1991 (4) TMI 114 - HC - Income Tax

Summary

Issues Involved:
1. Whether payments made for the purchase of stock-in-trade amount to expenditure within the meaning of section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962.

Summary of Judgment:

Issue 1: Applicability of Section 40A(3) to Payments for Stock-in-Trade
- Facts of the Case: The assessee, a registered firm dealing in hardware, made payments exceeding Rs. 2,500 in cash for the purchase of goods from M/s. Jamunalal Mangilal and Co. The Income-tax Officer added Rs. 83,100 to the assessee's income under section 40A(3) for making payments in cash instead of crossed cheque or bank draft. The assessee argued that these payments were genuine and made for mutual convenience.

- Appellate Proceedings: The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal held that payments for the purchase of trade articles do not amount to expenditure deductible from net profit, thus section 40A(3) was not applicable. The Tribunal upheld this view, leading to the Revenue's appeal to the High Court.

- Legal Interpretation: The main question was whether payments for stock-in-trade can be considered as "expenditure" under section 40A(3). The High Court examined the meaning of "expenditure" and "payments in respect of any expenditure" and concluded that payments for stock-in-trade are not considered as expenditure since they are recoverable through sales and form part of business assets.

- Precedents and High Court Decisions: The judgment reviewed various High Court decisions that interpreted "expenditure" broadly to include payments for stock-in-trade. However, it disagreed with this interpretation, emphasizing that section 40A(3) applies only to payments for expenditure incurred, not all payments made by an assessee.

- Conclusion: The High Court held that section 40A(3) does not apply to payments made for the purchase of stock-in-trade as such payments do not constitute expenditure incurred. The question referred was answered in the negative, in favor of the assessee.

Final Decision: The High Court concluded that section 40A(3) does not apply to payments made for the purchase of stock-in-trade. The question was answered in favor of the assessee, with no order as to costs.