Cash payments to supplier bank accounts don't qualify for tax exemption, rules High Court

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Case Name:

Commissioner of Income Tax Vs K. Abdu & Co. (High Court of Kerala)

OP. No. 7697 of 2001(N)

Date: 19th November 2007

Key Takeaways:

1. Cash payments made to supplier bank accounts don't qualify for exemption under Rule 6DD(a)(ii) (of Income Tax Rules, 1962).

2. Truck drivers delivering goods cannot be considered agents of the assessee for making cash payments to suppliers.

3. The purpose of Section 40A(3) (of Income Tax Act, 1961) is to verify the genuineness of payments, but exceptions must be strictly interpreted.

Issue: 

Does the exemption under Rule 6DD(a) (of Income Tax Rules, 1962) apply to cash payments made to supplier bank accounts maintained with specified banks, and can truck drivers be considered agents for making such payments?

Facts:

1. K. Abdu & Co., a grocery merchant, made cash payments totaling Rs.19,05,964/- during the assessment year 1996-97.

2. Out of this, Rs.3,52,943/- and Rs.4,74,971/- were paid to supplier bank accounts maintained with State Bank of Mysore and Hassan District Co-op Central Bank Ltd.

3. The Assessing Officer initially allowed the claim but later rectified it under Section 154 (of Income Tax Act, 1961) and made an addition under Section 40A(3) (of Income Tax Act, 1961) for cash payments exceeding Rs.10,000/-.

4. The assessee filed a revision before the Commissioner, which was rejected.

5. The assessee then challenged this order in the High Court.

Arguments:

Assessee's arguments:

1. Payments made to supplier accounts in specified banks should be exempt under Rule 6DD(a)(ii) (of Income Tax Rules, 1962).

2. Cash remittances through truck drivers should be covered under Rule 6DD(a)(i) (of Income Tax Rules, 1962).

3. The purpose of Section 40A(3) (of Income Tax Act, 1961) is to verify the genuineness of payments, citing the Supreme Court decision in GURMUKH V. CIT.

Tax Department's arguments:

1. The protection under Rule 6DD(a) (of Income Tax Rules, 1962) is only available for payments made directly to the specified institutions, not to any account maintained in these institutions.

2. Truck drivers cannot be considered agents of the assessee for making payments to suppliers.

Key Legal Precedents:

1. GURMUKH V. CIT, (1991) 2 K.L.T. 350 (SC): The Supreme Court held that the purpose of Section 40A(3) (of Income Tax Act, 1961) is to verify whether payments made are genuine or not. However, the High Court noted that exceptions must still be strictly interpreted.

Judgement:

The High Court ruled in favor of the Tax Department, holding that:

1. Payments made to supplier accounts in specified banks do not qualify for exemption under Rule 6DD(a)(ii) (of Income Tax Rules, 1962).

2. Rule 6DD(a) (of Income Tax Rules, 1962) applies only to payments made directly to the institutions mentioned, not to any account maintained in these institutions.

3. Truck drivers cannot be considered agents of the assessee for making payments to suppliers, so Rule 6DD(a)(i) (of Income Tax Rules, 1962) is not applicable.

4. The court dismissed the assessee's petition and upheld the Commissioner's order confirming the assessment revised under Section 154 (of Income Tax Act, 1961).

FAQs:

1. Q: Why didn't the payments to supplier bank accounts qualify for exemption?

  A: The court interpreted Rule 6DD(a) (of Income Tax Rules, 1962) to apply only to direct payments to specified institutions, not to any account maintained in these institutions.

2. Q: What was the significance of the truck drivers in this case?

  A: The assessee argued that payments through truck drivers should be exempt, but the court ruled that truck drivers couldn't be considered agents for making payments to suppliers.

3. Q: How did the court interpret the purpose of Section 40A(3) (of Income Tax Act, 1961)?

  A: While acknowledging that the purpose is to verify the genuineness of payments, the court emphasized that exceptions must be strictly interpreted.

4. Q: What's the key lesson for businesses from this judgment?

  A: Businesses should be cautious about making cash payments exceeding the specified limit, even if they're deposited into bank accounts, as they may not qualify for exemption under Rule 6DD (of Income Tax Rules, 1962).

