Several laudable and well-intentioned amendments have been made to Section 40A (3) of the Income-Tax Act, 1961 over the years on a piecemeal basis. First, insistence on payment through banking channels of an amount exceeding Rs 20,000 was made more meaningful by further insisting on the cheque or demand draft being crossed account payee so as to be able to reach out to the payee quickly which was considerably frustrated when a mere crossed cheque or demand dr aft was accepted as good enough.
A non-account payee crossing permitted its negotiability, thus tying the I-T department in knots and leaving them running in a blind alley. The regime was made more meaningful when the rather quixotic penalty of disallowing just 20 per cent of payments made otherwise than by a crossed cheque or DD was replaced by a penalty that disallows the entire payment.
But the department was still hamstrung because courts bailed out the delinquents when they pulled wool over everyones eyes by recording several payments during the course of the day with each one not being for more than Rs 20,000.
The Finance Act, 2008 has plugged this loophole as well so much so that what matters now are payments made during the course of a day to a person. If the aggregate is more than Rs 20,000, it would attract the axe.
Has the department cleared all the decks? Unfortunately, the answer is no. Those intent on making cash payments in excess of Rs 20,000 in the course of a day have still a ridiculously simple expedient at their disposal. What was earlier spread during the day would now be spread during the course of the week. In other words, the department would continue to be frustrated in carrying its battle into the black money camp.
What then is the solution? No law should be made which has got in-built loopholes because government should not be made to look sheepish or foolish. The fertile loopholes still bedevilling the regime are mainly two splitting the cash payment over several days as pointed out above and the latitude granted in permitting cash payments when the due date for payment happens to be a bank holiday or when the bank is closed due to strike.
This latitude should be done away forthwith because even if the bank is closed that day the cheque can always be presented the next day for collection given the fact that a crossed cheque after all is not going to be paid by the bank across the counter in cash.
Leeway being exploited
Experience shows that this leeway granted by Rule 6DD is being exploited to the hilt by the deviants so much so that the severity of the main provision stands considerably diluted and undermined. Simultaneously, the fixation with Rs 20,000 should be given up.
In cities and towns where there is banking facility there is no reason why leeway up to Rs 20,000 should be given. The only leeway given should be for petty cash payments to auto rickshaws, taxis etc.
In other words, the norm should be routing of all payments through banking channels. The only two exceptions brooked should be petty cash payments with their list being carefully drawn and payments to residents living in places where there is no banking facility.
For, experience shows that if you give an inch, the deviants take a foot. They have played with the magic figure of Rs 20,000 cleverly all these years and would continue to do so unless the government reads the riot act.
S. Murlidharan (The author is a Delhi-based chartered accountant.)