Section 40A(3) additions not justified when demand draft amount credited to bank account although not crossed

M. K. Agrotech Private Ltd. Vs ACIT (Karnataka High Court)

The main purpose of crossing a demand draft is to ensure that the payment is cleared by means of an account, i.e., the payment is deposited in the Bank Account i.e the person in whose favour the demand draft has been drawn. It ensures the payee receives the payment and it is routed through bank In the facts of this case, both have been proved. The Bank report would indicate that demand drafts were admittedly not crossed. However, the payments were credited into the accounts of the payees. Therefore, the object with which Section 40A(3) was promulgated stands satisfied with such material.

Further, the only objection was as to why payments have not been made through crossed demand drafts. In fact, in its order, a question was asked as to why the payments were not made in crossed demand drafts. The same is answered by the assessee, who stated that, generally, suppliers require demand drafts for quick realisation. For purchasing the demand drafts normally ‘yourself cheque’ will be issued to the bankers. The Bank may not have crossed the demand draft. It did not come to his notice.

We are of the view that expecting a answer for a specific question as to why the demand draft has not being crossed, would not be appropriate. In view of the fact that the Bank report would indicate that payees have received the said amounts with the concerned drafts, the finding of the Tribunal on this issue with regard to unsatisfactory answer given by the assessee falls into insignificance.

For the aforesaid reasons, the substantial question of law is answered by holding that the Tribunal was not justified confirming the disallowance of Rs.27,31,483/- under Section 40A(3) of the Act in the facts and circumstances of the case. Consequently, the appeal is allowed. The orders of the Tribunal, the Commissioner of Income Tax (Appeals) and the Assessing Officer are set aside on the issue of disallowance under Section 40A(3) of the Act.

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