In the Finance Bill, 2007 the lawmakers have made a U-turn on Section 40A(3). This provision provides for not allowing business expenditures exceeding Rs 20,000 if paid otherwise than by an account-payee crossed cheque or bank draft.

About a decade ago, expenditure payments had to be made by crossed cheques or bank drafts, and if the payments were made otherwise, the entire expenditure was disallowed. The Finance Act, 1995 provided that only 20 per cent of the expenditure would be disallowed instead of 100 per cent. The Taxation Laws (Amendment) Act, 2006 had the additional compliance condition for allowance of expenditure by prescribing the mode of payment as account-payee crossed cheque or bank draft instead of the simple crossed cheques and drafts.

Norms tightened

And, now, the Finance Bill, 2007 is substituting the legal provision w.e.f. April 1, 2008, disallowing 100 per cent of the expenditure incurred if Section 40A(3) is violated payment otherwise than by account-payee crossed cheque or bank draft.

Previously, when the law provided for 100 per cent disallowance, the considerations such as nature and extent of banking facilities available and other business expediencies were given due weightage and, accordingly, clause (j) of Rule 6 DD provided the exceptions from disallowance, which were: i) exceptional or unavoidable circumstances; and ii) genuine difficulty to the payee having regard to the nature of the transaction, etc. Clause (j) of Rule 6 DD was omitted w.e.f. July 25, 1995, consequent to amendments to Section 40A(3), with disallowance of only to the extent of 20 per cent.

In the new Section 40A(3), banking facility, business expediency and other relevant factors will be considered for deciding on the exception. With advancement in technology, such as transfer of funds through core banking, Rule 6 DD, when subjected to change, must take into account the practical realities of business. In addition to e-filing and prescribing enclosures with the return contained in the newly inserted Sections 139 C and 139 D, the concept of delegated legislation is applicable for Section 40A(3).

A realistic amendment to tax provisions can be found in Section 36(1)(ib) dealing with payment of insurance on health of employees and Section 80D relating to mediclaim policy premium payment. Previously, the expenditures had to be settled by means of cheque only then would they be eligible for deduction. Now, the Finance Bill, 2007 states that payment by any mode other than cash is acceptable. Hence, the denial of deduction is possible only where the payment is made in cash.

Controversial amendment

One of the controversial amendments proposed relates to Section 9, wherein an explanation has been inserted taxing income of non-resident without considering his residence, place of business or business connection in India. This explanation is retrospectively inserted from June 1, 1976. As a corollary, the definition of the term `India' has been enlarged retrospectively. It is said that the amendments have upset the apex court decision in the Ishikawajima Harima Heavy Industries Ltd (158 Taxman 259) case. But when there is a conflict between double taxation avoidance agreement (DTAA) and the tax provisions, the former will prevail and, hence, the decision in the Ishikawajima case will remain unaffected even after the amendment.

V. K. Subramani
(The author is a an Erode-based chartered accountant.)