1. As directed by this court the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question to us:
'Whether, on the facts and in the circumstances of the case, Section 40A(3) of the Act is applicable to the facts of the present case ?'
2. The brief facts are these. M/s. H.A. Nek Mohd. & Sons, a registered firm, was engaged in the business of purchase and sale of Banarasi sarees.During its assessment for the assessment year 1970-71, the ITO found that the assessee had made the following payments exceeding Rs. 2,500 at a time to 12 parties for purchase of resham, etc.:
Mr.Gopal Das Lalta Pd.
M/s. BurmaSilk Centre
M/s.Gopal Das Lalta Pd.
M/s.Gopal Das Lalta Pd.
M/s.Jawahar Silk Centre
3. Some of the payments had been made by post-dated bearer cheques, received from the customers and some in cash. When called upon to explain the circumstances in which these payments were made, the assessee explained that it was ignorant of the relevant provisions of the I.T. Act and Rules. It did not produce any evidence in this behalf and hence the ITO added the total amount of such payments amounting to Rs. 49,902, in round figures, under Section 40A(3) of the Income-tax Act.
4. On appeal, the AAC being of the opinion that none of these payments had exceeded Rs. 2,500 in cash at a time, held that the provision contained in Section 40A(3) was not applicable and hence deleted the addition. The department then took up the matter in appeal before the Appellate Tribunal. In the opinion of the Tribunal since the payments by postdated cheques and in cash were made on the same date and the sum so paid exceeded Rs. 2,500 at one time, it was a clear device to defeat the provisions contained in Section 40A(3) and that being so restored the addition.
5. We were referred to the details of the disputed payments which are contained in annex. 'A' to the statement of the case and they go to show that the payment made in cash at one time did not exceed the statutory amount of Rs. 2,500. Of course, if the amount paid in cash is added to the amount mentioned in the post-dated cheques received by the assessee from the customers. the total amount exceeds the above figure, paid at one time. The question, however, is as to whether payment made by a post-dated cheque is a payment made on the date on which the cheque is given or it would be a payment made on the date on which the cheque matures and is encashed. We do not think that it admits of any doubt that payment by post-dated bearer cheques is a recognized mode of making payments in business circles. It is certainly not a device to defeat any provision of law and the view taken by the Appellate Tribunal is absolutely erroneous. What Sub-section (3) of Section 40 requires is that where the asses-see incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. This Sub-section, thus, enjoins a particular mode for making payments in a sum exceeding Rs. 2,500 at a time. Now, such payment is required to be made either by a crossed cheque drawn on a bank or a crossed bank draft. If a payment in a sum exceeding Rs. 2,500 at a time is made in cash, such expenditure is liable to be disallowed. It would be clear from the details of the disputed payments that the amount paid in cash at one time did not exceed Rs. 2,500. Some of the payments were made by post-dated bearer cheques as well. If these cheques were not post-dated, then certainly these payments would have been caught within the mischief of this provision. They were, however, made by post-dated bearer cheques. In other words, they were not payments made on the date on which the cheque was issued or given. The payment of the money mentioned therein would be taken to have been made on the date on which the cheque matured and was encashed. The AAC was, thus, right in holding that Section 40A(3) was not attracted to the disputed payments and the Appellate Tribunal in taking a contrary view acted against the provisions of law.
6. We, therefore, answer the question in the negative, in favour of the assesses and against the department. The assessee is entitled to costs which we assess at Rs. 250.