Holding

Section 40A(3) is a valid, overriding provision that applies to cash payments for stock-in-trade and must be read together with Rule 6DD, which provides limited exemptions.

Summary

The assessees, Attar Singh and Gurmukh Singh, made cash payments exceeding Rs.10,000 for purchases of stock-in-trade, which the assessing authority disallowed as deductions under Section 40A(3) of the Income Tax Act, 1961 read with Rule 6DD of the Income Tax Rules, 1962. The assessees challenged the validity of Section 40A(3) and its applicability to payments for acquiring stock-in-trade. The Supreme Court held that Section 40A(3) is a valid, overriding provision but must be read in conjunction with Rule 6DD, which allows exemption in specified circumstances and does not intend to curtail business activity. The Court interpreted "expenditure" broadly to include purchases of stock-in-trade, making the provision applicable to such payments. It emphasized that the rule aims to prevent the use of unaccounted money and that genuine business transactions can escape disallowance if the assessee satisfies the assessing officer. Consequently, the Court dismissed all the appeals and the special leave petition, upholding the disallowance where no exemption under Rule 6DD was shown.

Issues considered

The validity of Section 40A(3) of the Income Tax Act, 1961.
The applicability of Section 40A(3) to payments made for acquiring stock-in-trade.

Legislation cited

Income Tax Act, 1961s. 28, s. 40A(3)
Income Tax Rules, 1962s. 600, s. 6DD

Subjects

Section 40A(3)Income Tax Actcash paymentsstock-in-tradededuction disallowanceRule 6DDblack moneytax law interpretation

Judgment

ATIAR SINGH GURMUKH SINGH A
v.
INCOME TAX OFFICER, LUDHIANA ETC.

AUGUST 7, 1991

[K. JAGANNATHASHETIY ANDYOGESHWARDAYAL, JJ.] B

Income Tax Act, 1961/lncome Tax Rules, 1962-Section 40A(3)/
Rule 6DD-Validity of-Applicability to payments made for acquiring
stock-in-trade.

The assessees in these appeals have made payments · in cash
exceeding a sum of Rs.2500 for some of the purchases of stock-in-trade.
c
So while computing the income of the assessees under the head "profits
and gains of business" the assessing authority disallowed deduction on.
account of such payments held to be in contravention of the terms of
section 40A(3) of the Income Tax Act, 1961 read with the Rule 600 of
the Income Tax Rules, 1962. D

The assessees have challenged the same. So in the instant case the
question under consicteration before this Court is (i) the validity of
section 40A(3) of the Act (ii) the applicability of section 40A(3) to pay-
ments made for acquiring stock-in-trade.
E
Originally section 40A(3) required payments in respect of expen-
diture which exceeded Rs.2500 to be made by a" crossed cheque or
crossed bank draft and by the Amending Act 1987 to remove hardships
to smaller assessees the said amount has been raised to Rs.10,000,
Section 40A(3) begins with a non-obstante clause so the legislature hao
made it clear that the provisions of section 40A(3) are overriding and F
operate inspite of any thing to the contrary contained in any other
provisions of the Act relating to the .computation of income under the
head "profits and gains of business or profession". Sub-section (3)
empowers the assessing authority to disallow as deduction of any exr 'n-
diture in respect of which payment is made in cash exceeding Rs.10,000
otherwise than by a crossed cheque or crossed hank draft. G

Rule 600 of Income Tax Rules, 1962 provides for cases and
circumstances in which payment of a sum exceeding Rs.10,000 may be
made otherwise than by crossed cheque or by a crossed demand draft.

The assessees challenged on the ground that provisions of section H

405
406 SUPREME COURT REPORTS [ 1991] 3 S.C.R.

A
40A(3) intend to restrict the business activities.

