Date of payment of tax by cheque: Whether tender date or clearing date?
September, 08th 2006
In terms of provisions of Income-Tax Act, 1961 (Act) the payment of taxes i.e. advance Income-Tax, fringe benefit tax, tax deducted/ collected at source are to be made before the specified due dates and even a day's delay in payment attracts penal interest or may lead to disallowance of expenses in tax assessments/ returns. In cases where taxes are paid through cheque, the date of payment could be the date of tender of cheque to the authorised banker or the date of clearance of cheque from the payer's account. In view of conflicting judicial precedents it is important to be aware of the legal position on the matter and issues involved.
As a background to the issue it may be mentioned that prior to June, 1983 payments to government account were regulated by Central treasury rules (erstwhile rules) which provided that in case of realised cheque, the payment date would relate back to date of presentation of the cheque with the banker.
These rules were subsequently replaced by Central Government Account (Receipts & Payment) Rules,1983 (Rules) in June, 1983 which provided that in such cases, the date on which the cheque is cleared and entered in receipt scroll would constitute the date of payment.
During the period when the erstwhile rules were in force, the Central Board of Direct Taxes (CBDT) had issued Circular No. 261 dated August 8, 1979 clarifying a similar position i.e. in case of realised cheques, the date of payment would relate back to date of presentation of the cheque with the banker. Interestingly, the above circular has not been withdrawn after insertion of the rules and continues to remain in force.
However, on a conjoint reading of Circular and Rules, the apparent conflict between the two is clearly evident, which has resulted in the controversy as to what would be construed as 'date of payment'. The above conflict has been duly noticed by Authority for Advance Ruling, while rendering decision in AAR No. P 2 of 1994 reported in 221 ITR 172.
Independent of the Rules, it may be mentioned that the Act authorises the CBDT to issue circulars and clarifications for proper administration of the Act and the authorities employed in execution of the Act are bound to observe and follow such instructions. The binding nature of circulars issued by the CBDT on the tax department has been time and again affirmed by judicial authorities, as recent as by the apex court in the case of UCO Bank reported in 237 ITR 889. Thus, as far as the matter relates to execution, administration of the Act, the position clarified in circular may be construed as binding on Income-Tax authorities in preference to any other executive instructions issued by any other authorities.
Further, the issue regarding 'date of payment' of tax in case of payment through cheque was subject matter of consideration before the Chennai Tribunal in case of PL Haulwel Trailers Ltd reported in 100 ITD 485, wherein the tribunal has affirmed the position that in case of payment of tax by cheque, the date of presentation should be taken as date of payment. While rendering its decision, the tribunal has duly considered the conflict between the Rules, Circular and the provisions of Negotiable Instruments Act, 1881.
Other than upholding the binding nature of the Circular, the tribunal has observed that under the Negotiable Instruments Act, 1881 it has been held that once the cheque is encashed in ordinary course, it will discharge the drawer from payment, and thus there exists an apparent conflict between interpretation of Negotiable Instrument Act, 1881 and the Rules which have been framed by executive authorities in exercise of powers under Article 283(1) of the Constitution of India.
The tribunal has thereafter, held that in such a scenario, the law enacted by the Parliament would prevail i.e. Negotiable Instruments Act, 1881 would prevail over the Rules.
Though the reasoning given by the tribunal appears to be on a strong footing, the matter is likely to be disputed by the tax authorities at various levels, until the position is further clarified by the CBDT.
The author is a senior tax professional with Ernst & Young