KEJRIWAL IRON STORES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has by its order dated December 27, 1974, referred the following three questions of law arising out of its order to this court for decision :

(2.) M/s. Kejriwal Iron Stores, Neem-ka-thana, is assessed to income-tax as a registered firm. While scrutinising the return of the aforesaid firm in respect of the assessment year 1970-71 and the account books of the firm relating to the aforesaid period, the assessing authority, viz., the Income-tax Officer, Sikar, found that there were discrepancies in the dates of payments and receipts between the purchaser and sellers in respect of three amounts totalling Rs. 16,250. He also found that each one of the three amounts exceeded Rs. 2,500 but payments were not made either by crossed cheques or demand drafts and as such the assessee committed breach of Section 40A(3) of the income-tax Act, 1961 (hereinafter referred to as "the Act"). The assessing authority, therefore, directed that the amount of Rs. 16,250 be disallowed and be added back to the total income of the assessee.

(3.) THE aforesaid section was added to the Income-tax Act by section 7 of the Finance Act of 1968 with effect from April 1, 1968. Sub-section (1) of Section 40A provides that the provisions of Section 40A shall have effect notwithstanding anything to the contrary contained in any other provision of the Income-tax Act relating to the computation of income under the head "Profits or gains of business or profession". Thus, any expenditure incurred by the assessee in the sum of Rs. 2,500 or above will not be allowed as a deduction unless the payment is made by a crossed cheque or by a crossed bank draft. In case payment is made in cash of a sum of Rs. 2,500 or above in respect of an expenditure incurred by the assessee, the same shall not be allowed as deduction. THE purpose of enacting Section 40A(3) was clearly to prevent use of unaccounted money in carrying on business by purchases of stock-in-trade or raw materials or any payment of overhead expenses. We are of the view that payments made for purchases would be covered by the word "expenditure" occurring in Section 40A(3) and such payments would be disallowed if they are made in cash, if the sum so paid exceeds Rs. 2,500 or more. THEre is no reason why the word "expenditure" should be given a restricted meaning so as to refer to only overhead expenses enumerated in Sections 30 to 43A. If the provisions of Section 40A(3) are not held to apply to payments made for purchase of stock-in-trade or raw materials, then it would be defeating the intention of the legislature as the purpose of preventing unaccounted money being used for clandestine transactions would be frustrated. THE view that we have taken that payments made for purchase of goods would be covered by the term "expenditure" employed in Sub-section (3) of Section 40A has also been taken by the Allahabad High Court in U.P. Hardware Store v. CIT [1976] 104 ITR 664, Ratan Udyog v. ITO [1977] 109 ITR 1 (All) and Addl. CIT v. Jamuna Dass Nemi Chand [1980] 121 ITR 777 (All), by the Punjab and Haryana High Court in CIT v. Grewal Group of Industries [1977] 110 ITR 278, CIT v. Kishan Chand Maheshwari Dass [1980] 121 ITR 232 and CIT v. Avtar Singh and Sons [1981] 129 ITR 671. THE same view has also been taken by the Kerala High Court in P. R. Textiles v. CIT [1980] 121 ITR 237 and by the Orissa High Court in Sajowanlal Jaiswal v. CIT [1976] 103 ITR 706. All these decisions have taken the view that Section 40A(3) was designed to check tax evasion by claims of cash expenditure which are difficult to be properly investigated. It was held that the expression "expenditure" need not be given a restricted meaning, but it should include within its ambit payments made for the purchase of goods.