Dismissing the appeals and Special Leave Petition, the Court,

HELD: That section 40A(3) must not be read in isolation or to the
exclusion of Rule 6DD. This section must be read along with the Role
B 6DD and if read together it is clear that the provisions of the section are
not intended to restrict the business activities. It only empowers the
assessing officer to disallow the deductions claimed as expenditure in
respect of which payment is not made by crossed cheque or crossed
bank draft. The same is insisted only to enable the assessing authority to
ascertain whether it was out of the income from disclosed sources and
C even the terms of section 40A(.3) are not absolute. Considerations of
business expediency and other relevant factors are not excluded, since it
is open to the assessee to furnish the circumstances under which the
payment was not practicable or would have caused genuine difficulty to
the payee. Rule 6DD provides tiltat an assessee can be exempted from
the requirement of payment by a crossed cheque or crossed bank draft
D in the circumstances specified under the rule. Thus section 40A(3) and
Rule 6DD are intended to regulate the business transactions and to
prevent the use of unaccounted money or reduce the chance to use black
money for business transactions. Moreover while interpreting a taxing
statute the Court cannot be oblivious of the proliferation of black
money which is in circulation in our country. Thus any restraint
E intended to use or create black should not be regarded as curtailing the
freedom of trade or business. [409G-4!0E]

The term expenditure as peir section 40A(3), means all outgoings
including the expenditure incurred for purchasing the stock-in-trade.
Since to determine the gross profits the value of the stock-in-trade has
F to be taken into account. So payments can be disallowed if they are
made in cash in the sums exceeding the amount s~~dfied under section
40A(3) and also not provided for exemption under Rule 6DD. Thus
section 40A(3) is attracted to payments made for acquiring stock-in-
trade and other materials. [410G-411A]

G Sajowanlal Jaiswal v. CIT, [1976] 103 ITR 706 Orissa; U.P.
Hardware Store v. CIT, [1976] 104 ITR 664; Allahabad; Ratan
Udyog v. ITO, [1977] 109 I.T.R. l Allahabad; P.R. Textiles v. CIT
Kera/a, [1980] 121 ITR 237 Kerala; CIT v. Kishan Chand Maheswari
Dass, [1980] 121 ITR 232 P & H; Kanti Lal Purshottam & Co. v. CIT,
[1985] 155 ITR 519 Raj; CIT v. New Light Tin Mfg. Co., [1980] 121
H ITR 229 P & H; Fakri Automobiles v. CIT, [1986] 160 ITR 504 Raj;
ATTAR SINGH v. l.T.0. [SHETfY, J.] 407

Venkata Satayanarayana Timber Depotv. /TR, (1987] 165 ITR 253 AP.
A
and Akash Films v. CIT, (1991] ITR 32 Karnataka, approved.
C/Tv. Hardware Exchange, (1991] 190 ITR 61, reversed.
4
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11 of
1991.
B
From the Judgment and Order dated 15. 10.1979 of the Punjab
and Haryana High Court in C.Q.P. No. 1009 of 1974.
WITH
Civil Appeal Nos. 2752/79, 1105/76, 29 & 985/87, 4950/X9,
1032/79, 3331/83, SLP (Civil) No. 15/80, CMP. No. 1350/80 and C.A. No.
1425 of 1976. C
B. Sen, G.C. Sharma, S.K. Mehta, C.S. Aggarwal, BV. Desai,
Ms. Radha Rangaswamy, K.C. Dua, Umesh Khaitan, Darshan Singh.
·rraveen Kumar, M.M. Kashyap and S.K. Bagga for the Appellants.
J. Ramamurthy, B.B. Ahuja and Ms. A. Subhashini for the
D
Respondents.
The Judgment of the Court was delivered by
K. JAGANNATHA SHETTY, J. The assessees in these appeals
have made payments in cash exceeding a sum of Rs.2500 for some of
the purchases of stock-in-trade. The payments are not allowed as
£
deductions in the computation of income under the head "profits and
gains of business". The payments are held to be in contravention of
the terms of Section 40A(3) of the Income Tax Act, 1961 read with the
Rule 6DD of the Income Tax Rules, 1962. The assessees have
appealed to this Court challenging the disallowance.
Two questions arise for consideration in these appeals; (i) The F
validity of Section 40A(3) of the Act; and (ii) The applicability of
Section 40A(3) to payments made for acquiring stock-in-trade.
Section 40A(3) so far as material provides:
"40A. Expenses or payments not deductible in certain
circumstances-( 1) The provisions of this section shall have G
effect notwithstanding anything to the contrary contained
in any other provision of this Act relating to the computa-
tion of income under the head "Profits and Gains of busi-
ness or profession.

xxx xxx xxx xxx H
408 SUPREME COURT REPORTS [19911 3 S.C.R.

