The Hindu Business Line : Banking channel can be bypassed after all

Section 40A(3) of the Income-Tax Act, 1961 is one of those legal provisions that curiously contain their own seeds of destruction. So much so, in its more than three decades of existence, it has remained a butt of joke what with businessmen getting around its rigors with consummate ease.

Its avowed aim is laudable though — encouraging banking culture by providing for positive disincentives against cash payment. It frowned on cash payment by disallowing 20 per cent of the expenses paid for otherwise than by a crossed cheque or demand-draft if each such payment was for an amount exceeding Rs 20,000. Last year, the belts were further tightened by insisting on account payee cheque/demand-draft given that crossed cheques can be further negotiated thus frustrating the object of the law — to trace and if necessary buttonhole the recipient of the payment.

A good move

The amendment insisting on account payee cheque/draft was a good move notwithstanding the aberration that rocked the banking sector in the early 1990s — Harshad Mehta, who masterminded a banking scam of epic proportions got account payee cheques drawn on others endorsed in his favour and received the amounts. The government followed up last year's amendment with another sensible amendment — 100 per cent disallowance if the banking channel is bypassed against the extant piffling 20 per cent disallowance, perhaps in response to the carping criticism in knowledgeable quarters that the law cannot condone an irregularity to the extent of 80 per cent and condemn it only up to the remaining 20 per cent. Despite all these, the law is condemned to remain effete and impotent.

The solemn dictates of the Section did not deter anyone earlier from bypassing the banking system nor is it going to. The following explain the derision bordering on disdain one harbours for the Section:

The Section does not do anything to deter splitting of bills in such a way that no bill is for more than Rs 20,000;

The Section does not do anything to deter feigned innocence in making multiple payments even during the course of the same day so long as each such payment was for less than Rs 20,000 against a bill admittedly for more than Rs 20,000.

These escape routes, not plugged so far despite adverse judicial verdicts frustrating the I-T Department, have come as manna from the heaven for those intent on bypassing the banking system. The Finance Bill, 2007 has not done anything to seal these escape routes. What is the point in providing for a hundred percent disallowance instead of a twenty percent disallowance as hitherto when through the same expedients, one can duck the rigors of the section?

Reading the riot act

The government ought to have removed the latitude to make cash payments up to Rs 20,000, period. This would have read the riot act. And there is no way anybody can protest because what it would mean is everyone dealing with the company financially must have a bank account which by no stretch of imagination is a big deal or an onerous burden.

The Section empowers the CBDT to notify rules to relax the rigor of this Section. One of the relaxations is payment made on a day on which the banks were closed either on account of holiday or strike. This is another escape route, which the cunning businessmen lap up with alacrity. While strikes defy prediction, bank holidays do not. And this makes their task laughably simple. By design, fix the due date of payment so it falls on the weekly holiday of the branch! One hopes this kind of leeway is not afforded when the CBDT makes fresh rules for the purpose following the replacement of the old section 40A(3) by a new one by the Finance Bill, 2007.

(The author is a New Delhi-based chartered accountant.)

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