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Issues involved: Interpretation of the term 'expenditure' in section 40A(3) of the Income-tax Act, 1961 and applicability of the prohibition in cases of payments by book adjustments.
Interpretation of 'expenditure' in section 40A(3): The case involved a firm where the Income Tax Officer (ITO) applied the prohibition in section 40A(3) and made an addition to the declared income. The Tribunal accepted that the prohibition applied only to expenditure for which a deduction was otherwise allowable under specific sections of the Act. The Tribunal held that the term 'expenditure' in section 40A(3) did not cover expenditure on purchases of goods, as the prohibition was against the allowability of the expenditure as a deduction. The revenue contended that payments for goods purchased fell within the meaning of 'expenditure' in section 40A(3) to prevent tax evasion. Various High Court judgments supported this view, emphasizing that payments for goods constituted expenditure under the Act. Applicability of prohibition in cases of payments by book adjustments: The Tribunal held that payments by book adjustments in the accounts of third parties were hit by the prohibition in section 40A(3) unless the adjustment was made directly with the party who supplied the goods or services. The Tribunal's decision was supported by clause (e) of rule 6DD of the Income Tax Rules, 1962, which outlined the limited area where book adjustments could be considered an exception to the prohibition. The court agreed with the Tribunal's interpretation, stating that payments by book adjustment to the supplier directly fell outside the prohibition's scope. Conclusion: The court ruled in favor of the revenue regarding the interpretation of 'expenditure' in section 40A(3), affirming that payments for goods constituted expenditure under the Act. Additionally, the court upheld the Tribunal's decision on the applicability of the prohibition in cases of payments by book adjustments, emphasizing the limited exceptions outlined in the relevant rule. Both questions were answered accordingly, with no costs imposed.
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