1991 (8) TMI 5 - SC - Income Tax

Payments in cash exceeding a sum of Rs. 2, 500 for some of the purchases of stock-in-trade. - the payments are not allowed as deductions in the computation of income under the head Profits and gains of business . The payments are held to be in contravention of the terms of section 40A (3) - validity of section 40A(3) - applicability of Section 40A(3) to payments made for acquiring stock-in-trade

Summary

Issues:
1. Validity of section 40A(3) of the Income-tax Act, 1961.
2. Applicability of Section 40A(3) to payments made for acquiring stock-in-trade.

Analysis:

Validity of section 40A(3):
The judgment addresses the contention that section 40A(3) of the Income-tax Act, 1961, which disallows deductions for payments exceeding a specified amount made in cash, is arbitrary and restricts the right to carry on business. The court clarifies that section 40A(3) must be read in conjunction with rule 6DD, which provides exceptions and circumstances where payments exceeding the specified amount can be made in cash. The court emphasizes that the provision aims to regulate business transactions, prevent the use of unaccounted money, and curb black money circulation. It highlights that genuine transactions can still be claimed as deductions if the assessee satisfies the Assessing Officer regarding the impracticability of making payments through crossed cheques or bank drafts. The court underscores that such regulations do not impede the freedom of trade or business but rather aim to ensure transparency and accountability in financial transactions.

Applicability of Section 40A(3) to payments for acquiring stock-in-trade:
The judgment interprets the term "expenditure" under section 40A(3) as encompassing all outgoings, including payments for purchasing stock-in-trade. It explains that payments made for stock-in-trade fall within the purview of "expenditure" and can be disallowed if made in cash exceeding the specified limit. The court highlights the alignment of rule 6DD with section 40A(3), which exempts certain transactions from the requirement of crossed cheques or bank drafts. It cites various High Court decisions supporting the view that payments for acquiring stock-in-trade are considered as expenditure under section 40A(3). The judgment rejects the dissenting opinion of the Gauhati High Court, which argued that payments for stock-in-trade do not qualify as "expenditure incurred." Ultimately, the court dismisses the appeals and special leave petition, upholding the applicability of section 40A(3) to payments made for acquiring stock-in-trade.

This comprehensive analysis of the judgment highlights the court's interpretation and application of section 40A(3) of the Income-tax Act, 1961, addressing both its validity and applicability to payments for acquiring stock-in-trade.