Section 40A (3) disallowance applicable to payment by means of crossed cheque
The Gujarat High Court in a recent judgment pronounced on 26.4.2014 in the case of Rajmoti Industries vs. ACIT, held that payment through any crossed cheque is subject to disallowance under section 40A (3) of the Income Tax Act.
To understand the difference between a “crossed cheque” and “account payee” cheque first of all one should learn the concept of Endorsements. As per section 15 of the Negotiable Instruments Act 1881 endorsing is signing on an instrument for negotiating a negotiable instrument like cheque.
A person signing the cheque is an endorser and to whom it is transferred is an endorsee. The endorsee gains a right to negotiate the instrument to another person. By making an endorsement the endorser gives a guarantee to compensate the holder if the same is not encashed due to any fault on his part.
What is “crossed cheque”?
Crossing a cheque by marking two parallel lines is general crossing.
What is “account payee cheque”?
The Negotiable Instruments Act 1881 does not define the account payee crossing. It is practically a banking practice. Making a cheque account payee is a result of practice which is accepted legally. An account payee cheque cannot be further endorsed.
Disallowance under Section 40A (3) of the Income Tax Act:
No deduction is allowed for which a payment or collection of payments amounting to more than Rs. 20,000/- are made to a person in one day by a method other than an account payee cheque of a bank or by an account payee bank draft.
The disallowance under Section 40A (3) is important for calculating income under the head “income from business or profession” and due to Section 58(2) these provisions are also applicable to calculation of income under the head “income from other sources”.
The section has over the last few years undergone various changes and by virtue of the Finance Act of 2008 many changes in the total scheme of Section 40A (3) have been enforced. Many issues in connection with Section 40A (3) have been settled through many recent amendments.
The term which was used in Section 40A (3) was “crossed cheque or a crossed bank draft”. This has been amended and has been replaced by the term “an account payee cheque or account payee bank draft”. This was done due to the experience that people are endorsing even crossed cheques in favor of a person other than the drawee for which it is becoming hard to track the ingredient of the money.
To fill up this loophole the essentials of section 40A (3) have been made more stringent. Now we cannot accept the argument of the counsel for an assessee that there was no difference between a crossed cheque and an account payee cheque, as it would be obliterate this amendment.