Disallowance u/s 40A(3) for bearer cheque Payments. CBDT 1977 Circular not applicable

Disallowance u/s 40A(3) for bearer cheque Payments. CBDT 1977 Circular relied upon by assessee does not exits with amendment to Rule 6DD. Supreme Court dismisses SLP

In a recent judgment, the Hon’ble Supreme Court has dismissed the Special Leave Petition (SLP) filed by the assessee against the order of the Hon’ble High Court confirming the disallowance u/s 40A(3) for payments made to suppliers through bearer cheques.

ABCAUS Case Law Citation:
ABCAUS 3917 (2024) (03) SC

Important Case Laws relied upon by parties:
Attar Singh Gurmukh Singh Vs. ITO, 191 ITR 667 (SC)

Girdharilal Goenka v. CIT [1989] 179 ITR 122

The assessee during the year under consideration derived income from Trading in Iron and Steels and other items and deriving profit under the head Profit and gain from business and profession. The return filed by the assessee was taken up for scrutiny through CASS.

During the assessment proceedings, the Assessing Officer (AO) found that in respect of certain purchases the assessee had made payments to three concerns otherwise than by account payee cheque.

A show cause notice was issued for the disallowance u/s 40A(3) of the Income Tax Act, 1961 (the Act) for which the assessee replied that the bearer cheques were issued to the supplier parties on demand as assessee was new in the business so the assessee had to accept the demand of the supplier.

The appellant assessee, in his defence, sought to rely on the erstwhile Rule 6DD(j) of the Income Tax Rules, 1962, read with Central Board of Direct Taxes (CBDT) Circular No. 220 dated 31.05.1977 (1977 circular). The relevant part of the said 1977 circular, which is founded on Rule 6DD(j) provided for circumstances when Income-tax Officer can relax requirement of making payments in excess of prescribed limit by crossed cheques under clause (j) of rule 6DD.

The said circular listed out some following circumstances in which the conditions laid down in rule 6DD(j) would be applicable:

  1. the purchaser is new to the seller,
  2. the transactions are made at a place where either the purchaser or the seller does not have a bank account;
  3. the transactions and payments are made on a bank holiday;
  4. the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from this particular seller;
  5. the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods;
  6. specific discount is given by the seller for payment to be made by way of cash.

It was further provided in the 1977 circular that it would, generally, satisfy the requirements of rule 6DD(j), if a letter to the above effect is produced in respect of each transaction falling within the categories listed above from the seller giving full particulars of his address, sales tax number/permanent account number, if any, for the purposes of proper identification to enable the Income-tax Officer to satisfy himself about the genuineness of the transaction. The Income-tax Officer will, however, record his satisfaction before allowing the benefit of rule 6DD(j).

The assessee produced the confirmations from the all three suppliers in compliance with the 1977 circular and contended that there were exceptional circumstances that compelled the appellant/assessee to make payments via bearer cheques. All the confirmation letters from the suppliers stated that the assessee was a new entrant in the business and they insisted on payments by bearer cheque only.

The assessee contended before the AO that the 1977 circular applied to his case, given the circumstances at hand.

However, the AO made the impugned disallowances which were confirmed by the CIT(A).

The ITAT observed that the settled proposition of law is that sub-rule (j) of Rule 6DD, which existed in its original form from 01.04.1970 to 27.07.1995, prior to its amendment, did provide that in any other case where the assessee satisfies the Income-tax Officer that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed bank draft due to exceptional or unavoidable circumstances or 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, then such payments could be allowed as exception to Section 40A(3) of the Act.

However, the Tribunal opined that still, a reading of the first proviso to section 40A(3) with Rule 6DD(j), shows that no disallowance under section 40A(3) can be made, if the transaction for which the payment is made is genuine and due to business expediency and other compelling factors payment was required in cash.

The Tribunal further observed that there are judicial pronouncements that even after amendment of Rule 6DD(j), the legal exposition propounded by the Hon’ble Supreme Court regarding consideration of expediency and other relevant factors cannot be considered to be diluted as the rules framed by way of delegated legislation cannot override the substantive legislation in form of section 40A(3) which has not changed its character.

However, the Tribunal observed that CIT(A) had observed that the undated confirmations given by the parties were produced before it and not before the AO. He had examined the confirmations and found that confirmations letters bear identical language. This brought the genuineness of the transactions into serious doubt.

The ITAT agreed with the observation of the CIT(A) that a bearer cheque can bounce as well, for insufficient balances therefore giving bearer cheque to parties as the surety of being encashed is not sustainable explanation of business expediency.

The ITAT opined that if the intention was to secure the payments to the parties by bearer cheques to be as good as cash then there are other banking instruments like Banker’s cheque or RTGS/NEFT facilities which would have ensured prompt and secured payments.

In view of the above findings the ITAT dismissed the appeal of the assessee.

The Hon’ble High Court also opined that even if it is accepted that the reason given in the confirmation letters were correct, that the appellant/assessee was a new entrant in the business, to allay concerns of the suppliers, payments could have been made through bank drafts or other modes. Furthermore, the Tribunal had returned with a finding of fact that these confirmations were produced for the first time before the CIT(A).

The Hon’ble High Court opined that even if the assessee’s case fell within the ambit of the 1977 circular, the assessee could not have been allowed deductions on the subject payments made by the assessee as the rule under which leeway was claimed did not exist for the Assessment Year in question.

The Hon’ble High Court held that no substantial question of law arose for consideration and the appeal was dismissed.

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