Introduction

The case of Ch. Mangayamma v. Union Of India And Others was adjudicated by the Andhra Pradesh High Court on August 2, 1999. The petitioner, Ch. Mangayamma, challenged the constitutional validity of Section 40A(3) of the Income Tax Act, 1961. The primary contention was that the disallowance of 20% of cash payments exceeding ₹20,000 in the computation of business expenditure was arbitrary and violated Articles 14 and 19(1)(g) of the Constitution of India.

The case arose after the petitioner, a widow who continued her late husband's business of purchasing and selling cool drinks, was assessed by the Income Tax Department. Her cash transactions with Sarvaraya Sugars Pvt. Ltd., acting on behalf of Coca Cola, led to disallowances under the contested section.

Summary of the Judgment

Justice B. Prakash Rao delivered the judgment, dismissing the writ petition filed by Ch. Mangayamma. The High Court upheld the validity of Section 40A(3), affirming that the amendment made by the Finance Act of 1996 was within Parliament's legislative competence. The Court held that the provision aimed to curb black money and regulate business transactions, thereby serving a legitimate public interest without being arbitrary or unconstitutional.

The Court also referenced key precedents, particularly the Supreme Court's decision in Attar Singh Gurumukh Singh v. ITOR, Ludhiana, reinforcing the validity of the section when read in conjunction with Rule 6DD of the Income Tax Rules.

Analysis

Precedents Cited

The judgment extensively cited two pivotal cases:

• Attar Singh Gurumukh Singh v. ITOR, Ludhiana: In this case, the Supreme Court upheld the constitutional validity of Section 40A(3), emphasizing that the provision, when read alongside Rule 6DD, was not an arbitrary restriction on business activities but a measure to prevent black money circulation.
• Union Of India v. A. Sanyasi Rao: This case reinforced the principle that the Legislature possesses wide discretion in tax matters to target areas with high evasion rates. The Court in this case supported the Legislature's ability to enact statutes aimed at curbing tax evasion, provided they are reasonable and have a sufficient nexus to their objectives.

These precedents were instrumental in guiding the High Court's interpretation of Section 40A(3), particularly in assessing its alignment with constitutional provisions.

Legal Reasoning

The Court examined Section 40A(3) in detail, noting the amendments introduced by the Finance Act of 1996, which increased the threshold from ₹10,000 to ₹20,000 and limited disallowances to 20% of the excess cash payments. The petitioner argued that the removal of clauses permitting exceptions under Rule 6DD(j) rendered the provision arbitrary.

However, the Court reasoned that the legislative intent behind these provisions was to enhance measures against black money without unduly restricting legitimate business operations. The deletion of specific clauses under Rule 6DD(j) did not render the section unconstitutional; rather, it streamlined the enforcement mechanism to prevent exploitation.

The Court further emphasized that the requirement to make payments via crossed cheques or bank drafts was not onerous in the contemporary banking environment, thus not infringing on the freedom to carry on business as guaranteed under Article 19(1)(g).

Impact

This judgment has significant implications for taxpayers and the Income Tax Department. By upholding Section 40A(3), the Court reinforced the government's authority to regulate cash transactions and prevent tax evasion. Future cases will likely reference this decision when addressing challenges to similar provisions, ensuring that anti-evasion measures remain robust against constitutional challenges.

Moreover, the judgment underscores the judiciary's deference to legislative judgments in crafting tax policy, provided they align with constitutional mandates. This balance is crucial for the effective administration of tax laws.

Complex Concepts Simplified

Section 40A(3) of the Income Tax Act

This section disallows 20% of cash payments exceeding ₹20,000 in business expenditures unless made via a crossed cheque or bank draft. The aim is to prevent the use of unaccounted money and curb black money circulation.

Articles 14 and 19(1)(g) of the Constitution of India

• Article 14: Guarantees equality before the law and equal protection of the laws within the territory of India.
• Article 19(1)(g): Protects the freedom to practice any profession, or to carry on any occupation, trade, or business.

Rule 6DD of the Income Tax Rules

This rule elaborates on the circumstances under which payments exceeding ₹10,000 (later ₹20,000) can be made in cash without disallowance under Section 40A(3). It outlines exceptions based on business necessity and other factors.

Conclusion

The Andhra Pradesh High Court's decision in Ch. Mangayamma v. Union Of India And Others reaffirms the constitutional validity of Section 40A(3) of the Income Tax Act. By dismissing the challenge, the Court underscored the importance of regulatory measures in combating black money and tax evasion. This judgment serves as a critical reference point for future litigations involving the balance between regulatory statutes and constitutional freedoms, ensuring that anti-evasion provisions are upheld while maintaining the integrity of legitimate business activities.