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Issues involved: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding disallowance of cash payments exceeding Rs. 2,500 for purchases made by an assessee.
Summary: The High Court of Allahabad addressed a reference under section 256(1) of the Income-tax Act, 1961, concerning a registered firm engaged in the iron and hardware business for the assessment year 1970-71. The Income-tax Officer disallowed cash payments exceeding Rs. 2,500 for purchases totaling Rs. 55,471 u/s 40A(3) read with rule 6DD of the Income-tax Rules, 1962. The Tribunal referred two questions of law to the court regarding the nature of these payments as 'expenditure' and the justification for the disallowance. The court analyzed the provisions of section 40A, emphasizing that payments exceeding Rs. 2,500 made in cash are not allowed as deductions unless by crossed cheque or bank draft. The court rejected the argument that 'expenditure' should be limited to specific deductions under sections 30 to 43A, stating that the term has a broader meaning encompassing expenses affecting gross profit. The court highlighted the legislative intent behind section 40A(3) to prevent the use of unaccounted money in business transactions, supporting the disallowance of cash payments for purchases. The court also discussed the relevance of rule 6DD, which exempts certain payments from the crossed cheque requirement, but found that the assessee did not qualify for any exceptions under the rule. Consequently, the court answered both questions in favor of the department, upholding the disallowance of the cash payments and awarding costs to the department.
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