MUDIAM OIL CO Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) IN these two writ petitions, the constitutional validity of Section 40A(3) and (4) of the INcome-tax Act, 1961 (hereinafter referred to as "the Act"), has been questioned on two grounds: (1) that it is ultra vires the powers of Parliament under entry 82, List I of the Seventh Schedule to the Constitution ; and (2) that it violates the fundamental right guaranteed under Article 19(1)(g) of the Constitution. Rule 6DD is also challenged on the ground that it is beyond the competence of the rule making authority and repugnant to Article 14 of the Constitution.

(2.) TO appreciate the tenability or otherwise of the contentions raised in these two writ petitions, it will suffice if we refer to the relevant facts stated in the affidavit filed in support of Writ Petition No. 4603 of 1970. The petitioners are all firms represented by their respective partners. They are merchants and commission agents. All of them are income-tax assessees. According to them, the -agriculturists bring their produce in cart-loads from their respective villages to the market yard at Nizamabad and some of the merchants act as commission agents on behalf of the agriculturists and put up the produce at an auction for sale. The sale bill contains the nature of the grain or produce, weight, rate, total price brokerage and weighment charges, etc. The sales are all conducted under the supervision of the market committee, which also collects the market fee. The sellers are paid in cash for the produce the same day and the goods are delivered to the purchasers with the bills prepared. Commission to the commission agents as per the percentage noted in the bills is paid to them by cheque or draft on the 5th or 6th day after the goods are taken delivery of by the buyers. The produce bought at such auctions by the buyers normally exceeds a sum of Rs. 2,500. The commission agents pay in cash to the sellers "due to the exigencies of business, custom and nature of business" and it takes about 7 or 8 days for them to realise or collect from the buyers what has been expended on their account. They express their difficulty in having to pay by a crossed cheque or a crossed bank draft to the sellers as required under Section 40A(3) as the sellers insist on cash payments having no accounts in banks or having no banks at all in their villages. The financial status of buyers who come from mofussil is also not known to the commission agents and, therefore, cash payments are insisted upon by them for the goods purchased. If a seller has to part with these goods accepting a cheque and in case the cheque is to be dishonoured, the option left to him is to lay action on these dishonoured cheques, which, in terms, involves him in litigation. This insistence upon payments by cheques under the impugned provisions of the Act impedes the business activities of the petitioners. In short, it is their case that the mandatory requirement for payment by a crossed cheque or a crossed bank draft under the impugned provisions acts as a dog affecting their fundamental right to transact their business by making payments in cash; and that they confer vast and arbitrary power on the income-tax authorities to allow or disallow any expenditure incurred towards payments made in cash and it is an unreasonable restriction on their right to carry on trade or business.

(3.) SUB-section (3) of Section 40A was added by the Finance Act of 1968 and SUB-section (4) was inserted by the Finance Act of 1969. These provisions were inserted as Section 40, which prohibited deductions in certain cases specified thereunder, was found to be inadequate to achieve the object sought to be achieved, viz., checking tax evasion. SUB-section (3) injuncts that an assessee shall not be entitled to claim deduction unless, in regard to the expenditure incurred by him, payment is made where such expenditure exceeds Rs. 2,500 by a crossed cheque drawn on a bank or by a crossed bank draft. The provisos to this sub-section are not relevant for the purpose of our case. SUB-section (4) is intended to protect the assessee against the payee. Any payment made in respect of expenditure as specified in SUB-section (3) will not be open to challenge by a payee or any person in any suit or other proceeding, on the ground that the payment was not made or "tendered in cash or in other manner." Rule 6DD relaxes the rigour of SUB-section (3) as this rule specifies certain bodies or institutions to whom payments exceeding Rs. 2,500 could be made otherwise than by a crossed cheque or a crossed bank draft. The rule further provides that, in other cases not specified in the rule if the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque or a crossed bank draft due to exceptional or unavoidable circumstances and furnishes evidence as to the cause for non-payment by a crossed cheque or a crossed bank draft, deduction will be allowed in regard to such payments.