Thursday 20 December 2018

HC: No Sec. 40A(3) disallowance for payment by non-crossed drafts, once payee’s account credited


Karnataka HC reverses ITAT order, deletes disallowance u/s. 40A(3) for payments made by assessee (a manufacturing company) to vendors by non-crossed bank drafts during AY 2005-06; Notes that Revenue had disallowed the expenses only on the grounds that the drafts were not crossed as mandated by Sec.40A(3) read with Rule 6DD, but had not disbelieved the genuineness of purchases; Further notes that the documents such as registered dealer invoices, transit documents, freight charges paid, vendors’ sales tax returns, letters from bank indicated that the purchases were genuine and payments made to vendors were credited to their respective bank accounts; Cites the main objective of crossing a demand draft is to ensure that the payment is deposited in whose favour the draft is drawn (i.e. the payee receives the payment) and it is routed through banking channels, noting that both the conditions were met in the present case, ITAT holds that the spirit for which Sec.40A(3) was promulgated is satisfied; Moreover, acknowledges assessee’s contention that normally suppliers require drafts for quick realization, and hence non-crossed drafts were issued, relies on SC judgment in Attar Singh Gurmukh Singh.:HC

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