ATTAR SINGH GURMUKH SINGH versus INCOME TAX OFFICER, LUDHIANA ETC.

Citation: [1991] 3 S.C.R. 405 · Decided: 07-08-1991 · Supreme Court of India · Bench: K. JAGANNATHA SHETTY · Disposal: Dismissed

Judgment (excerpt)

ATIAR SINGH GURMUKH SINGH 
v. 
INCOME TAX OFFICER, LUDHIANA ETC. 
AUGUST 7, 1991 
[K. JAGANNATHASHETIY ANDYOGESHWARDAYAL, JJ.] 
Income Tax Act, 1961/lncome Tax Rules, 1962-Section 40A(3)/ 
Rule 6DD-Validity of-Applicability to payments made for acquiring 
stock-in-trade. 
The assessees in these appeals have made payments · in cash 
exceeding a sum of Rs.2500 for some of the purchases of stock-in-trade. 
So while computing the income of the assessees under the head "profits 
and gains of business" the assessing authority disallowed deduction on. 
account of such payments held to be in contravention of the terms of 
section 40A(3) of the Income Tax Act, 1961 read with the Rule 600 of 
the Income Tax Rules, 1962. 
The assessees have challenged the same. So in the instant case the 
question under consicteration before this Court is (i) the validity of 
section 40A(3) of the Act (ii) the applicability of section 40A(3) to pay-
ments made for acquiring stock-in-trade. 
Originally section 40A(3) required payments in respect of expen-
diture which exceeded Rs.2500 to be made by a" crossed cheque or 
crossed bank draft and by the Amending Act 1987 to remove hardships 
A 
B 
c 
D 
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to smaller assessees the said amount has been raised to Rs.10,000, 
Section 40A(3) begins with a non-obstante clause so the legislature hao 
made it clear that the provisions of section 40A(3) are overriding and 
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operate inspite of any thing to the contrary contained in any other 
provisions of the Act relating to the .computation of income under the 
head "profits and gains of business or profession". Sub-section (3) 
empowers the assessing authority to disallow as deduction of any exr 'n-
diture in respect of which payment is made in cash exceeding Rs.10,000 
otherwise than by a crossed cheque or crossed hank draft. 
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Rule 600 of Income Tax Rules, 1962 provides for cases and 
circumstances in which payment of a sum exceeding Rs.10,000 may be 
made otherwise than by crossed cheque or by a crossed demand draft. 
The assessees challenged on the ground that provisions of section 
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405 
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406 
SUPREME COURT REPORTS 
[ 1991] 3 S.C.R. 
40A(3) intend to restrict the business activities. 
Dismissing the appeals and Special Leave Petition, the Court, 
HELD: That section 40A(3) must not be read in isolation or to the 
exclusion of Rule 6DD. This section must be read along with the Role 
B 
6DD and if read together it is clear that the provisions of the section are 
not intended to restrict the business activities. It only empowers the 
assessing officer to disallow the deductions claimed as expenditure in 
respect of which payment is not made by crossed cheque or crossed 
bank draft. The same is insisted only to enable the assessing authority to 
ascertain whether it was out of the income from disclosed sources and 
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even the terms of section 40A(.3) are not absolute. Considerations of 
business expediency and other relevant factors are not excluded, since it 
is open to the assessee to furnish the circumstances under which the 
payment was not practicable or would have caused genuine difficulty to 
the payee. Rule 6DD provides tiltat an assessee can be exempted from 
the requirement of payment by a crossed cheque or crossed bank draft 
D in the circumstances specified under the rule. Thus section 40A(3) and 
Rule 6DD are intended to regulate the business transactions and to 
prevent the use of unaccounted money or reduce the chance to use black 
money for business transactions. Moreover while interpreting a taxing 
statute the Court cannot be oblivious of the proliferation of black 
money which is in circulation in our country. Thus any restraint 
E intended to use or create black should not be regarded as curtailing the 
freedom of trade or business. [409G-4!0E] 
The term expenditure as peir section 40A(3), means all outgoings 
including the expenditure incurred for purchasing the stock-in-trade. 
Since to determine the gross profits the value of the stock-in-trade has 
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to be taken into account. So payments can be disallowed if they are 
made in cash in the sums exceeding the amount s~~dfied under section 
40A(3) and also not provided for exemption under Rule 6DD. Thus 
section 40A(3) is attracted to payments made for acquiring stock-in-
trade and other materials. [410G-411A] 
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Sajowanlal Jaiswal v. CIT, [1976] 103 ITR 706 Orissa; U.P. 
Hardware Store v. CIT, [1976] 104 ITR 664; Allahabad; Ratan 
Udyog v. ITO, [1977] 109 I.T.R. l Allahabad

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