S. 40A(3) Cash Payment allowable if necessary to ensure smooth functioning of business

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HIGH COURT OF DELHI

R.C. Goel

v.

Commissioner of Income-tax

IT APPEAL NO. 636 OF 2012

DECEMBER 4, 2012

 

The assessee engages itself in executing catering contracts for Railways in respect of two trains. In those trains, its personnel are deployed for sale of small articles of daily necessity and use to the passengers. Per force, the payments received by them are necessarily in cash. These amounts are collected and in turn handed over to the assessee.The assessee in terms of its contract is bound to maintain constant supplies in the trains and ensure that at no point in time can the passengers be deprived of these articles (which are food articles, soft drinks and other items necessary for travel). In the course of such transactions, it sources these articles from ‘S’. Apparently, that concern is also a small time one and insists on cash payments for ensuring continuity and timely supplies. Whilst, the Court is conscious and does not in any manner wish to comment adversely on the larger public interest element embedded in section 40A and the underlying principle, at the same time, the Court also notes that the proviso seeks to relieve to a certain extent, the measure of hardship which might be imposed upon small businesses and professionals who are engaged in activities and are dependent entirely on timely cash flow. It is in such cases that rule 6DD – which was formulated as a proviso to section 40A(3) – steps into aid such assessees and concerns. In this context, the statutory mandate in rule 6DD(k), at least in the circumstances of the case, has to be so construed as to mean that but for the cash payment, the assessee would have been deprived of the benefit of supplies itself. The High Court clarifies that the interpretation of the expression ‘who is required to make payment in cash’ having regard to the circumstances of the case is fact dependent, at least in the present case. The consequence of instances of payment through account payee cheques in small business which are dependent on such supplies would be to completely stifle, if not stop, the business activities. It is in that sense that the expression ‘required’ would have to be construed. [Para 9]

In view of the above discussion, the High Court is of the opinion that having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of rule 6DD(k), the benefit of which the assessee clearly was entitled to. The question of law is accordingly answered in favour of the assessee and against the revenue.