TMI Blog1991 (4) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... lso filed. In the course of examination of the books of account for the purposes of assessment, the Income-tax Officer noticed that the assessee had purchased corrugated aluminium sheets and hardware to the tune of Rs. 1,94,229 during the relevant previous year from a firm named M/s. Jamunalal Mangilal and Co. It was found that on 12 occasions during the year, the assessee paid sums exceeding Rs. 2,500 on account of purchase of goods to the said firm in cash and not by crossed cheque or crossed bank draft. The total of such payments came to Rs. 98,100 out of which a sum of Rs. 10,500 had been paid before March 31, 1969. The amounts so paid in cash on or after April 1, 1969 amounted to Rs. 83,100. The Income-tax Officer issued a notice to the assessee to show cause as to why the aforesaid amount of Rs. 83,100 should not be added back to its income under the provisions of section 40A(3) of the Act. The assessee in its reply claimed that the payments made were genuine and were made in cash for mutual convenience. The Income-tax Officer found that the wives of two of the partners of the assessee-firm were partners of the firm, M/s. Jamunalal Mangilal and Co. from whom the purchases in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords "Payments in respect of any expenditure" to determine whether "expenditure" can be so widely interpreted to include payments on account of purchase of stock-in-trade. Another aspect that arises for consideration is whether payments exceeding Rs. 2,500 in respect of expenditure incurred made in cash for facility of suppliers or vendors can be disallowed under section 40A(3) of the Act even in a case where the transactions are held to be genuine. This aspect, however, is no more res integra. It was elaborately discussed by a Division Bench of this court in Paul Brothers v. CIT [1990] 186 ITR 356 ; [1990] 2 GLR 324, where the Chief Justice, A. Raghuvir, speaking for the Bench, on a consideration of the various decisions of different High Courts on the subject, held that where the assessee tendered evidence that cash payments were made for facility of suppliers or vendors, the Tribunal was not justified in rejecting the explanation. It was observed (p. 359) : "In the instant case, the five firms to whom payments were made, were all based at Gauhati. The assessee-firm is at Tezpur. Normally, the transactions are made 'through accounts'. But, in the above five instances, the repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Tribunal did not approve the interpretation of the Income-tax Officer and held that payments made for purchase of trade articles or stock-in-trade do not amount to expenditure inasmuch as no deduction is claimed by an assessee in the computation of his taxable income on account of such payments. It was, therefore, held that section 40A(3) had no application to such payments. The addition of Rs. 83,100 made by the Income-tax Officer to the income of the assessee was, accordingly, held to be not tenable. In view of the aforesaid conclusion, the appellate authorities did not consider the claim on the other aspect whether, in view of the finding of the Income-tax Officer that the payments were genuine, the amount could have been added to the income of the assessee or not. Under the circumstances, the only question of law that has been referred to us for decision is whether on a proper interpretation of section 40-A(3) of the Act, payments made for purchases of goods are to be construed as expenditure. Section 40A, so far as relevant, reads : "40A. Expenses or payments not deductible in certain circumstances. - (1) The provisions of this section shall have effect notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn on a bank or by a crossed bank draft. -No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely: (a) where the payment is made to - . . . (b) where the payment is made to Government and, under the rules framed by it, such payment is required to be made in legal tender ; ... (f) where the payment is made for the purchase of (i) agricultural or forest produce ; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming ; or (iii) fish or fish products ; or (iv) the products of horticulture or apiculture to the cultivator, grower or producer of such articles, produce or products ; (g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products ; (h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity of the payee. A number of clarifications and circulars were issued from time to time by the Central Board of Direct Taxes elaborating the scope and effect of section 40A(3). By a letter dated April 10, 1969, issued by the Under Secretary, Central Board of Direct Taxes, it was made clear that payments made in advancing loans and returning the principal amount of borrowed moneys are not covered by the provisions of section 40A(3) of the Act as these do not constitute "expenditure". However, by another letter dated April 18, 1969, issued by the Under Secretary, Central Board of Direct Taxes, addressed to a firm of tax practitioners, it was clarified that the word "expenditure" in section 40A(3) covers expenditure of all categories "including that on purchase of goods and merchandise" as also payment for services. In fact, it is this interpretation of section 40A(3) which appears to have led the officers of the Department to hold that payments on account of purchase of goods are also to be construed as expenditure. In the backdrop of the aforesaid provisions of section 40A(3), rule 6DD and the circulars of the Board, it is to be decided whether the provisions of section 40A(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 'expenditure' to merely overhead expenses and do not take into account the expenditure incurred on the purchase of stock-in-trade or raw materials." In this case also, the provisions of rule 6DD, particularly clauses (f) and (g) which provide