TaxTMI 
TaxTMI 
1991 (4) TMI 114
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....ss in hardware. For the assessment year 1970-71 (corresponding to the previous year Ram Navmi 2026), the assessee-firm submitted its return of income showing the taxable income from business at Rs. 7,860. A copy of the profit and loss account was also filed. In the course of examination of the books of account for the purposes of assessment, the Income-tax Officer noticed that the assessee had purchased corrugated aluminium sheets and hardware to the tune of Rs. 1,94,229 during the relevant previous year from a firm named M/s. Jamunalal Mangilal and Co. It was found that on 12 occasions during the year, the assessee paid sums exceeding Rs. 2,500 on account of purchase of goods to the said firm in cash and not by crossed cheque or crossed bank draft. The total of such payments came to Rs. 98,100 out of which a sum of Rs. 10,500 had been paid before March 31, 1969. The amounts so paid in cash on or after April 1, 1969 amounted to Rs. 83,100. The Income-tax Officer issued a notice to the assessee to show cause as to why the aforesaid amount of Rs. 83,100 should not be added back to its income under the provisions of section 40A(3) of the Act. The assessee in its reply claimed that the....
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....ermination is whether payments made for purchase of trade articles or goods for sale, commonly known as "stock-in-trade" can be construed as payments in respect of any expenditure. It will be necessary for this purpose to find out the true meaning of the words "Payments in respect of any expenditure" to determine whether "expenditure" can be so widely interpreted to include payments on account of purchase of stock-in-trade. Another aspect that arises for consideration is whether payments exceeding Rs. 2,500 in respect of expenditure incurred made in cash for facility of suppliers or vendors can be disallowed under section 40A(3) of the Act even in a case where the transactions are held to be genuine. This aspect, however, is no more res integra. It was elaborately discussed by a Division Bench of this court in Paul Brothers v. CIT [1990] 186 ITR 356 ; [1990] 2 GLR 324, where the Chief Justice, A. Raghuvir, speaking for the Bench, on a consideration of the various decisions of different High Courts on the subject, held that where the assessee tendered evidence that cash payments were made for facility of suppliers or vendors, the Tribunal was not justified in rejecting the explanati....
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..... So far as applicability of section 40A(3) to payments on account of purchases is concerned, evidently the Income-tax Officer was of the opinion that such payments amounted to "expenditure" and section 40A(3) was attracted. Both the appellate authorities the Appellate Assistant Commissioner as well as the Tribunal did not approve the interpretation of the Income-tax Officer and held that payments made for purchase of trade articles or stock-in-trade do not amount to expenditure inasmuch as no deduction is claimed by an assessee in the computation of his taxable income on account of such payments. It was, therefore, held that section 40A(3) had no application to such payments. The addition of Rs. 83,100 made by the Income-tax Officer to the income of the assessee was, accordingly, held to be not tenable. In view of the aforesaid conclusion, the appellate authorities did not consider the claim on the other aspect whether, in view of the finding of the Income-tax Officer that the payments were genuine, the amount could have been added to the income of the assessee or not. Under the circumstances, the only question of law that has been referred to us for decision is whether on a prope....
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....ailable, consideration of business expediency and other relevant factors. 9. The exceptions have been prescribed in rule 6DD of the Income-tax Rules, 1962. The rule so far as relevant reads as follows : "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 where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely: (a) where the payment is made to - . . . (b) where the payment is made to Government and, under the rules framed by it, such payment is required to be made in legal tender ; ... (f) where the payment is made for the purchase of (i) agricultural or forest produce ; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming ; or (iii) fish or fish products ; or (iv) the products of horticulture or apiculture to the cultivator, grower o....
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....iculty to the payee having regard to the nature of the transaction and the necessity for expeditious settlement thereof. Thus, under the amended clause (j), proof as to the existence of any of the four circumstances enumerated in the two sub-clauses thereof will take the case out of the sweep of section 40A(3) of the Act. However, even in such cases, the assessee is required to furnish satisfactory evidence as to the genuineness of the payment and the identity of the payee. 11. A number of clarifications and circulars were issued from time to time by the Central Board of Direct Taxes elaborating the scope and effect of section 40A(3). By a letter dated April 10, 1969, issued by the Under Secretary, Central Board of Direct Taxes, it was made clear that payments made in advancing loans and returning the principal amount of borrowed moneys are not covered by the provisions of section 40A(3) of the Act as these do not constitute "expenditure". However, by another letter dated April 18, 1969, issued by the Under Secretary, Central Board of Direct Taxes, addressed to a firm of tax practitioners, it was clarified that the word "expenditure" in section 40A(3) covers expenditure of all c....