(3) Where the assessee incurs any expenditure in
A
respect of which payment is made, after such date (not
being later than the 31st day of March 1969) as may be
specified in this behalf by the Central Government by
notification in the Official Gazette, in a sum exceeding ten
thousand rupees otherwise than by a crossed cheque drawn
B on a bank or by a crossed bank draft, such expenditure
shall not be allowed as a deduction:

xxx xxx xxx xxx

Provided further that no disallowance under this sub-
section shall be made where any payment in a sum exceed-
c ing ten thousand rupees is made otherwise than by a cros-
sed cheque drawn on a bank or by a crossed bankdraft, in
such cases and under such circumstances as may be pre-
scribed, having regard to the nature and extent of banking
facilities available, considerations of business expediency
D and other relevant factors."

Originally, Section 40A(3) required payments in respect of
expenditure, which exceed Rs.2,500 to be made by a crossed cheque or
a crossed bank draft. On failure to do so, the payments made were
disallowed in the computation of income. Jn order to remove hardship
E to smaller assessees, the Amending Act, 1987, has raised this ceiling to
Rs.10,000. Section 40A(3) begins with a non-obstante clause. It is an
overriding provision whieh operates inspite of anything to the contrary
contained in any other provision of the Act relating to the comP.titation
of income under the head "profits and gains of business or \'>rofes-
sion". The legislature has thus made it clear that the provisions of
F Section 40A will apply in supersession of other contrary provisions of
the Act relating to the computation of income. Sub-section (3) empo-
wers the assessing officer to disallow, as a deduction any expenditure
in respect of which payment is made of any sum exceeding Rs.10,000
otherwise than by a crossed cheque or crossed bank draft. ·

G Rule 600 of the Income Tax Rules, 1962 refers to cases and
circumstances in which payment of a sum exceeding Rs. 10,000 may be
made oth~rwise than by a crossed cheque or by a crossed bank draft.
The Rule so far as it is relevant reads:

"600. Cases and circumstances in which payment in a
H sum exceeding ten thousand rupees may be made otherwise
ATTAR SINGH v. I.T.O. (SHETIY, J.J 409

than by a crossed cheque drawn on a bank or by a crossed A
bank draft-No disallowance under sub-section (3) of
Section 40 A shall be made where any payment in a sum
exceeding ten thousand rupees is made otherwise than by
crossed cheque drawn on a bank or by a crossed bank draft
in the cases and circumstances specified hereunder,
namely: B

xxx xxx xxx xxx

(j) in any other case, where the assessee satisfies the
Assessing Officer that the payment could not be made by a
crossed cheque drawn on a bank or by a crossed bank
draft-
c
"(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 D
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 Asses-
sing Officer as to the genuineness of the payment and the
identity of the payee." F

As to the validity of Section 40A(3) it was urged that if the price
. of the purchased material is not allowed to be adjusted as against the
• sale price. of the material sold for want of proof of payment by a crossed
cheque or crossed bank draft, then the income tax levied will not be on
the income but it will be on an assumed income. It is said that the F
provision authorising levy tax on an assumed income would be a rest-
riction on the right to carry on the business besides being arbitrary.

In our opinion, there is little merit in this contention. Section
40A(3) must not be read in isolation or to the exclusion of Rule 6DD.
';'he Section must be read along with the Rule. If read together, it will G
be clear that the provisions are not intended to restrict the business
activities. There is no restriction on the assessee in his trading
activ'.ties. Section 40A(3) only empowers the assessing officer to disal-
__,_ low the deduction claimed as expenditure in respect of which payment
is not made by crossed cheque or crossed bank draft. The payment by
crossed cheque or crossed bank draft is insisted on to enable the asses- H
410 SUPREME COURT REPORTS [1991] 3 S.C.R.

