R.L. Gulati, J. - (1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961.
(2.) THE assessee is a registered firm carrying on the business of iron and hardware. THE proceedings relate to the assessment year 1970-71. During the course of examination of the books of accounts of the assessee, the Income-tax Officer discovered that the assessee had made payments in cash exceeding the sum of Rs. 2,500 for some of the purchases. THE total of such payments came to Rs. 55,471. Being of the view that under Section 40A(3) read with Rule 6DD of the Income-tax Rules, 1962, such payments could not be allowed as deduction, the Income-tax Officer required the assessee to show cause why the payments amounting to Rs. 55,471 be not disallowed. After considering the explanation filed by the assessee, the Income-tax Officer came to the conclusion that the conditions laid down in Rule 6DD were not satisfied and he accordingly disallowed the sum of Rs. 55,471 claimed as deduction and added it to the income of the assessee. THE assessee's appeal was dismissed by the Appellate Assistant Commissioner of Income-tax and its second appeal was also dismissed by the Income-tax Appellate Tribunal. However, at the instance of the assessee, the Tribunal has referred the following two questions of law for the opinion of this court: "(1) Whether, on the facts and in the circumstances of the case, the payments made to suppliers for purchase of goods are 'expenditure' within the meaning of the Income-tax Act, 1961 ? (2) If the answer to the first question is in the affirmative, whether the Tribunal was justified in maintaining the disallowance and/or addition of Rs. 55,741 in computing the taxable income of the assessee for the assessment year 1970-71 ?" Section 40A was added to the Income-tax Act by Section 7 of the Finance Act of 1968, with effect from 1st April, 1968. We are concerned with the interpretation of Sub-section (3) of this section which reads: "40A. (3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969), as may be specified in this behalf by the Central Government by notification in the official Gazette, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction." Sub-section (1) of Section 40A provides that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession".
(3.) CLEARLY, any expenditure incurred by an assessee in a sum of Rs. 2,500 or above is not to be allowed as a deduction unless the payment is made by a crossed cheque or a crossed bank draft. In other words, payments made in cash are to be disallowed. Now, in the instant case, there is no dispute that the assessee made payments exceeding Rs. 2,500 in cash and the total of such payment comes to Rs. 55,741. The only argument raised by the learned counsel for the assessee is that the payments made for purchase of stock-in-trade cannot be called "expenditure" and, as such, Section 40A(3) is not applicable. According to the learned counsel, the word "expenditure" must be restricted to expenditure which is allowed as a deduction under Sections 30 to 43A of the Act and the payments made for the purchase of stock-in-trade is not covered by any of these provisions. Section 28 deals with the profits and gains of business or profession and by virtue of Section 29, the income referred to in Section 28 would be computed in accordance with the provisions contained in Sections 30 to 43A. The deductions contained in Sections 30 to 43A are overhead expenses such as rent, taxes, repairs, insurance, salary, etc., etc., and depreciation allowance. They are to be deducted out of the gross profits arising from the business and it is only then that the net profits are arrived at which are liable to tax. But we see no justification for accepting the plea that the word "expenditure" used in Section 40A(3) should be restricted to overhead expenses enumerated in Sections 30 to 43A, including the depreciation allowance, etc. The word "expenditure" is of wide import. It will also cover the expenses to be taken into account while determining the gross profit. The gross profit is determined by the difference between the opening stock and the purchases on the one side and the closing stock and the sales on the other. The payments made for purchases would also be covered by the word "expenditure" and such payments can be disallowed if they are made in cash in the sums exceeding Rs. 2,500. Such disallowance will increase the gross profit and would necessarily increase the net profit.;