed income. Its antitheses, however, is not logical and correct. Therefore, all the expenditure, which has actually been made, would automatically come out of the undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant assessment year in respect of the income derived from that film would be 1996-97. The contention was that in respect of such payments, which were made in breach of section 40A(3), the disallowance of the expenditure would be only 20 per cent. and thus the rest of 80 per cent. would be the allowable expenditure. According to learned counsel from the language of section 40A(3), the amendments made thereto and from the language of the second proviso to that section, the Tribunal should not have restricted the disallowance to 20 per cent. only in respect of a movie made after the amendment to the section. He further contends that the amendment to the section is in the nature of a procedural amendment and, therefore, it would apply to all the earlier payments made by cash (not by cheques as provided by the section). Learned counsel assails the interpretation put forward by the Tribunal that the amendment to section 40A(3) is not procedural in nature and is, therefore, not retrospective. Indeed, the Tribunal has held this amendment to be prospective and, therefore, has given the benefit of this amendment only in respect of the Tamil movie Thirumoorthy, the relevant year for which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n contravention of section 40A(3) then, 20 per cent. of such expenditure would be disallowed and shall be taken into account for computation of income. It is relevant to note that clause (j) of rule 6DD was deleted. By that clause, a discretion lay in the assessing authority to ignore the breach of the section if the assessee was able to convince that it was not feasible or possible to make the payments by cheques. It will be seen in this behalf that from April 1, 1968, to March 31, 1989, any payment of more than Rs. 2,500 was required to be made by cheque and all such payments were disallowed completely. This position continued up to March 31, 1989, from April 1, 1989, the limit of Rs. 2,500 was increased to Rs. 10,000. However, any payments made in breach of the section entirely were liable to be disallowed. This position continued upto April 1, 1996, when the amendment was brought in where the limit was retained to Rs. 10,000. However, it was provided that in contradistinction to all the expenditure not being allowed 20 per cent. of the expenditure would not be allowed meaning thereby that the authority had discretion to allow such expenditure to the extent of 80 per cent. (subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came up for consideration in that case before the Division Bench of the Punjab High Court where the constitutional validity of this section was challenged on the ground that the section is unreasonable and arbitrary. The argument raised was that the income of the assessee would be the difference between the price of the purchased material and the price at which the same is sold. It was contended that if the price of the purchased material was not adjusted as against the sale price of the material so sold, in that case the income-tax levied would not be on the income, rather it would be arbitrarily levied on an assumed income. The learned judges observed as follows:...."we are of the opinion that the said provision is more a rule of procedure, rather than creating any substantial hindrance in the way of an assessee who wants to have deduction on the genuine purchase transactions." The learned judges referred to sub-rule (j) of rule 6DD and pointed out that the said rule provided for all the eventualities which may occur due to exceptional and unavoidable circumstances. The Bench held that the provision has been made to safeguard the revenues of the State and if the measures were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The earlier provision has been quoted in the said decision from which it is clear that such expenditure as was made in breach of section 40A(3) was not to be allowed at all as a deduction whereas now the position has completely changed and for those words, the words "20 per cent. of such expenditure shall not be allowed as a deduction" have been substituted. While in the earlier provision there was no right in favour of the assessee, now it is clear that in place of the whole expenditure 20 per cent. is not to be allowed as deduction. This certainly changes the whole scenario. Therefore, by this amendment, which is assessee-friendly, the assessee stands benefited and gains a right inasmuch as instead of the whole expenditure being disallowed, the amendment provides for the compulsory disallowance of 20 per cent. expenditure only. This would change the very nature of the amendment and therefore the observations made by the learned judges in respect of the nature of the amendment would not be applicable to the present provision as it now stands. Such amendment which limits the discretion of the assessing authorities and creates a right in the assessee to plead for the remaining 80 p ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