sing authority to ascertain whether the payment was genuine or
A
whether it was out of the income from disclosed sources. The terms of
Section 40A(3) are not absolute. Consideration of business expediency
and other relevant factors are not excluded. The genuine and bona fide .....
transactions are not taken out of the sweep of the Section. It is open to
the assessee to furnish to the satisfaction of the assessing officer the
B circumstances under which the payment in the manner prescribed in
Section 40A(3) was not practicable or would have caused genuine
difficulty to the payee. It is also open to the assessee to identify the
person who has received the cash payment. Rule 6DD provides that an
assessee can be exempted from the requirement of payment by a eras-
sed cheque or crossed bank draft in the circumstances specified under
the rule. It will be clear from the provisions of Section 40A(3) and rule
c 6DD that they are intended to regulate the business transactions and
to prevent the use of unaccounted money or reduce the chances to use
black-money for business transactions. See: Mudiam Oil Company v.
ITO, [1973] 92 ITR 519 A.P. If the payment is made by a crossed
cheque drawn on a bank or a crossed bank draft then it will be easier to
D ascertain, when deduction is claimed, whether the payment was
genuine and whether it was out of the income from disclosed sources.
In interpreting a taxing statute the Court cannot be oblivious of the -...

E
proliferation of black-money which is under circulation in our country.
Any restraint intended to curb the chances and opportunities to use or
create black-money should not be regarded as curtailing the freedom
of trade or business.
-
As to the second question it may be stated that the word 'expen-
diture' has not been defined in the Act. It is a word of wide import.
Section 40A(3) refers to the expenditure incurred by the assessee in _..J.." :•

respect of which payment is made. It means all outgoings are brought
F under the word 'expenditure' for the purpose of the Section. The
expenditure for purchasing the stock-in-trade is one of such out-
goings. The value of the stock-in-trade has to be taken into account
while determining the gross profits under section 28 on principles of
commercial accounting. The payments made for purchases would also
be covered by the word 'expenditure' and such payments can be disal-
G lowed if they are made in cash in the sums exceeding the amount
specified under section 40A(3). We have earlier observed that Rule ,I.
6DD has to be read along with Section 40A(3). The Rule also contem-
plates payments made for stock-in-trade and raw materials. This Rule
is in accordance with the terms of Section 40A(3). The Rule provides
that an assessee can be exempted from the requirements of payment -'
H by crossed cheque or a crossed bank draft where the purchases are
ATTAR SINGH v. l.T.0. (SHETTY, J.] 411

made of certain agricultural or horticultural commodities or from a A
village where there is no banking facility. Section 40A(3) is, therefore.
attracted to payments made for acquiring stock-in-trade and other
~ materials. This is also the view taken by several High Courts. See·
Sajowanlal Jaiswal v. CIT, [1976] 103 ITR 706 Orissa; U.P. Hardware
Store v. CIT, [1976] 104 JTR 664 Allahabad; Ratan Udyog v. ITO,
B
[1977] 109 !TR I Allahabad; P.R. Textiles v. CIT, Kera/a, [ 1980] 121 ITR
237 Kerala; C/Tv. Kishan Chand Maheswari Dass, [1980] 121!TR232
P & H; Kanti Lal Purshottam and Co. v. CIT, [1985] 155 ITR 519 Raj;
CIT, v. New Light Tin Mfg. Co., [1980] 121 ITR 229 P & H; Fakri
Automobiles v. CIT, [1986] 160 !TR 504 Raj; Venkata Satayanarayana
.... Timber Depot v. !TR, [1987] 165 ITR 253 AP.; and Akash Films v.
CIT, [1991] ITR 32 Karnataka. The decisions of the High Courts of c
Andhra Pradesh, Orissa, Allahabad, Kerala, Karnataka, Punjab &
Haryana, Rajasthan and Patna are to the effect that the payments
.. made for purchasing stock-in-trade or raw materials should also be
regarded as expenditure for the purpose of Section 40A(3). The only
discordant note struck on this aspect is by the Gauhati High Court in
CIT v. Hardware Exchange, [1991] 190 ITR 61. The Gauhati High D

... Court has observed that Section 40A(3) applies only to payments
made on account of 'expenditure incurred' and the payment made for
purchase of stock-in-trade cannot be termed as 'expenditure incurred'
> since money does not go irretrievably in such cases. We are unable to
agree with the view taken by the Gauhati High Court.
E
In this view of the matter we dismiss all these appeals and special
leave petition with costs .
...
-'t- S.B. Appeals dismissed.