5. Q: Does this judgment affect all types of cash payments?

  A: No, it specifically addresses payments made to supplier accounts and through truck drivers. Other scenarios may have different outcomes based on specific circumstances.

Petitioner is challenging Ext.P6 order issued by the Commissioner of Income-tax under Section 264 (of Income Tax Act, 1961) confirming disallowance of addition made under Section 40A(3) (of Income Tax Act, 1961) for the payments made in cash in excess of Rs.10,000/-. During the previous year, relevant to the assessment year 1996-97, petitioner made payments of Rs.19,05,964/- in cash against requirement of payment through account payee cheque or DD which attracts addition of 20% under Section 40A(3) (of Income Tax Act, 1961). Out of this amount, petitioner claimed that an amount of Rs.3,52,943/- and Rs.4,74,971/- were paid by the petitioner to the bank account of the suppliers who supplied goods to the petitioner who is a grocery merchant. Even though initially the claim was allowed by the assessing officer, he rectified it under Section 154 (of Income Tax Act, 1961) and made addition under Section 40A(3) (of Income Tax Act, 1961) for the payments made in cash in excess of Rs.10,000/-. Against this petitioner filed revision before the Commissioner, who rejected the same vide Ext.P6 order , which is under challenge in this O.P.

2. Heard counsel for the petitioner and standing counsel for the Income-tax Department. The claim put forward by the petitioner is that payments fall specifically within the exception clause, Rule 6DD(a) (of Income Tax Rules, 1962). For easy reference the said rule is extracted hereunder:

6DD. No disallowance under sub-section 3 (of Income Tax Act, 1961) of Section 40A (of Income Tax Act, 1961) shall be made where any payment in a sum exceeding ten thousand 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 (10of 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, 1948 (15 of 1948);

(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);

The contention of the petitioner is that payments were made to the account of the suppliers maintained with State Bank of Mysore and Hassan District Co-op. Central Bank Ltd. Counsel for the petitioner contended that all these Banks come under clause (ii) of sub-rule (a) of Rule 6DD (of Income Tax Rules, 1962) and therefore these two payments are eligible for exemption from disallowance under Section 40A(3) (of Income Tax Act, 1961). Counsel also relied on the decision of the Supreme Court in GURMUKH V. CIT, (1991) 2 K.L.T. 350 (SC) whereunder the Supreme Court has held that purpose of Section 40A(3) (of Income Tax Act, 1961) is to verify whether payments made are genuine or not. Standing counsel for the Department on the other hand contended that petitioner is not entitled to the protection under Rule 6DD(a) (of Income Tax Rules, 1962) because the payments made by the petitioner are not to the institutions referred to therein. I am in agreement with the contention of counsel for the respondents because the protection under clause (a) of Rule 6DD (of Income Tax Rules, 1962) is available only if the payments are made to any of the institutions referred to thereunder. Obviously in order to qualify for the benefit of Rule 6DD(a) (of Income Tax Rules, 1962) the beneficiary of the payee should be an institution referred to therein. Even though counsel for the petitioner contended that payments to any beneficiary in the account maintained in the Banks referred to in Rule 6DD(a) (of Income Tax Rules, 1962) is also covered by the exception, I do not think the same can be accepted because, some of the institutions referred to in the Rule, namely, Reserve Bank of India, State Financial Corporations, Industrial Development Corporation and other financial institutions are not engaged in banking operations. Therefore Rule 6DD(a) (of Income Tax Rules, 1962) applies only for payments to institutions referred to therein and not for payment made to any party's account maintained in the institutions referred to therein. In the circumstances, I reject the contention of the petitioner and uphold Ext.P6 order of the Commissioner of Income-tax confirming the assessment revised under Section 154 (of Income Tax Act, 1961).

3. The next contention raised by the petitioner is that cash remittances in the account of the suppliers were made by entrusting the cash to the truck drivers and therefore the same is covered by clause (l) of Rule 6DD (of Income Tax Rules, 1962). This contention is seen not pressed before the Commissioner. In any case, the truck drivers who brought the goods cannot be treated as petitioner's agent who is required to make payment in cash for the goods to the suppliers. In the circumstances, this contention is also rejected.

O.P. is dismissed as devoid of any merit.

(C.N. RAMACHANDRAN NAIR)

Judge