Cash Payments Below Rs.2,500 Not Disallowed: Delhi High Court Upholds Tribunal's Decision

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Case Name:

Commissioner of Income Tax vs Hitesh Bansal (High Court of Delhi)

ITA 801/2014

Date: 22nd December 2014

Key Takeaways

1. The court interpreted Section 40A(3) (of Income Tax Act, 1961) as applying to individual cash payments exceeding Rs.2,500, not the aggregate of payments made in a day.

2. The court considered commercial expediency and business realities in its decision.

3. The judgment emphasized the importance of interpreting tax laws in a manner that makes them workable and aligned with legislative intent.

Issue

Should Section 40A(3) (of Income Tax Act, 1961), be interpreted to disallow deductions for the aggregate of cash payments made to a single party in a day, even if individual payments are below Rs.2,500, for the assessment year 2008-09?

Facts

1. The case pertains to the assessment year 2008-09.

2. The assessee filed a return on 8th August, 2008, declaring an income of Rs.4,64,703/-.

3. The assessee had expanded his business from an STD booth to include mobile phones, accessories, and recharge coupons.

4. The assessee made cash purchases of Rs.1,38,43,525/- throughout the year from two parties.

5. The assessee claimed that being new in the business with a small capital base, distributors were not ready to give credit, forcing cash purchases.

Arguments

Revenue's Argument:

- Relied on the Himachal Pradesh High Court decision in Commissioner of Income Tax versus Dalip Chand and Sons (2008) 301 ITR 276 (HP), which held that cash payments should be aggregated for a day under Section 40A(3) (of Income Tax Act, 1961).

Assessee's Argument:

- Cited decisions from Orissa, Madhya Pradesh, and Allahabad High Courts supporting the view that individual payments, not daily aggregates, should be considered.

- Argued for commercial expediency and business realities forcing cash payments.

Key Legal Precedents

1. Commissioner of Income Tax versus Dalip Chand and Sons (2008) 301 ITR 276 (HP)

2. Commissioner of Income Tax, Orissa versus Aloo Supply Co. (1980) 121 ITR 680 (Orissa)

3. CIT versus Treveni Prasad Pannalal (1997) 228 ITR 680 (MP)

4. Kiran Jaiswal versus ITO, ITA No.191/2008 decided on 3rd May, 2012 reported as 2013(1) ALJ 357

Judgement

The Delhi High Court dismissed the Revenue's appeal and upheld the ITAT's order. The court agreed with the interpretation that Section 40A(3) (of Income Tax Act, 1961) applies to individual payments exceeding Rs.2,500, not the daily aggregate. The court considered the assessee's business circumstances and the potential disproportionate impact of disallowing the entire purchase amount.

FAQs

Q1: What was the main issue in this case?

A1: The main issue was whether Section 40A(3) (of Income Tax Act, 1961) should be interpreted to disallow deductions for the aggregate of cash payments made in a day, even if individual payments are below Rs.2,500.

Q2: Why did the court rule in favor of the assessee?

A2: The court considered the assessee's business circumstances, the potential disproportionate impact of disallowing the entire purchase amount, and the interpretation of Section 40A(3) (of Income Tax Act, 1961) that aligns with legislative intent and makes the provision workable.

Q3: How does this judgment affect the interpretation of Section 40A(3) (of Income Tax Act, 1961) for the assessment year 2008-09?

A3: For the assessment year 2008-09, this judgment supports the interpretation that Section 40A(3) (of Income Tax Act, 1961) applies to individual cash payments exceeding Rs.2,500, not the aggregate of payments made in a day.

Q4: Did the court consider any amendments to Section 40A(3) (of Income Tax Act, 1961)?

A4: Yes, the court noted that an amendment requiring aggregation of daily payments was made effective from 1st April, 2009, but this case pertained to the assessment year 2008-09.

Q5: How did the court view the concept of "commercial expediency" in this case?

A5: The court considered the assessee's argument of commercial expediency, acknowledging the business realities of a new entrant in the mobile phone market with limited capital and credit options.

1. This appeal by the Revenue pertains to assessment year 2008-09 and impugns order dated 9th May, 2014 passed by the Income Tax Appellate Tribunal (Tribunal, for short).

2. Learned counsel for the Revenue has relied upon decision of the

Himachal Pradesh High Court in Commissioner of Income Tax versus

Dalip Chand and Sons (2008) 301 ITR 276 (HP). In the said decision,

it has been held that even prior to the amendment of Section 40A(3) (of Income Tax Act, 1961) of

the Income Tax Act, 1961 (Act, for short) with effect from 1st April,

2009, effect should be given to the said provision by aggregating the

total cash payments towards expenditure made to a particular person

during a day. It is noticeable that the Tribunal in the impugned order

has referred to judgments, which take the other view and reliance has

been placed upon the decision of the Orissa High Court in

Commissioner of Income Tax, Orissa versus Aloo Supply Co. (1980)

121 ITR 680 (Orissa) and the Madhya Pradesh High Court in CIT

versus Treveni Prasad Pannalal (1997) 228 ITR 680 (MP). Another

decision of the Allahabad High Court in Kiran Jaiswal versus ITO,

ITA No.191/2008 decided on 3rd May, 2012 reported as 2013(1) ALJ

357 has been quoted. The decision in Aloo Supply Co. (supra) was

pronounced on 18th December, 1979, interpreting the word “sum” in

the following manner:-

“The word "sum" has no statutory definition and

must have the common parlance meaning. Relying

upon its meaning as given in the dictionary,

learned standing counsel has contended that the

word conveys a sense of totality and, therefore,

even if an assessee has paid a sum exceeding Rs.

