Appeal No 11 of 1991
From the Judgment and Order dated 15101979 of the Punjab and Haryana High Court in CQP No 1009 of 1974
WITH Civil Appeal Nos
275279 110576 29  98587 495089 103279 333183 SLP CivilNo 1580 CMP
No 135080 and CA No 1425 of 1976
B Sen GC Sharma SK Mehta CS Aggarwal BV
Desai Ms Radha Rangaswamy KC Dua Umesh Khaitan Dar shan Singh
Praveen Kumar MM Kashyap and SK Bagga for the Appellants
J Ramamurthy BB Ahuja and Ms A Subhashini for the Respondents
The Judgment of the Court was delivered by K JAGANNATHA SHETTY J
The assessees in these appeals have made payments in cash exceeding a sum of Rs2500 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 40A3 of the Income Tax Act 1961 read with the 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 40A3 of the Act and ii The applicability of Section 40A3 to payments made for acquir ing stock in trade
Section 40A3 so far as material provides 40A Expenses or payments not deductible in certain circumstances 1 The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head Profits and Gains of business or profession
XXX XXX XXX XXX 408 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 speci fied in this behalf by the Central Government by notification in the Official Gazette in a sum exceeding ten thousand 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 XXX XXX XXX Provided further that no disallow ance under this subsection 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 such cases and under such circum stances as may be prescribed having regard to the nature and extent of banking facilities available considerations of business expedi ency and other relevant factors Originally Section 40A3 required payments in respect of expenditure which exceed Rs2500 to be made by a crossed cheque or a crossed bank draft
On failure to do so the payments made were disallowed in the computation of income
In order to remove hardship to smaller assessees the Amending Act 1987 has raised this ceiling to Rs 10000
Section 40A3 begins with a non obstante clause
It is an overriding provision which operates inspite of any thing to the contrary contained in any other provision of the Act relating to the computation of income under the head profits and gains of business or profession
The legisla ture has thus made it clear that the provisions of Section 40A will apply in supersession of other contrary provisions of the Act relating to the computation of income
Sub sec tion 3 empowers the assessing officer to disallow as a deduction any expenditure in respect of which payment is made of any sum exceeding Rs 10000 otherwise than by a crossed cheque or crossed bank draft
Rule 6DD of the Income Tax Rules 1962 refers to cases and circumstances in which payment of a sum exceeding Rs 10000 may be made otherwise than by a crossed cheque or by a crossed bank draft
The Rule so far as it is relevant reads 6DD
Cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise 409 than by a crossed cheque drawn on a bank or by a crossed bank draft No disallowance under sub section 3 of Section 40 A shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder namely XXX XXX XXX XXX j in any other ease where the assessee satisfies the Assessing 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 circum stances 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 satisfac tion of the Assessing Officer as to the genu ineness of the payment and the identity of the payee
 As to the validity of Section 40A3 it was urged that if the price of the purchased material is not allowed to be adjusted as against the sale price of the material sold for want of proof of payment by a crossed cheque or crossed bank draft then the income tax levied will not be on the income but it will be on an assumed income
It is said that the provision authorising levy tax on an assumed income would be a restriction on the right to carry on the business besides being arbitrary
In our opinion there is little merit in this conten tion
Section 40A3 must not be read in isolation or to the exclusion of Rule 6DD
The Section must be read along with the Rule
If read together it will be clear that the provi sions are not intended to restrict the business activities
There is no restriction on the assessee in his trading activities
Section 40A3 only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft
The payment by crossed cheque or crossed bank draft is insisted on to enable the asses 410 sing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources
The terms of Section 40A3 are not absolute
Consideration of business expediency and other relevant factors are not excluded
The genuine and bona fide transactions are not taken out of the sweep of the Section
It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40A3 was not practicable or would have caused genuine difficulty to the payee
It is also open to the assessee to identify the person who has received the cash payment
Rule 6DD provides that an asses see can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule
It will be clear from the provi sions of Section 40A3 and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions
See Mudiam Oil Company vs ITO AP
If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain when deduction is claimed whether the payment was genuine and whether it was out of the income from disclosed sources
In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black money which is under circulation in our country
Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business
As to the second question it may be stated that the word expenditure  has not been defined in the Act
It is a word of wide import
Section 40A3 refers to the expenditure incurred by the assessee in respect of which payment is made
It means all outgoings are brought under the word expenditure  for the purpose of the Section
The expendi ture for purchasing the stock in trade is one of such outgo ings
The value of the stock in trade has to be taken into account while determining the gross profits under section 28 on principles of commercial accounting
