Business Daily from THE HINDU group of publications
Saturday, May 05, 2007
ePaper
Business Daily from THE HINDU group of publications Saturday, May 05, 2007 ePaper |
|
|
|
|
|
|
|
|
|
|
Home Page
-
Financial Policy Opinion - Taxation Cash no longer carries T. C. A. Ramanujam
THE DISALLOWANCE clause is a strong disincentive for cash payment in transactions worth over Rs 20,000.
The tax law tries to prevent transactions in cash. Even loans can be made or repaid only by account payee cheques/drafts if the amount exceeds Rs 20,000. Violation of this provision will invite stiff penalty. Business transactions involve heavy expenditure, and Section 40A(3) of the Income-Tax Act, 1961 lays down that wherever payment is made in cash or by bearer cheques for this purpose, there will be a disallowance of 20 per cent of the expenditure incurred. The Section was brought in by Finance Act, 1968. At that time, the law provided for 100 per cent of disallowance of such expenditure. This was considered too drastic. From the Assessment year 1996-97 onwards, the disallowance has been at 20 per cent of such expenditure.
Anti-evasion measure
This was meant to be an anti-evasion measure. Whether it is proprietary or partnership or corporate business, one easy mode of reducing taxable profits can be by inflating expenditure. This is easily done by claiming cash payments. Restricting the disallowance to 20 per cent of the claim for deduction of business expenditure was considered lenient. The taxpayer can still inflate his claim and get away with substantial allowance even after the 20 per cent disallowance. Thus, the Finance Bill, 2007 amends Section 40A(3) to restore the old law of 100 per cent disallowance of payments made otherwise than by an account payee cheque/draft. Exceptional circumstances are taken care of by vesting powers in the Central Board of Direct Taxes to allow expenditure having regard to: The nature and extent of banking facility available, Business expediency considerations, and Other relevant factors. This disallowance provision that has been on the statute book from 1968 has quite a few case laws vis-à-vis the interpretation of various aspects of the Section. The Supreme Court itself had said that the word "expenditure" is of wide import and will take in all outgoings, including payments made for purchase of stock-in-trade and raw materials. However, it needs to be emphasised that the disallowance contemplated under the law relates only to actual payment by means otherwise than by account payee cheque/draft. In adjustment of cross-claims, settlement in accounts book, or set-off involving no payment in cash, the question of disallowance cannot arise. Rule 6DD purports to deal with the case of payment by way of adjustment. There is a controversy on the interpretation of this Rule. The issue, the authorities point out, was not argued before the Supreme Court in the appeal in the case of Attar Sing vs. ITO 191 ITR 667 SC. Rule 6DD contains exceptions to Section 40A(3). Payments made to cultivators, growers or producers of agricultural products are exempted from the operation of the Rule. Clause (j) provided that the provision will not apply to any payment where the assessee satisfies the Assessing Officer that the payment could not be made as per statutory requirements due to exceptional or unavoidable circumstances or because payment in the manner prescribed was not practicable and would cause genuine difficulties to the payee. This clause was omitted with effect from July 25, 1995.
Exceptions to the Rule
The latest Finance Bill vests in the Board powers to prescribe circumstances warranting exemption from the operation of the law. The Board prescribed various circumstances in Circular No.220 of May 31, 1977. Courts have interpreted the Circular to mean that the illustrations given therein are only illustrations and there can be other situations where the bona fides of the payment may have to be looked into before attempting a disallowance. It is for the taxpayer to prove the genuineness of the transaction and the existence of circumstances warranting payment by cash. The identity of the payee will have to be established. Courts have interpreted the Section and the Rule in a liberal way. Payments made after the close of banking hours or to new parties or transactions between persons not having a bank account, were all considered by the Courts as falling outside the ambit of the disallowance provision. It is also possible that a supplier will insist on cash payment if an earlier cheque given by the buyer was dishonoured. Cash payments to lorry drivers were also held as not disallowable. Assessment of income by estimate of gross profit will be outside the purview of Section 40A(3). It is to be hoped that the Board will frame Rules taking into account the established case law on the subject. (The author is a former Chief Commissioner of Income-Tax.)
More Stories on : Financial Policy | Taxation | Budget
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | The Hindu ePaper | Business Line | Business Line ePaper | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2007, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|
