1982 (2) TMI 63 - HC - Income Tax

Summary

Issues Involved:
1. Scope of the term "expenditure" under Section 40A(3) of the Income-tax Act.
2. Appropriation of payments towards amounts due.

Detailed Analysis:

1. Scope of the Term "Expenditure" under Section 40A(3):

The core issue here was whether the term "expenditure" under Section 40A(3) includes payments for the purchase of stock. The revenue contended that "expenditure" is a broad term and should encompass payments for stock purchases, relying on various precedents from the Allahabad and Punjab & Haryana High Courts. Conversely, the assessee argued that the term should be restricted to expenses incurred during trading activities and distinct from payments for stock-in-trade, citing the Supreme Court decision in CIT v. S. C. Kothari and other relevant cases.

The court acknowledged the complexity of this issue but chose not to resolve it in this judgment, focusing instead on the second issue regarding the appropriation of payments.

2. Appropriation of Payments Towards Amounts Due:

The second issue revolved around the chronological adjustment of payments. The ITO had adjusted payments chronologically, leading to a disallowance of Rs. 21,316 under Section 40A(3). The assessee contended that cash payments should be applied to the old credit balance as of April 1, 1969, while cheque payments should cover purchases made during the year.

The court examined Sections 59, 60, and 61 of the Indian Contract Act, 1872, which govern the appropriation of payments. According to these sections, appropriation is primarily a matter for the debtor; failing that, the creditor can appropriate. Only when neither party makes an appropriation does Section 61 come into play, which mandates chronological adjustment.

The court also referenced the principle that in disputes between the revenue and the taxpayer, the taxpayer is entitled to appropriate payments in a manner least disadvantageous to themselves. This principle was supported by precedents such as Smith v. Law Guarantee and Trust Society Ltd. and CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga.

Applying these principles, the court concluded that the assessee was entitled to have the cash payments adjusted against the earlier sums due as of April 1, 1969. This was consistent with the assessee's written reply to the ITO, which explicitly stated this intention.

Conclusion:

The court agreed with the Tribunal's decision to delete the addition of Rs. 21,316 made by the ITO. The court did not address the broader issue of whether payments for purchases constitute "expenditure" under Section 40A(3), focusing instead on the appropriation of payments. The assessee was awarded costs, with counsel's fee set at Rs. 350.