The payments made for purchases would also be covered by the word expendi ture  and such payments can be disallowed if they are made in cash in the sums exceeding the amount specified under section 40A3
We have earlier observed that Rule 6DD has to be read along with Section 40A3
The Rule also contem plates payments made for stock in trade and raw materials
This Rule is in accordance with the terms of Section 40A3
The Rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are 411 made of certain agricultural or horticultural commodities or from a village where there is no banking facility
Section 40A3 is therefore
attracted to payments made for acquir ing stock in trade and other materials
This is also the view taken by several High Courts
See  Sajowanlal Jaiswal vs CIT Orissa UP Hardware Store vs CIT Allahabad Ratan Udyog vs ITO Allahabad PR Textiles vs CIT Kerala 19801 Kerala CIT vs Kishan Chand Maheswari Dass P  H Kanti Lal Purshottam and Co vs CIT Raj CIT vs New Light Tin Mfg Co P  H Fakri Automobiles vs CIT Raj Venkata Satayanarayana Timber Depot vs ITR AP and Akash Films vs CIT Karnataka
The decisions of the High Courts of Andhra Pradesh Orissa Allahabad Kerala Karnataka Punjab  Haryana Rajasthan and Patna are to the effect that the payments made for purchasing stock in trade or raw materials should also be regarded as expenditure for the purpose of Section 40A3
The only discordant note struck on this aspect is by the Gauhati High Court in CIT vs Hardware Exchange The Gauhati High Court has observed that Section 40A3 applies only to payments made on account of expenditure incurred  and the payment made purchase of stock in trade cannot be termed as expenditure incurred since money does not go irretrievably in such cases
We are unable to agree with the view taken by the Gauhati High Court
In this view of the matter we dismiss all these appeals and special leave petition with costs
SB Appeals dismissed


Summary:
The appellant company was ordered to be wound up in 1949
In the course of its winding up the liquidator sold certain assets of the company and invested the sale proceeds thereof in fixed deposits with certain banks
The liquidator incurred certain expenditures on salaries legal fees travelling expenses postage and stationery
The assessee company claimed a deduction of the said expenses from the interest income
The ITO did not allow it and assessed the entire interest income as taxable us 56 of the Income Tax Act 1961 under the head Income from other sources
The assessment orders were confirmed by the Appellate As sistant Commissioner and by the Income Tax Appellate Tribu nal in appeal
On a reference by the Tribunal the High Court held that the income from fixed deposit was income from other sources and it disallowed deduction of the expenditure section 57iii on the ground that the expenses claimed were not related to the earning of the interest income
Aggrieved the assessee companY preferred appeal by special leave to this Court
On the questions whether 1 in effecting the sale and realisation of the assets of the Company in liquidation and investing the same in fixed deposits the liquidator was engaged in the business of the company and the interest income was a business income taxable us 28 of the Act and not under section 56 under the head Income from other sources and 2 the expenses incurred by the liquidator were in curred solely for the 384 purpose of earning the interest income so as to claim deduc tion section 57iii
Dismissing the appeal this Court HELD 1
The Liquidator in merely realising the assets of the Company could not be considered as carrying on any business of the Company
387G 2
In the instant case the company before its liquida tion was engaged in the manufacture of sugar
The records did not disclose that the liquidator was carrying on the business of manufacture of sugar or  any trading activity for the purpose of facilitating the winding up
The only accepted fact was that the interest income was derived from fixed deposits purchased out of the proceeds of sale of assets during winding up
The assessee could not be said to have carried on any business to bring the interest income within the meaning of section 28 of the Act and therefore the interest income was liable to be assessed only under the head Income from other sources
The Tribunal was there fore right in holding that the interest income in the instant case was not governed by section 28 but fell to be con sidered under section 56
387F 388B C 389A B Vijay Laxmi Sugar Mills Ltd vs Commissioner of Income Tax Delhi Central All affirmed
Morvi Mercantile Bank Ltd vs Commissioner of Income Tax Gujarat Guj approved
31 In computing the income chargeable under the head Income from other sources requirement under section 57iii of the Act is that the expenditure should have been incurred for the purpose of making or earning such income and the deduction is to be made in respect of expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income
389C D  G 32 It is true that the connection between the expendi ture and the earning of income need not be direct and it may be indirect
But since the expenditure must have been in curred for purpose of earning that income there should be some nexus between the expenditure and the earning of the income
389D E 33 The interest accrues sui generis
The interest is payable by the bank whether it is claimed or not and whether there is any establishment or not
389E F 385 34 In the instant case there could be no doubt that the expendidure incurred by the liquidator can by no stretch be said to have been incurred with the object or for the pur pose of earning the interest income
It could not be said that the expenditure incurred was to preserve or acquire the asset
Nor could it be said that the expenses were incurred for the purpose of maintenance of the source
The Tribunal was therefore right in holding that the expenses claimed were not related to the interest income and was not a de ductable expenditure under section 57
390A B 389G