COMMISSIONER OF INCOME TAX Vs. HARDWARE EXCHANGE

JUDGEMENT

(1.) BY this reference under S. 256(1) of the INCOME TAX ACT, 1961, made at the instance of the CIT , North Eastern Region, Shillong (CIT), the Tribunal Gauhati Bench, Gauhati, has referred the following question of law to this Court for opinion :

(2.) THE facts of the case are as follows. The assessee is a registered firm carrying on business in hardware. For the asst. year 1970 -71 (corresponding to the previous year Ram Navmi 2026), the assessee -firm submitted its return of income showing the taxable income from business at Rs. 7,860. A copy of the P and L a/c was also filed. In the course of examination of the books of account for the purposes of assessment, the ITO 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 Jamunalal Mangilal & 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 ITO 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 ITO found that the wives of two of the partners of the assessee -firm were partners of the firm, Jamunalal Mangilal & Co. from whom the purchases in question were made. On a consideration of the facts and circumstances of the case, the ITO came to the conclusion that the payments in question made by the assessee to the said firm were genuine. He was, however, of the opinion that the proof of identity of the payee and/or genuineness of the payment was not enough to satisfy the requirement of S. 40A(3) of the Act. He was not satisfied with the explanation given by the assessee for not making the payments by crossed cheque or crossed bank draft. He, therefore, held that the said payment infringed the provisions of S. 40A(3) of the Act. Accordingly, a sum of Rs. 83,100 was added back to the total income of the assessee. On appeal, the AAC held that the payments in question having been made in respect of liabilities created by regular purchase of trade articles did not amount to expenditure deductible from the net profit. In that view of the matter, he held that the payment of Rs. 83,100, on account of purchase of trade articles, made by the assessee was not an expenditure and, as such, the provisions of section 40A(3) were not attracted. In that view of the matter, the addition made by the ITO was deleted.

(3.) THE determination of the controversy in this case, therefore, revolves round the construction of s. 40A(3) of the Act and r. 6DD of the IT Rules. The question for determination is whether payments made for purchase of trade articles or goods for sale, commonly known as "stock -in - trade" can be construed as payments in respect of any expenditure. It will be necessary for this purpose to find out the true meaning of the words "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 S. 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 vs. CIT (1990) 186 ITR 356 (Gau):(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 :