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Issues Involved:
1. Applicability of Section 40A(3) of the Income-tax Act, 1961 to payments for the purchase of goods. 2. Interpretation of the term "expenditure" under Section 40A(3) of the Income-tax Act, 1961. 3. Relevance and application of Rule 6DD(j) of the Income-tax Rules, 1962. 4. Preliminary objection regarding the academic nature of the question referred. Detailed Analysis: 1. Applicability of Section 40A(3) to Payments for the Purchase of Goods: The central issue in this case was whether the term "expenditure" in Section 40A(3) of the Income-tax Act, 1961 includes payments made for the purchase of goods. The assessee, a registered firm, made cash payments exceeding Rs. 2,500 for the purchase of goods, which the Income-tax Officer disallowed under Section 40A(3) because the payments were not made by crossed cheque or bank draft. The Tribunal and the Appellate Assistant Commissioner initially held that "expenditure" did not include purchases, thus allowing the payments. However, the High Court disagreed, concluding that the term "expenditure" under Section 40A(3) does include payments for the purchase of goods. 2. Interpretation of the Term "Expenditure" under Section 40A(3): The High Court emphasized that the term "expenditure" is of wide import and includes payments made for the purchase of stock-in-trade. The Court rejected the argument that "expenditure" should be restricted to overhead expenses enumerated in Sections 30 to 43A of the Act. Instead, it held that the word "expenditure" also covers expenses taken into account while determining gross profit, including payments for purchases. This interpretation aligns with the views of other High Courts, such as the Orissa, Allahabad, Punjab and Haryana, and Kerala High Courts, which have consistently held that purchases of stock-in-trade are covered by the term "expenditure" under Section 40A(3). 3. Relevance and Application of Rule 6DD(j): The assessee argued that the payments in question were made under exceptional or unavoidable circumstances, invoking Rule 6DD(j) of the Income-tax Rules, 1962. However, the High Court noted that neither the Tribunal nor the Appellate Assistant Commissioner provided clear findings as required under Rule 6DD(j). The Court pointed out that the Appellate Assistant Commissioner only considered the genuineness of the purchases without addressing whether the payments were made due to exceptional circumstances. Therefore, the preliminary objection based on Rule 6DD(j) was rejected. 4. Preliminary Objection Regarding the Academic Nature of the Question: The assessee raised a preliminary issue, arguing that the question referred by the Tribunal had become academic since the Appellate Assistant Commissioner had already believed the assessee's case. However, the High Court rejected this objection, stating that the Appellate Assistant Commissioner did not provide the necessary findings under Rule 6DD(j). The Court also held that it could not allow the assessee to raise new questions that were not referred by the Tribunal, citing precedents from the Supreme Court. Conclusion: The High Court concluded that the Tribunal was incorrect in holding that "expenditure" under Section 40A(3) does not include payments for the purchase of goods. The question was answered in the negative, in favor of the Revenue, and against the assessee. Both parties were directed to bear their own costs.
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