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Attar Singh Gurmukh Singh v. Income-Tax Officer
Structured Summary of the Opinion (B.S. Dhillon, J.; S.S. Dewan, J. concurring)
Factual and Procedural Background
The petitioner is a firm engaged in buying and selling electroplating material. The firm submitted an income-tax return for the year 1971-72 to the Income-tax Officer (ITO). The ITO served a notice (annexure P-1) requesting the petitioner to furnish a list of items where purchases in excess of Rs. 2,500 were effected otherwise than by crossed cheques. That notice related to assessment years 1970-71 and 1971-72.
Subsequently, the ITO issued another notice dated 7 March 1974 (annexure P-2) under section 143(3) of the Income-tax Act, 1961, stating that the assessee had not filed the requested details of cash purchases above Rs. 2,500. The ITO recorded purchases amounting to Rs. 3,70,344 representing items above Rs. 2,500 that were unvouched and indicated an opinion that these purchases were inadmissible under section 40A(3) of the Act. The notice proposed disallowance and called the assessee to appear before the ITO.
The petitioner filed the present writ petition under Articles 226 and 227 of the Constitution, challenging the notice dated 7 March 1974 principally on the ground that section 40A(3) of the Income-tax Act is ultra vires on the basis of arbitrariness.
Legal Issues Presented
- Whether the provisions of section 40A(3) of the Income-tax Act, 1961 are ultra vires the Constitution on the ground of arbitrariness (i.e., violative of Article 14).
- Whether, in light of the statutory rule-making power, the exceptions provided by rule 6DD of the Income-tax Rules, 1962 afford procedural safeguards that permit genuine purchase transactions to be allowed as deductions, and whether the assessee may claim those exceptions in response to the ITO's notice.
Arguments of the Parties
Appellant's Arguments (as recorded)
- Mr. Doabia, counsel for the petitioner, contended that section 40A(3) is arbitrary and therefore ultra vires.
- He argued that the petitioner, in its trade of buying and selling electroplating material, derives income as the difference between purchase price and sale price; if genuine purchases are disallowed because payment was not made by crossed cheque, the tax would operate on an assumed income rather than the true income, producing an arbitrary levy.
The opinion does not contain a detailed account of any counter-arguments advanced by the revenue beyond the contents of the ITO's notice; no separate, detailed respondent submissions are recorded in the text.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mudiam Oil Co. v. ITO, [1973] 92 ITR 519 (Andhra Pradesh High Court) | Upheld the vires of the provision at issue (section 40A(3) and its scheme) — i.e., previous judicial support for constitutionality. | The court relied on this prior decision as confirming that the provision is not ultra vires and as persuasive support for dismissing the petition attacking section 40A(3) as arbitrary. |
Court's Reasoning and Analysis
The court examined the language of section 40A(3) and the exceptions framed by the Central Government in rule 6DD of the Income-tax Rules, 1962. It treated the statutory regime as essentially procedural in character rather than one which strips the assessee of substantive rights to genuine deductions.
Key elements of the court's step-by-step analysis as recorded in the opinion:
- The court read section 40A(3) together with the second proviso which authorized the framing of rules prescribing circumstances in which disallowance would not be made; it then considered rule 6DD enacted pursuant to that power.
- Rule 6DD contains multiple specific exceptions (clauses (a)–(j)) and, in particular, sub-rule (j) provides for cases where payment could not be made by crossed cheque due to exceptional or unavoidable circumstances, or where payment by crossed cheque was not practicable or would have caused genuine difficulty to the payee. The rule also requires the assessee to furnish evidence as to the genuineness of the payment and identity of the payee.
- Given the availability of those exceptions and the requirement to produce evidence and satisfy the Income-tax Officer, the court characterized section 40A(3) as a regulatory/procedural measure aimed at preventing tax evasion and clandestine, unaccounted transactions rather than a penal or arbitrary removal of genuine deduction rights.
- The court held that measures enacted to safeguard revenue and check evasion cannot be struck down as arbitrary merely because they regulate and require documentary or banking standards; the provision does not curtail freedom of trade or business in substance, but prescribes a procedure to ensure the integrity of deductions claimed.
