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Issues involved: Assessment of cash payments exceeding Rs. 2,500 u/s 40A(3) of the Income Tax Act, 1961 and denial of opportunity to summon concerned parties for examination u/s 133 of the Act.
Assessment of Cash Payments u/s 40A(3): The assessee, a registered firm engaged in the sale and purchase of cloth, filed a return of income for the assessment year 1970-71 at Rs. 40,026. The Income Tax Officer (ITO) disallowed cash payments exceeding Rs. 2,500 for certain purchases amounting to Rs. 42,770 u/s 40A(3). The Appellate Assistant Commissioner (AAC) reduced the disallowance to Rs. 22,258. The Tribunal held that s. 40A(1) and (3) apply only to items of expenditure deductible in determining business profits. The High Court, following precedent, held that payments to suppliers for goods fall under "expenditure" in s. 40A(3) and can be disallowed if made in cash over Rs. 2,500. Denial of Opportunity to Summon Concerned Parties u/s 133: The assessee requested the ITO to summon concerned parties to justify the cash payments, offering to bear expenses. The ITO refused, stating the assessee failed to prove the necessity of cash payments. The AAC, based on confirmatory letters from some parties, allowed relief under r. 6DD. However, the ITO's refusal to summon all parties denied the assessee a fair opportunity to present evidence. The High Court held that the ITO's failure to summon parties vitiated the assessment and the Tribunal should have remanded the case for fresh orders after summoning the parties concerned. Conclusion: The High Court ruled against the assessee on the interpretation of s. 40A(3) but found the denial of opportunity to summon parties unjust. The Tribunal's deletion of the addition without remand was deemed legally unjustified. The Court directed the case to be remanded for fresh assessment.
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