TMI Blog1985 (1) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... a " goods and out of the total purchases, those paid for in cash in excess of Rs. 2,500 between April 1, 1969, to June 2, 1969, amounted to Rs. 41,922. According to the ITO, such payments were caught within the mischief of sub s. (3) of s. 40A of the I.T. Act, 1961 (hereinafter to be referred to as " the Act "), which was inserted from April 1, 1969, and the assessee had not been able to show any exceptional or unavoidable circumstances for the payment in cash or that the payment was impracticable or would have caused genuine difficulty to the payee. As such, the amount of Rs. 41,922 was treated as the assessee's income from undisclosed source and was added to his total income. On appeal, the AAC of Income-tax came to the conclusion that a sum of Rs. 18,371 could not be added to the income of the assessee in terms of s. 40A(3), but the remaining amount aggregating to Rs. 23,551 was in his opinion covered by s. 40A(3). On further appeal before the Tribunal, the assessee contended that the genuineness of the purchase was not in doubt. Therefore, the amount should not have been added to his total income. He further submitted that the Word " expenditure " used in sub-s. (3) of s. 40A c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, Such expenditure shall not be allowed as a deduction : Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the I st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees, otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the tota income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in subsection (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding two thousand five, hundred rupees is made otherwise than by a crossed ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits to relatives and associate concerns in the form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often with a view to frustrating investigation as to the identity of the recipients and the genuineness of the claim. To plug these loopholes, I propose to provide that payments made in businesses and professions to relatives or associate concerns will have to pass the test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after a date to be notified later will be allowed as deduction only if these are made by crossed cheques or by crossed bank drafts. And, therefore, he submitted that the very purpose of introducing this new section was to have a check over the dishonest assessee who wants to make false deductions on account of expenditure incurred in cash and this intention is further fortified by reference to r. 6DD(j) wherein it has been provided that the ITO is to be satisfied that the payment could not be made by a crossed cheque or a crossed bank draft due to exceptional or unavoidable circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary for him to make the payment through crossed cheque or crossed draft as he was dealing in agricultural produce, was fully justified. Even cl. (j) was substituted vide Notification No. S.O. 3769 dated November 18, 1970, " with effect from April 1, 1970 ", and the substituted clause (j) runs as under: " (j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft (1) due to exceptional or unavoidable circumstances) or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee." This amendment was published in the Gazette of India, Extraordinary, Part 11, s. 3(iii), page 1855, dated November 19, 1970. On the basis of this, learned counsel for the assessee has submitted that the amendment brought in the Act by introducing new s. 40A(3) and introducing new r. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea or wilful fraud, he was entitled to deduction of these amounts from his total income and he should not be penalised. Learned counsel for the petitioner-assessee has placed reliance on the Supreme Court judgment in Motilal Padampat Sugar Mills Co. v. State of UP [1979] 118 ITR 326, wherein it was observed as follows (p. 339): " Moreover, it must be remembered that there is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law. Over a hundred and thirty years ago, Maula J. pointed out in Martindale v. Falkner [1846] 2 CB 706 : ' There is no presumption in this country that every person knows the law : it would be contrary to common sense and reason if it were so.' Scrutton L. J. also once said: 'It is impossible to know all the statutory law, and not very possible to know all the common law.' But it was Lord Atkin who, as in so many other spheres, put the point in its proper context when he said in Evans v. Bartlam [1937] AC 473 : '...the fact is that there is not and never has been a presumption that every one knows the law. There is the rule tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceptional circumstance for making payments in cash. He has further submitted that the High Court should not look to the statement of objects and reasons for interpreting the provisions of any law and relied on Aswini Kumar v. Arabinda Bose, AIR 1952 SC 369. In rejoinder, Shri Ranka, learned counsel for the assessee, drew our attention to K. P. Varghese v. ITO [1981] 131 ITR 597 (SC), wherein the Supreme Court itself referred to the speech made by the mover of the bill explaining the reasons for its introduction for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object or purpose for which the legislation is enacted. We have given our thoughtful consideration to the whole matter and have also gone through the relevant records and the various citations at the Bar. Income-tax is a tax on the real income and the purpose of introducing s. 40A(3) was to block the loopholes of making cash payment and claim as deductions with a view to frustrate investigation as to the identity of the recipients and the genuineness of the claim. Proviso to s. 40A(3) shows that the Legislature intended not to make the provision of s. 40A(3) very strict and absolu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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