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....ofit. It was, therefore, held that "payments made for purchases" would also be covered by the word "expenditure". It was observed (p. 667) : "In enacting section 40A(3), the intention of Parliament clearly was to prevent use of unaccounted money in carrying on business. Unaccounted money may be used in the purchase of stock-in-trade or raw materials or in payment of overhead expenses. We will be defeating the intention of the Legislature if we restrict the import of the word 'expenditure' to merely overhead expenses and do not take into account the expenditure incurred on the purchase of stock-in-trade or raw materials." 15. In this case also, the provisions of rule 6DD, particularly clauses (f) and (g) which provide that an assessee can be exempted from the requirement of payments by crossed cheque or crossed bank draft in certain circumstances, were also referred to in support of the wider interpretation given to the expression "expenditure". 16. This decision and the decision of the Orissa High Court in Sajowanlal jaiswal [1976] 103 ITR 706 were followed by the Allahabad High Court in Ratan Udyog v. ITO [1977] 109 ITR 1. It was held that, having regard to ....
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....nd it includes the price paid for the purchase of stock-in-trade and/or raw materials and such payments fall within the sweep of the said section. 22. In a later decision in Kejriwal Iron Stores v. CIT [1988] 169 ITR 12, the Rajasthan High Court again considered the meaning of the word "expenditure" in section 40A(3) to find out whether it includes payments made on account of purchase of goods and, following the decisions of the various High Courts referred to above, reiterated that such payments were covered by the word "expenditure". 23. This decision (sic) was followed in Nahgi Lal v. CIT [1987] 167 ITR 139 (Raj) and in Badrilal Phool Chand Rodawat v. CIT [1987] 167 ITR 404 (Raj). 24. The Patna High Court considered this question in CIT v. Ram Chand Gobind Prasad [1985] 156 ITR 766 and, following the decisions of the Orissa, Allahabad and Punjab and Haryana High Courts, held that expenditure as contemplated in section 40A(3) of the Act includes expenditure on purchases relating to the trading account. 25. In Venkata Satyanarayana Timber Depot v. CIT [1987] 165 ITR 253, this question arose also before the Andhra Pradesh High Court. In this case also, the contention as....
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....nditure incurred" which, in our opinion, is not correct. 28. Payments are made by an assessee in the course of his business, on various accounts, e.g., for purchase of assets, including current assets or floating assets, advance of loans, expenditure, etc. All payments ipso facto cannot be termed as "expenditure" nor can all such payments be claimed as deduction in the computation of profits or income. In fact, no question of allowance or disallowance of all such payments as deduction does arise except in case of payments in respect of expenditure allowable under the Act. Payments for acquisition of assets are, in fact, investment-not expenditure. Section 40A(3) is confined to disallowance of "expenditure" in respect of which payment is made in cash beyond the specified limit not all payments on whatever account. The two expressions "payment made" and "expenditure incurred" are not interchangeable. Payments may be made on various accounts-"expenditure incurred" is only one of them. Evidently, application of section 40A(3) is confined to payments made in respect of "expenditure incurred". It does not extend to other payments. In that view of the matter, to determine whether payme....
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....ture, the expression "and is something which is gone irretrievably". Every payment is not expenditure. Payment may be for acquisition of assets. Assets may be fixed assets or floating or circulating assets. Fixed assets are assets of business which are of permanent nature and are held for the purpose of earning revenue and not with a view to resell, e.g., plant and machinery, buildings. Floating or current assets are those assets which are made or acquired and merely held for a short period of time, also with a view to sell at a profit in the ordinary course of business. These assets are easily convertible into cash and include stock, debtors, bills receivable. 34. The point that crops up for consideration, therefore, is when stock-in-trade is acquired and money is paid for that purpose, whether the money so paid goes irretrievably. Evidently, that is not so. By such payment, goods are acquired which are termed as floating or current assets and the money so paid is likely to be recovered by sale of such assets in the course of business. 35. The expressions "stock" or "stock-in-trade" have been defined in various dictionaries, general as well as legal. 36. The Random House ....
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....o his place of business for use in his trade or for the purpose of sale. It is said to be well understood as meaning goods for sale ; a stock of goods offered for sale ; the goods kept for sale by a merchant or shopkeeper ; a stock of merchandise ; merchandise or goods kept for sale or traffic ; the goods or chattels which a merchant holds for sale." 41. A careful consideration of the aforesaid definitions of the two expressions "expenditure" and "stock-in-trade" makes it abundantly clear that payments made for purchase of stock-in-trade cannot be termed as "expenditure". Money does not go irretrievably in such a case. What is acquired by such payments, namely, stock-in-trade, forms part of the business assets of the assessee. Such assets are sold in due course and the money paid ordinarily recovered with some profit. Stock-in-trade which remains unsold at the end of the year is reflected as assets in the balancesheet. It is, therefore, difficult to hold the payments made on account of purchase of stock-in-trade as expenditure. Besides, a careful reading of section 40A(3) also makes it clear that the said section applies only to payments made on account of "expenditure incurred"....