that an assessee can be exempted from the requirement of payments by crossed cheque or crossed bank draft in certain circumstances, were also referred to in support of the wider interpretation given to the expression "expenditure". This decision and the decision of the Orissa High Court in Sajowanlal jaiswal [1976] 103 ITR 706 were followed by the Allahabad High Court in Ratan Udyog v. ITO [1977] 109 ITR 1. It was held that, having regard to the wider meaning of the word "expenditure" so as to embrace whatever is paid out or away, there is no reason why payments made for the purchase of stock-in-trade or raw materials should not be regarded as expenditure for the purposes of section 40A(3) of the Act. The decision in U. P. Hardware Store [1976] 104 ITR 664 (All) was followed by the Allahabad High Court in all subsequent cases including Addl. CIT v. Nathimal Badri Prasad [1979] 116 ITR 409 ; Addl. CIT v. Ram Narain Kishan Gopal [1979] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure". This decision (sic) was followed in Nahgi Lal v. CIT [1987] 167 ITR 139 (Raj) and in Badrilal Phool Chand Rodawat v. CIT [1987] 167 ITR 404 (Raj). The Patna High Court considered this question in CIT v. Ram Chand Gobind Prasad [1985] 156 ITR 766 and, following the decisions of the Orissa, Allahabad and Punjab and Haryana High Courts, held that expenditure as contemplated in section 40A(3) of the Act includes expenditure on purchases relating to the trading account. In Venkata Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253, this question arose also before the Andhra Pradesh High Court. In this case also, the contention as to the applicability of section 40A(3) to payments made for purchase of stock-in-trade was raised by the assessee. The court, however, did not consider it necessary to consider this contention in view of its findings that, under the facts and circumstances of the case, the assessee was entitled to avail of the exemption provided under rule 6DD. We have given our careful consideration to the aforesaid decisions of the High Courts of Orissa, Allahabad, Kerala, Punjab and Haryana, Rajasthan and Patna wherein it has been held that payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments for acquisition of assets are, in fact, investment-not expenditure. Section 40A(3) is confined to disallowance of "expenditure" in respect of which payment is made in cash beyond the specified limit not all payments on whatever account. The two expressions "payment made" and "expenditure incurred" are not interchangeable. Payments may be made on various accounts-"expenditure incurred" is only one of them. Evidently, application of section 40A(3) is confined to payments made in respect of "expenditure incurred". It does not extend to other payments. In that view of the matter, to determine whether payments made for purchase of stock-in-trade can be said to be payments in respect of "expenditure incurred", it is necessary to ascertain the true meaning of the expressions "expenditure" and "stock-in-trade". The word "expenditure" has been defined in various dictionaries. In Random House Dictionary of the English Language, it has been defined to mean : " 1. The act of expending ; disbursement; consumption. 2. that which is expended..." In Corpus Juris Secundum (Vol. 35), "expenditure" has been defined as follows : "In its broader sense the word 'expenditure' is any layin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crops up for consideration, therefore, is when stock-in-trade is acquired and money is paid for that purpose, whether the money so paid goes irretrievably. Evidently, that is not so. By such payment, goods are acquired which are termed as floating or current assets and the money so paid is likely to be recovered by sale of such assets in the course of business. The expressions "stock" or "stock-in-trade" have been defined in various dictionaries, general as well as legal. The Random House Dictionary of the English language defines stock-in-trade as: "1. the requisites for carrying on a business, esp. goods kept on hand for sale in a store . . . " In Oxford Advanced Learner's Dictionary of Current English by A. S. Hornby, "stock" has been defined as : " store of goods available for sale, distribution or use, esp. goods kept by a trader or shopkeeper . . ." According to Black's Law Dictionary, "stock" means: "The goods and wares of a merchant or tradesman, kept for sale and traffic. In a larger sense, the capital of a merchant or other person, including his merchandise, money and credits, or, in other words, the entire property employed in business." Stroud's Judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid ordinarily recovered with some profit. Stock-in-trade which remains unsold at the end of the year is reflected as assets in the balancesheet. It is, therefore, difficult to hold the payments made on account of purchase of stock-in-trade as expenditure. Besides, a careful reading of section 40A(3) also makes it clear that the said section applies only to payments made on account of "expenditure incurred". This is the expenditure which is claimed as deduction in computing the profits and gains of business of the assessee and it is such expenditure which the Assessing Officer may not allow if the conditions set out in the said section are not fulfilled. The result of disallowance under this section is that the fact of incurring the particular expenditure itself is disregarded. That cannot be so in the case of purchase of assets like stock-in-trade. If such payment is disregarded, then it is difficult to visualise what will happen to the sale price of the goods acquired through such payments if such goods are sold during the year or to the stock of such goods if they remain unsold at the end of the year, whether the factum of sale of such goods can be ignored, whether the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X
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