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Issues involved: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding the allowability of expenditure incurred by the assessee.
Summary: The judgment dealt with the interpretation of section 40A(3) of the Income-tax Act, 1961 regarding the allowability of expenditure incurred by the assessee. In the assessment proceedings, a sum of Rs. 50,000 was debited in the profit and loss account representing the loss sustained by the assessee on a film. The Income-tax Officer disallowed the claim citing contravention of section 40A(3) and treating the loss as a capital loss. The Commissioner of Income-tax (Appeals) held that the loss was a trading loss and section 40A(3) was not applicable. Similar disallowance for another picture was affirmed by the Appellate Assistant Commissioner. The Appellate Tribunal concluded that the payments were in the nature of expenditure and hence section 40A(3) was attracted due to cash payments. The assessee argued that section 40A(3) applies only to "expenditure" and not all deductions, citing distinctions between deductions and expenditure under the Act. Referring to previous Supreme Court decisions, the assessee emphasized the difference between expenditure and other deductions. The Revenue contended that the payments were made in the course of the trading activity and should be treated as expenditure under section 40A(3) to prevent tax evasion. The Court held that the payments made by the assessee to acquire stock-in-trade were business expenditures falling within the concept of expenditure. Therefore, section 40A(3) directly governed the situation, and the Court answered the question in the affirmative against the assessee. In conclusion, the Court interpreted section 40A(3) to apply to the expenditure incurred by the assessee in acquiring stock-in-trade, affirming the disallowance of the claim under the provision.
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