- The court found the reasoning of the Andhra Pradesh High Court in Mudiam Oil Co. v. ITO persuasive and noted that no other grounds were pressed by the petitioner.
- Concerning the specific ITO notice (7 March 1974), the court stated that it is for the assessee to go before the authority and satisfy the Income-tax Officer that one or more of the Rule 6DD exceptions apply; the notice itself had offered the assessee an opportunity to be heard, which the court observed should be honored.
Holding and Implications
Holding: The petition is dismissed. The court concluded that section 40A(3) of the Income-tax Act, 1961 is not ultra vires and is not arbitrary.
Implications and direct consequences as stated in the opinion:
- The ITO's notice of 7 March 1974 stands and the petitioner must appear before the authority and attempt to satisfy the Income-tax Officer that the payment(s) fall within one or more exceptions under rule 6DD of the Income-tax Rules, 1962.
- If the concerned authority is satisfied by the evidence and explanations furnished by the assessee, the assessee will be entitled to the relief (i.e., allowance of the expenditure).
- The authority is directed to proceed further to process the case in accordance with law.
- The court ordered that there shall be no order as to costs.
This summary is strictly confined to the matters expressly recorded in the provided opinion text and does not add information beyond what the opinion itself contains.
B.S Dhillon, J.:— The petitioner in this petition under arts. 226/227 of the Constitution of India is a firm carrying on business of buying and selling electroplating material. The petitioner-firm submitted a return for the year 1971-72 before the ITO. The ITO asked the petitioner to show and furnish a list of items where purchases in excess of Rs. 2,500 were effected, otherwise than by crossed cheques. The copy of this notice is appended as annex. P-1 to this petition. In compliance with the above-mentioned notice, the petitioner produced the account books before the ITO. The notice, annex. P-1, pertains to the assessment years 1970-71 and 1971-72. Thereafter, the ITO issued another notice dated March 7, 1974 (annex. P-2), under s. 143(3) of the I.T Act, 1961 (hereinafter referred to as “the Act”), stating therein that the assessee having been requested to file the details of items of cash purchases above Rs. 2,500 as per his ledgers and the said details having not been filed, it was pointed out that purchases to the tune of Rs. 3,70,344 representing items above Rs. 2,500 were effected during that year which are also unvouched. He expressed the opinion that the said purchases were inadmissible items of deduction under the provisions of s. 40A(3) of the Act. The notice said that the ITO proposed to disallow the same and, with a view to allow an opportunity to the petitioner, he was asked to appear before the ITO. At this stage, the petitioner filed the present writ petition, challenging the aforesaid notice dated March 7, 1974, mainly on the ground that the provisions of s. 40A(3) of the Act are ultra vires.
2. The provisions of s. 40A(3) of the Act are as follows:
“40A. (3) Where the assessee incurs any expenditure in 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 two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction:
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made:
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.”
3. As is clear from the second proviso to s. 40A(3) of the Act, Rules have been framed providing for such circumstances so as not to allow disallowance under this sub-section where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.
4. Consequently, in pursuance of the power referred to above, r. 6DD of the I.T Rules, 1962 (hereinafter referred to as “the Rules”), has been framed. This rule has a number of cls. (a) to (j). Rule 6DD of the Rules is as follows:
“6DD. No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely:—
(a) where the payment is made to—
(i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society as defined in clause (cii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or any primary credit society as defined in clause (civ) of that section;
(v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956);
(vi) the Industrial Finance Corporation of India established under section 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948);
(vii) the Industrial Credit and Investment Corporation of India Ltd.;
(viii) the Industrial Development Bank of India established under section 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964);
(ix) the Unit Trust of India established under section 3 of the Unit Trust of India Act, 1963 (52 of 1963);
(x) the Madras Industrial Investment Corporation Ltd., Madras;
(xi). the Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad;
(xii) the Kerala State Industrial Development Corporation Ltd., Trivandrum;
(xiii) the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay;
(xiv) the Punjab State Industrial Development Corporation Ltd., Chandigarh;
(xv) the National Industrial Development Corporation Ltd., New Delhi;
(xvi) the Mysore State Industrial - Investment and Development Corporation Ltd., Bangalore;
(xvii) the Haryana State Industrial Development Corporation Ltd., Chandigarh;
(xviii) any State Financial Corporation established under section 3 of the State Financial Corporations Act, 1951 (63 of 1951);.
