TaxTMI 
TaxTMI 
1991 (8) TMI 5
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....1962. The assessees have appealed to this court challenging the disallowance. Two questions arise for consideration in these appeals : (i) the validity of section 40A(3) of the Act; and (ii) the applicability of Section 40A(3) to payments made for acquiring stock-in-trade. Section 40A(3) so far as material provides : "40A. Expenses or payments not deductible in certain circumstances. - (1) 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) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being l....
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.... of the Act relating to the computation of income. Sub-section (3) empowers the assessing officer to disallow, as deduction, any expenditure in respect of which payment is made of any sum exceeding Rs. 10,000 otherwise than by a crossed cheque or crossed bank draft. Rule 6DD of the Income-tax Rules, 1962, refers to cases and circumstances in which payment of a sum exceeding Rs. 10,000 may be made otherwise than by a crossed cheque or by a crossed bank draft. The rule so far as it is relevant reads: "6DD. Cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise than by, a crossed cheque drawn on a bank or by a crossed bank draft.-No disallowance under sub-section (3) of section 40A shall be made....
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....ll be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or 'crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the secti....
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.... the expenditure incurred by the assessee in respect of which payment is made. It means that all outgoings are brought under the word "expenditure" for the purpose of the section. The expenditure for purchasing stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits under section 28 on principles of commercial accounting. 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 the amount specified under section 40A(3). We have earlier observed that rule 6DD has to be read along with section 40A(3). The rule also contemplates payments made for stock-in-tra....