Expenditure verification requires independent enquiry, daily cash-payment testing, and disclosure of third-party material with cross-examination opportunity.

Freight and allied expenditure supported by vendor details, invoices, transport documents and banking evidence should not be wholly disallowed solely because vendors do not respond to verification notices; further lawful enquiry and examination of the evidence are required. Cash-payment disallowance is tested per payment to a person on a single day, rather than by annual aggregation, subject to verification of daily payment records. Where expenditure is questioned using a third-party statement, the material must be furnished to the assessee and cross-examination allowed if requested. The notes emphasise documentary verification, independent enquiry and procedural fairness before adverse conclusions are drawn.

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Issues: (i) Whether freight and allied expenditure could be wholly disallowed merely because vendors did not respond to notices under Section 133(6) despite primary supporting evidence and accepted turnover; (ii) Whether disallowance under Section 40A(3) could be made by aggregating annual cash payments rather than examining payments per person per day; (iii) Whether expenditure could be disallowed on the basis of an undisclosed third-party statement without furnishing it and affording cross-examination.

Issue (i): Whether freight and allied expenditure could be wholly disallowed merely because vendors did not respond to notices under Section 133(6) despite primary supporting evidence and accepted turnover.

Analysis: The assessee had produced vendor particulars, PAN, bank details, invoices, lorry receipts, consignment notes and banking-payment evidence. Non-response or return of notices, without positive material showing sham transactions or receipt of payments back by the assessee, was insufficient for wholesale disallowance. Once the assessee discharged its primary onus, further enquiry, including verification through the vendors' jurisdictional authorities where necessary, was required. The additional documentary material also required examination.

Conclusion: The issue was restored for fresh verification; the Assessing Officer must examine the supporting evidence, conduct lawful enquiries and provide adequate hearing. This is in favour of the assessee.

Issue (ii): Whether disallowance under Section 40A(3) could be made by aggregating annual cash payments rather than examining payments per person per day.

Analysis: The statutory threshold is to be tested with reference to payments made to a person on a single day, not annual aggregate payments. The assessee's assertion that no daily payment to a transporter exceeded the prescribed limit required factual verification from the daily payment details.

Conclusion: The issue was restored for limited verification, and no disallowance may be made if no payment exceeds the prescribed daily limit per person. This is in favour of the assessee.

Issue (iii): Whether expenditure could be disallowed on the basis of an undisclosed third-party statement without furnishing it and affording cross-examination.

Analysis: A third-party statement relied upon against an assessee must be confronted to it, and an effective opportunity to cross-examine the maker must be afforded. The vendor confirmations, invoices, consignment notes and other material produced by the assessee also required proper verification.

Conclusion: The issue was restored for fresh examination; any third-party material proposed to be relied upon must be supplied and cross-examination granted if sought. This is in favour of the assessee.

Final Conclusion: The disputed expenditure claims require fresh determination after verification of documentary evidence and adherence to procedural fairness; consequential interest is to be recomputed as necessary.

Ratio Decidendi: Where an assessee provides primary evidence supporting expenditure, adverse conclusions based solely on unverified third-party non-response or undisclosed third-party material cannot be sustained without independent enquiry and a fair opportunity of rebuttal.

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