KAMATH MARBLES Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) The petitioners in these Original Petitions are income tax assessees engaged in business. They are challenging the provisions of S.40A(3) of the Income Tax Act which provides for 20% disallowance of expenditure in excess of Rs. 20,000-00 where such payments are made other than through account payee cheques or demand drafts drawn on a Bank. S.40A(3) prior to its amendment with effect from 1.4.1997 provided for disallowance of entire expenditure subject to R.6DD in excess of payments over Rs. 10,000-00 made other than through account payee cheques and demand drafts. However, until the amendment of Rs. 6DD(j) with effect from 1.12.1995 the assessing officer was free to allow deductions on cash payments in excess of Rs. 10,000-00 if he was satisfied that such payments are made in unavoidable circumstances or it was not practical to make payment other than through cash or payment through account payee cheque or demand drafts would have caused genuine difficulty to the payee having regard to the nature of the transaction and the necessity for expeditious settlement thereof and on production of a proof in this regard. Consequent to amendment of S.40A(3) and substitution of sub-s.(j) and addition of sub-rr. (k) and (1) to R.6DD, any assessee who does not satisfy the conditions laid down in sub clauses (h), (k) and (1) will be subject to disallowance at 20% on the expenditure in excess of Rs. 20,000-00 which is not paid through account payee cheques or demand drafts. The petitioners, who are assessees engaged in business, are challenging the validity of S.40A(3) authorising disallowance to the extent of 20% of the expenditure made in cash.

(2.) I heard Sri C. Kochunni Nair and Sri. Premjit Nagendran, learned counsel for the petitioners and the learned Standing Counsel for the respondents. The petitioners contend that the Supreme Court upheld the constitutional validity of S.40A(3) prior to it's amendment, only by virtue of the then existing R.6DD(j) of the Income lax Rules which authorised the officer to allow the claim of expenditure made in cash over the limit prescribed in S.40A(3), if the officer was satisfied about the genuineness of payment. They further contend that the present provision authorising disallowance of 20% of expenditure over Rs. 20,000-00 made other than through account payee cheque or demand draft after deletion of Rs. 6DD(j) as it stood prior to it's substitution by IT (21st Amendment) Rules, 1955 is arbitrary and violative of the petitioner's rights under Arts 14 and 19(l)(g) of the Constitution of India. Therefore, according to the counsel, the decision of the Supreme Court in Attar Singh Gurmukh Singh v. Income Tax Officer, Ludhiana (191 ITR 664) cannot be relied on by the Department to sustain validity of the Section as it stands now. Standing Counsel for the Department on the other hand contended that the Government of India has not deleted R.6DD(j) as such but has refrained the entire Rules among others introducing new provisions, namely, (k) and (1) along with substituted Cl. (j). According to him, the safeguards provided in R.6DD after the amendment referred above will cover all practical difficulties for businessmen. His further contention is that S.40A(3) does not affect the petitioners' right to carry on business under Art.19(l)(g) of the Constitution as the petitioners are only subject to a disability of 20% disallowance if the expenditure is made in the form of payments in excess of Rs. 20,000-00 other than through account payee cheques or demand drafts except in cases covered by various clauses of R.6DD. The petitioners contend that the Department itself has recognised situations under R.6DD where payments have to be made by people engaged in business other than through account payee cheque or demand draft above Rs. 20,000-00 and therefore disallowance of 20% of the same is arbitrary. Their contention is that even without any proposal in the Finance Bill, 1996 the Minister on the basis of the representations from various trade organisations increased the limits of expenditure through cash other than through cheque or demand draft from Rs. 10,000-00 to Rs, 20,000-00. Therefore, according to them, business - exigencies which require payments in the form of cash is something accepted by the Government and therefore, there cannot be any further restriction in the form of disallowance of expenditure to the extent of 20% in such cases.

(3.) It has to be noted that the Supreme Court has upheld the constitutional validity of S.40A(3) in Attar Singh Gurmukh Singh's case referred above. Of course the Supreme court was dealing with S.40A(3) prior to its amendment vide Finance Act, 1996 wherein the provision was for complete disallowance of expenditure if the same was in excess of the limit provided then under S.40A(3) which was Rs. 10,000-00. While considering the validity of S.40A(3) the Supreme Court has also strongly relied on R.6DD(j) as it stood then which is as follows: