Payments for purchase of goods ruled as "expenditure" under Income-tax Act. Disallowance under section 40A(3) upheld.

Badrilal Phool Chand Rodawat Versus Commissioner Of Income-Tax

Badrilal Phool Chand Rodawat Versus Commissioner Of Income-Tax - [1987] 167 ITR 404, 65 CTR 306, 34 TAXMANN 96 Issues Involved:
1. Whether the payments made for the purchase of goods is expenditure within the meaning of section 40A(3).
2. Whether the payments to M/s. Suresh Oil Co., M/s. Shivnath Motilal, and M/s. Rajani Oil Co. were liable to be disallowed under section 40A(3) having regard to the provisions of rule 6DD(j).

Summary:

Issue 1: Definition of Expenditure u/s 40A(3)
The court examined whether payments made for the purchase of goods qualify as "expenditure" under section 40A(3) of the Income-tax Act, 1961. The term "expenditure" was interpreted broadly to include payments for goods. Citing precedents from various High Courts, including Sajowanlal Jaiswal v. CIT and U.P. Hardware Stores v. CIT, the court concluded that payments for goods are indeed "expenditure" within the meaning of section 40A(3). Thus, Question No. 1 was answered in the affirmative.

Issue 2: Disallowance of Payments u/s 40A(3) and Rule 6DD(j)
The court analyzed the disallowance of specific payments made by the assessee in cash, exceeding Rs. 2,500, under section 40A(3) and the exceptions provided in rule 6DD(j).

1. Payment to M/s. Suresh Oil Co. (Rs. 4,000):
- The assessee deposited Rs. 4,000 as "anamat" for future transactions, which was later adjusted against a purchase.
- The court found that the genuineness of the payment and the identity of the payee were established through account books and a confirmatory letter.
- Since this was the first dealing with M/s. Suresh Oil Co., the payment in cash was deemed necessary to build business credibility.
- The court concluded that this payment falls within the exceptions of rule 6DD(j) and should not be disallowed.

2. Payment to M/s. Shivnath Motilal (Rs. 2,602.49):
- The payment was part of a settlement for goods purchased, with Rs. 2,602.49 paid in cash on a bank holiday.
- The court found the genuineness of the payment and the identity of the payee were established through a confirmatory letter.
- Given the circumstances, including the first transaction and the bank holiday, the payment was covered by rule 6DD(j).
- The court ruled that this payment should not be disallowed.

3. Payment to M/s. Rajani Oil Industries (Rs. 10,028.30):
- The assessee claimed this was a speculative transaction, not an actual purchase.
- The Tribunal found it was indeed a purchase transaction.
- The assessee failed to provide a satisfactory explanation for the cash payment.
- The court upheld the Tribunal's decision to disallow this payment under section 40A(3).

Conclusion:
- Question No. 1: Payments made for the purchase of goods are "expenditure" within the meaning of section 40A(3).
- Question No. 2: The Tribunal was correct in disallowing the payment of Rs. 10,028.30 to M/s. Rajani Oil Industries but incorrect in disallowing the payments of Rs. 4,000 to M/s. Suresh Oil Industries and Rs. 2,602.49 to M/s. Shivnath Motilal.