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Issues involved: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding the nature of expenditure and payments made by the assessee.
Summary: The case involved a firm engaged in wholesale business, which made cash payments exceeding the specified limit without using crossed cheques or bank drafts, leading to a dispute with the Income-tax Officer. The Tribunal referred the question of whether section 40A(3) applies only to deductions under section 37 or to any payment affecting total income under the Act. The Tribunal held that section 40A(3) requires payments exceeding a certain limit to be made through specified means unless exceptional circumstances exist. The Appellate Tribunal upheld the addition to the assessee's income, emphasizing the specific requirements of section 40A(3) and the need for genuine evidence. The relevant provision, section 40A(3), prohibits certain expenditures from being deducted if payment is not made through specified methods. Rule 6DD of the Income-tax Rules, 1962 provides exceptions to this rule, including payments for specific types of purchases and in certain circumstances. The assessee argued that the payments in question were not deductions but investments in business, hence section 40A should not apply. However, the Court found that rule 6DD clearly indicates the scope of section 40A(3) and the intention behind it, leading to the dismissal of the assessee's contention. The legislative purpose behind section 40A(3) is to prevent tax evasion through cash expenditures, ensuring proper scrutiny by the tax authorities. The Court agreed with the Tribunal's decision, emphasizing the broad definition of "expenditure" and the legislative intent behind the provision. In conclusion, the Court held that the expenditure referred to in section 40A(3) is not limited to deductions under section 37 but includes any payment affecting the total income under the Act. The judgment was delivered by R. N. Mishra J., with N. K. Das J. concurring. End of Summary
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