Section 40A(3) does not eliminate considerations of business expediencies -SC

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 Rule 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 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 that an assessee can be exempted from the require- ment of payment by a crossed cheque or crossed bank draft 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 transac- tions. 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 intended to use or create black should not be regarded as curtailing the freedom of trade or business.

JUDGMENT

K. Jagannatha Shetty, J.—The assessees in these appeals have made payments in cash exceeding a sum of Rs. 2,500 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 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 validity of section 40A(3) of the Act; and (ii) the applicability of Section 40A(3) to payments made for acquiring stock-in-trade.

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