2,500 in different installments, the total having

exceeded the prescribed amount, the section

operated. The argument does not at all impress us.

The word sum has been used there to convey the

meaning of "amount” and not the sum total figure.

The Reader's Digest Great Encyclopaedic

Dictionary gives one of the meanings of "sum" as

"a quantity or amount of or of money". The Oxford

English Dictionary gives one of the meanings of

the word to be a quantity of money of a specified

amount. In Bouvier's Law Dictionary the meaning

of the word has been given as a quantity of money

or currency. The Webster's Universal Unabridged

Dictionary gives the same meaning of the word

"sum", i.e., a quantity of money or currency. As

has been indicated in Words and Phrases

(Permanent edn., Vol. 40) (West Publishing Co.), "

sum has a definite meaning appropriate to use with

reference to an amount of money. In the case of

Commissioners of Customs and Excise v. Queen's

Park Rangers Football and Athletic Club Ltd.

[1952] 2 QB 918 (QB), it has been indicated that

the word " sum " has two connotations, one being a

definite amount, e.g., so many pounds and

shillings, and the other one being an addition of

individual amounts to create a sum. In this

connection see also Kneen v. Martin [1935] 1 KB

499 ; 19 TC 33 (CA). In the A Dictionary for

Accounts by Eric L. Kohler, the meaning of “sum”

has been given as "an amount, as of money".

While legislating, Parliament obviously tries to

convey its intention through express words. It is

one of the well settled rules of interpretation that

where a word used in a statute carries more than

one meaning, that meaning which makes the

provision workable and is nearest to the legislative

intention, has to be adopted. We are of the definite

view that the word “sum” in the relevant provision

is used only to indicate an amount of money and

does not refer to the totality of expenditure.

There is considerable for in the stand accepted

by the Tribunal that if payments are made at

different times during the day and the assessee has

no idea that he has to pay to the same person on

more than one occasion, he cannot be subjected to

the statutory restriction contained in the provision

in question unless any one payment is above

Rs.2,500. Section 40A (of Income Tax Act, 1961) appears in Chap. IV of the

Act dealing with computation of total income and

is classified under the sub-heading in group D

“Profits and gains of business or profession”.

Parliament must have intended a working rule and

unless by clear meaning of the words a different

intention appears, we must give the provision a

construction which would make the provision

workable.”

3. The decision of the Himachal Pradesh High Court in Dalip

Chand and Sons (supra) proceeds on several aspects in addition to the

aggregation of the amounts paid in cash in one day. It was noticed that

other dealers similarly situated were making payments by crossed

cheque. The plea set up by the assessee that payments had to be made

to sellers in other towns and the assessee did not have a bank account

at places from where the sellers were operating, was not acepted. The

contention based upon business or commercial expediency and other

relevant factors, it was observed, was not proved. The Himachal

Pradesh High Court has specifically recorded that in the said case,

transactions themselves were found to be extremely doubtful and

appeared to be fraudulent. Noticeably, in terms of the amendment

made to Section 40A(3) (of Income Tax Act, 1961), aggregation of the total payments

during the day has to be made. However, the said amendment is

applicable with effect from 1st April, 2009. As per the assessment

order, the respondent-assessee had filed return on 8th August, 2008,

declaring income of Rs.4,64,703/-. The Assessing Officer did not

disturb the trading results declared by the respondent-assessee and has

accepted the Gross Profit rate after recording that the assessee had

furnished the requisite details, i.e. bank accounts details, details of

expenses debited to the profit and loss account, and books of account,

which were test checked and the case was discussed. The Assessing

Officer was satisfied with the reasons given for fall in the Gross Profit

rate which, it was stated, was on account of three-fold increase in

turnover. The respondent-assessee had pointed out that he had

expanded the ambit and area of business to include sale of mobile

phones, mobile phone accessories and recharge coupons. He had made

purchases of Rs.1,38,43,525/- for which payments were made to two

parties in cash. The purchases were not made on one day, but

throughout the year. Earlier, he was only running an STD booth/public

phone booth and related services. Being new in the business and

having a small capital base of less than Rs.10,00,000/-, the distributors

were not ready to give him goods on credit for even one or two days.

He was hence, forced to buy goods in cash to remain in business. In

case we accept the plea of the Revenue, then the entire expenditure for

purchase of mobile phones, etc. of Rs.1,38,43,525/- would be

disallowed and addition of Rs.1,38,43,525/- would be made to the

miniscule earning, as accepted by the Assessing Officer, of

Rs.4,64,703/-. The present case has several facets. There are several

mitigating factors to show and establish commercial expediency and

reasons for making the purchases, which are not disputed.

4. In view of the aforesaid factual position, we are not inclined to

interfere with the impugned order of the Tribunal. The appeal of the

Revenue is dismissed.

SANJIV KHANNA, J.

V. KAMESWAR RAO, J.

DECEMBER 22, 2014