Pr. Commissioner Of Income Tax- 11 v. Shri Inder Pal Singh Wadhawan

$~99 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 260/2017 PR. COMMISSIONER OF INCOME TAX- 11..... AppellantThrough:Mr. Zoheb Hossain, Advocate. Versus SHRI INDER PAL SINGH WADHAWAN..... RespondentThrough:None. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRIO R D E R%28.03.2017 1.The Revenue in its appeal under Section 260A of the Income Tax Act,1960 (hereinafter to be referred as ‘the Act’) urges that the cancellation ofdisallowance under Section 40A(3) of the Act was, under the circumstancesof the case, erroneous. 2.The facts for the purpose of this appeal are that amongst otherexpenses, the assessee had for Assessment Years 2007-08 claimed to havemade payments to its suppliers.It relied upon the banker’s cheques/payorders issued for the purpose. The Assessing Officer was of the opinion thatbanker’s cheques were not covered in any of the provisions of Rule 6DD ofthe Income Tax Rules as they were the account payee demand drafts underSection 40A()3) of the Act. The Commissioner of Income Tax (Appeals) ITA 260/2017 Page 1 of 5 [CIT(A)] found that the expenses were genuine but agreed with theinterpretation of the AO, which was concurred with by the Tribunal. ThisCourt is of the opinion that the literal construction of Section 40A(3) soughtto be canvassed by the Revenue is narrow and contrary to the provisions ofthe Negotiable Instruments Act, 1881, especially Section 5 thereof.Furthermore in Punjab & Sind Bank Vs. Vinkar Sahakari Bank Ltd. &Ors. (2001) 7 SCC 721, the Supreme Court examined a somewhat similarsituation in the context of the banker’s cheque or banker’s demand draft andobserved as follows:- “7.The maker or the drawer of a bill of exchange mustdirect a “certain person” to pay a particular sum of money.This is the quintessence of a bill of exchange. LearnedSenior Counsel for the respondents contended that in everybill of exchange there must necessarily be three parties, themaker, the payee and the person to whom the direction isgiven to pay. As a draft or a pay order contains only twopersons i.e. the drawer and the payee, it is only aninstrument promising to pay a certain sum of money,according to the learned counsel. He made an endeavour toshow that a draft may at best be a promissory note but thebid made by him did not succeed as it is a difficult task tobring the draft or a pay order, as in this case, within thepurview of the definition of promissory note in Section 4 ofthe Act. The indispensable postulate for a promissory note isthat there should be an unconditional undertaking to pay acertain sum by the drawer. Such an undertaking cannot beread out from the impugned instrument. At any rate theinstrument involved in this case is closer to a bill ofexchange because of the unconditional order of its maker tothe person concerned “to pay a certain sum”. 9. In this context a reference to Section 85-A of the Act is ofadvantage. We may point out that the said section fallswithin Chapter VII under the title “Of discharge fromliability on notes, bills and cheques”.Section 85A dealswith drafts drawn by one branch of a bank on anotherbranch of the same bank. The section says that: “85-A.Where any draft, that is, an order to pay money,drawn by one office of a bank upon another office of thesame bank for a sum of money payable to order on demand,purports to be endorsed by or on behalf of the payee, thebank is discharged by payment in due course.” It is evident that the section renders such draft a negotiableinstrument. 10.Section 131A, which was introduced in the statuteby Act 33 of 1947, makes all the provisions for crossing ofcheques applicable to the drafts also. That section says: “131-A. The provisions of this Chapter shall apply to anydraft, as defined in Section 85-A, as if the draft were acheque.” “85-A.Where any draft, that is, an order to pay money,drawn by one office of a bank upon another office of thesame bank for a sum of money payable to order on demand,purports to be endorsed by or on behalf of the payee, thebank is discharged by payment in due course.” It is evident that the section renders such draft a negotiableinstrument. 10.Section 131A, which was introduced in the statuteby Act 33 of 1947, makes all the provisions for crossing ofcheques applicable to the drafts also. That section says: “131-A. The provisions of this Chapter shall apply to anydraft, as defined in Section 85-A, as if the draft were acheque.” Learned counsel for the first respondent contended that thesaid section is more in favour of the position that a draft isotherwise not a cheque and it is declared to be a chequeonly for the limited purpose of Chapter XIV which dealswith “crossed cheques”. We are unable to agree with thesaid contention that Section 131A is intended to limit theoperation of a draft as a cheque only for crossing purposes.In our view, the said section is intended to widen the scopeof crossed drafts as to contain all incidences of a crossedcheque. This is for the purpose of foreclosing a possibility ofholding the view that draft cannot be crossed. 11.Even if it is possible to construe the draft either asa promissory note or as a bill of exchange, law has giventhe option to the holder to treat it as he chooses. This can bediscerned from Section 17 of the Act which says: “17.Wherean instrument may be construed either as a promissory noteor bill of exchange, the holder may at his election treat it aseither, and the instrument shall be thenceforward treatedaccordingly.” This means once the holder, which in this case is thecomplainant Bank, has elected to treat the instrument as acheque it cannot but be treated as a cheque thereafter. Thisis an irretrievable corollary of exercising such an electionby the holder himself. 12.The House of Lords had to consider whether abanker’s draft payable to order on demand addressed byone branch of a bank to another branch of the same bank, inthe wake of Section 82 of the Bills of Exchange Act 1882.While holding that such a draft is not a cheque within themeaning of Section 60 and 82 of the said Act Lord Lindleymade the following observations in Capital and CountiesBank vs. Gordon (1903 AC 240): “But I agree with the Court of Appeal in thinking that thebank,whichisbothdraweranddraweeoftheseinstruments, is not entitled to treat them as bills of exchangeas defined in Section 3 of the Bills of Exchange Act,although a holder may sue the bank upon them, and treatthem either as bills of exchange or as promissory notes.” 3.The Court also went on to hold that a complaint is maintainable underSection 142 in the event a banker’s cheque is dishonoured. This Court also ITA 260/2017 notices that the expression used in the Income Tax itself is “a bill ofexchange”, which is a class of instruments, that cannot be ignored ordisallowed by virtue of Section 40A(3) read with Rules 6 DD of the IncomeTax Rules. 4.For the above reasons, no substantial question of law arises.Theappeal is therefore, dismissed. S. RAVINDRA BHAT, J. MARCH 28, 2017sb NAJMI WAZIRI, J. ITA 260/2017