(b) where the payment is made to Government and, under the rules framed by it, such payment is required to be made in legal tender;
(c) where under any contract entered into by the assessee before the 1st day of April, 1969, the payment is required to be made in legal tender;
(d) where the payment is made by—
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank.
Explanation.—For the purposes of this clause and clause (h), the term. ‘bank’ means any bank, banking company, or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 194-J (10 of 1949)], whether incorporated, or not, which is established outside India;
(e) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied on services rendered by the assessee to such payee;
(f) where the payment is made for the purchase of—
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or pro ducts;
(g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;
(h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;
(i) where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or the heirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head ‘Salaries’ of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs. 7,500;
(j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft—
(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 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 Income-tax Officer as to the genuineness of the payment and the identity of the payee.”
5. The only contention raised by Mr. Doabia, learned counsel for the petitioner, is that the provisions of s. 40A(3) of the Act are ultra vires as the same are arbitrary. It has been contended that the assessee is engaged in the business of buying and selling electroplating material. In the course of business he has to purchase certain material. The income of the assessee will be the difference between the price of the purchased material and the price at which the same is sold. It has been contended that if the price of the purchased material is not adjusted as against the sale price of the material so sold, in that case the income-tax levied will not be on the income, rather it will be arbitrarily levied on an assumed income. We are unable to agree with this contention of the learned counsel. Taking into consideration the language of s. 40A(3) of the Act and r. 6DD of the Rules, we are of the opinion that the said provision is more a rule of procedure, rather than creating any substantial hindrance in the way of an assessee who wants to have deduction on the genuine purchase transactions. The provisions of sub-r. (j) of r. 6DD of the Rules may specially be referred to in this regard. The said rule in fact provides for all eventualities which may occur due to exceptional or unavoidable circumstances, or because payment in the manner as provided in s. 40A(3) of the Act was not practicable or would have caused genuine difficulty to the payee having regard to the nature of the transaction and the necessity of expeditious settlement thereof. The said provision has been made to safeguard the revenues of the State and if the measures are taken to check the evasion of income-tax, it cannot be said the said measure taken is ultra vires on the ground of arbitrariness and violative of art. 14 of the Constitution. The said provision, in our view, has been introduced only to regulate the business activities and prevent unaccounted money being used for clandestine transactions and it was in the interest of revenue and national economy that the restriction imposed in this provision has been enacted. This provision in no way can be held to curtail the freedom of trade or business. As already observed, the said provision is more of a procedure than to be of taking away any right of an assessee and the said procedure has been prescribed with a view to avoid evasion of tax to which the revenue legitimately is entitled. The provision, therefore, cannot be in any manner termed to be arbitrary. The vires of this provision were upheld by the Andhra Pradesh High Court in Mudiam Oil Co. v. ITO, [1973] 92 ITR 519. No other ground has been pressed.
6. For the reasons recorded above, we are clearly of the opinion that the provisions of s. 40A(3) of the Act are not ultra vires.
7. As regards the notice dated March 7, 1974 (annex. P-2), it is for the assessee to go and satisfy the authority concerned that he is entitled to claim any of the exceptions as provided for in r. 6DD of the Rules, referred to above. It, of course, goes without saying that the assessee will be afforded an opportunity as has also been stated in the notice to satisfy the authority concerned that he is entitled to the deduction of the expenditure claimed in view of the provisions of the rule referred to above. The concerned authority being satisfied, the assessee will be entitled to the relief.
8. For the reasons recorded above, there is no merit in this petition and the same is hereby dismissed. The authority concerned shall proceed further to process the case in accordance with law. However, there will be no order as to costs.
S.S Dewan, J.:— I agree.
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