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Issues involved: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding the disallowance of cash payments exceeding Rs. 2,500 made for purchase of goods in a trading business.
Summary: The High Court of Kerala was presented with a case regarding the disallowance of cash payments totaling Rs. 40,840 made by a registered firm for the purchase of textiles, under section 40A(3) of the Income-tax Act, 1961. The Income Tax Officer (ITO) disallowed these payments as expenditure, resulting in an increased income assessment for the firm. Despite a dissenting opinion from a judicial member, the Income-tax Appellate Tribunal upheld the disallowance. The firm's counsel argued that such payments for goods should not be considered as expenditure but rather as part of the cost of goods sold. The court examined section 40A(3) which restricts deductions for certain expenditures exceeding Rs. 2,500 made in cash. The court emphasized the literal interpretation of the section, stating that any amount exceeding the limit must be paid through specified means to be deductible. The court also referred to a similar provision in the UK Income Tax Act and highlighted the importance of wording in determining deductibility. Ultimately, the court ruled in favor of the department, affirming the disallowance of the cash payments exceeding Rs. 2,500. The judgment was forwarded to the Income-tax Appellate Tribunal for further action.
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