Punjab-Haryana High Court
Commissioner Of Income-Tax vs Kishan Chand Maheshwari Dass on 10 September, 1979
Equivalent citations: 1980 121 ITR 232 P H
Author: J Gupta
Bench: B Dhillon, J Gupta
JUDGMENT J.V. Gupta, J.
- At the instance of the revenue, the Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following two questions of law for the opinion of this court:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the word ‘expenditure’ used in Section 40A(3) does not cover expenditure on purchases of goods ?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the prohibition in Section 40A(3) was attracted even in cases of payments by book adjustments and where the book adjustments were not made by the assessee directly in the accounts of the party who supplied the goods or services to the assessee?”
- The assessee, M/s. Kishan Chand Maheshwari Dass, is a registered firm. It has four partners, namely, Sarvashri Amar Nath, Manohar Lal, Bhan Chand and Kishan Chand, with varying shares in the firm’s profits. For the assessment year 1972-73, the ITO completed the assessment at a total income of Rs. 78,440 as against the declared income of Rs. 22,280. The ITO purported to apply the prohibition contained in Section 40A(3)of the Income-tax Act, 1961 (hereinafter called “the Act”), and on this account made an addition of Rs. 56,156 to the declared income of the assessee. The said addition was confirmed by the AAC on appeal. In second appeal to the Appellate Tribunal, the assessee made a number of contentions in favour of his plea that the addition was not warranted by law. The Tribunal accepted the assessee’s contention that the prohibition laid down in Section 40A(3)of the Act was attracted only in a case of expenditure in respect of which a deduction \vas otherwise allowable under Sections 30 to 37 of the Act and held that the expenditure in question having been incurred by the assessee on purchase of goods dealt with by it, it did not attract the said prohibition. The reason stated was that, according to the very wording of the said section, the prohibition was against the allowability of the expenditure as a deduction.
- The assessee’s another contention that it was only cash payments, which were hit by the prohibition contained in Section 40A(3)was, however, rejected by the Tribunal. The Tribunal in this regard referred to Clause (e) of Rule 6DD of the I.T. Rules, 1962, and noted the limited area within which payments by book adjustments could be considered to fall within the exception to the rule of prohibition contained in the said provision. The said limited area was where the payment by book adjustment was made to a person directly who supplied the goods or services to the assessee. The Tribunal, consequently, held that payments by book adjustments in the accounts of third parties were hit by the prohibition contained in Section 40A(3).
- Question No. 1.–The learned counsel for the revenue submitted that the question of law referred to this court has already been dealt with in a judgment of this court in CIT v. Grewal Group of Industries 110 ITR 278, wherein it has been held that Section 40A(3)is obviously designed to check fax evasion by claims of cash expenditure which are difficult of proper investigation by the revenue. To exclude from the meaning of the expression “expenditure”payments made for goods purchased is to once again make it difficult for the revenue to properly investigate payments and to open the door wide to evasion. Payment for goods comes within the expression “expenditure” in Section 40A(3). Therefore, payments made for the purchase of goods fall within the meaning of the expression “expenditure” in Section 40A(3)of the Act. This judgment has also been subsequently followed by this court in CIT v. New Light Tin Manufacturing Company, Income-tax Reference No. 63 of 1974, decided on 27th August, 1979 (since reported in  121 ITR 229). The learned counsel in support of his contention further relied upon the Allahabad High Court judgments in U. P. Hardware Store v. CIT  104 ITR 664, Addl. CIT v. Nathimal Badri Prasad  116 ITR 409, Addl. CIT v. Ram Narain Kishan Gopal  116 ITR 776, Ideal Tannery v. CIT  117 ITR 34, Addl. CIT v. Radhey Shyam Jagdish Prasad  117 ITR 186 and CIT v. Kohli Khan Bhandar  111 ITR 419 and of the Orissa High Court in Sajowanlal Jaiswal v. CIT  103 ITR 706. An unreported judgment of the Kerala High Court in P.R. Textiles v. CIT, ITR No. 68 of 1973, decided on 19th February 1975 (since reported in  121 ITR 237 (Appendix) infra has also been cited, which supports his point of view.
- The learned counsel for the assessee has disputed the correctness of these judgments. However, he was unable to cite any High Court judgment in his support. His main contention is that the words “such expenditure” in Section 40A(3)is to be read as “such expenditure as given in the preceding sections”. Section 40A(3)reads as under :
“Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by crossed bank draft, such expenditure shall not be allowed as a deduction…”
- The various expenditures on which deductions, he contends, are allowable, are dealt with in Sections 30to 37of the Act and Section 40A(3) deals only with those deductions. Expenditure incurred otherwise than that, such as cost price of the goods, etc., is not included in the term “expenditure” used therein. According to the learned counsel, cost price is not the assessee’s profit, and, therefore, the question of claiming any deduction on that account does not arise. For the meaning of the word “expenditure” he cited Indian Molasses Co. (P.) Ltd. v. CIT  37 ITR 66 (SC). The word “expenditure”, though in another connection, was referred to by the Supreme Court in that case and it was observed:
” ‘Spending’ in the sense of ‘paying out or away’ of money is the primary meaning of ‘expenditure’. ‘Expenditure’ is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become, expenditure on the happening of an event is not expenditure.”
- We have considered the argument of the learned counsel for the assessee at great length, but we are unable to agree with him. The Allahabad High Court as well as the Orissa High Court have considered this contention of the assessee and have repelled the same. In Sajowanlal Jaiswal’s case  103 ITR 706 the Orissa High Court has observed (p. 709):
” ‘Expenditure’ has no definition in the statute. All outgoings could broadly come under this head. In fact the Chambers’ Twentieth Century Dictionary gives the following meaning to the words :
‘act of expending or laying out; that which is expended; the process of using up; money spent.’ If this be the meaning of the word according to common parlance, and in the absence of a statutory definition, the word would take its colour according to its common parlance use, payment for purchase of goods would certainly be an expenditure. Deduction need not also be confined to Section 37. In Sub-section (3) that word has been used in its widest amplitude and the provisions of rule 6DD throw considerable light as to what exactly is meant to be the scope of Sub-section (3).”
- Similarly, in U. P. Hardware Store’s case  104 ITR 664, 668 the Allahabad High Court has repelled this contention by saying thus:
“The learned counsel then urged that money spent on purchase of stock-in-trade, etc., represents circulating capital and cannot be included in the term ‘expenditure’ which means money spent away. He cited certain cases to support tbis contention. It is not necessary to notice these cases because it cannot be disputed that the money invested in the purchases of stock-in-trade and raw materials represents circulating capital and such payments are not covered by any of the provisions contained in Sections 30 to 43A. But the value of the stock-in-trade has to be taken into account while determining the gross profits under Section 28 itself on principles of commercial accounting.”
- Thus, in all these judgments, this matter has been dealt with and the argument of the assessee has been negatived.
- The learned counsel for the assessee then contended that the words “not being later than the 31st day of March, 1969” (reproduced above), apply to those payments which have been made prior to 31st March, 1969, and not to payments made subsequent thereto. In our opinion, this argument is wholly misconceived. The language of the section is quite clear. The meaning, as suggested by the learned counsel, is not at all borne out from the language used therein.
- Thus, we do not find any force in the contentions raised by the learned counsel for the assessee. We respectfully follow the view earlier taken by this court in Grewal Group of Industries’ case  110 ITR 278 which finds further support from the judgments of the Allahabad High Court as well as the Orissa High Court, referred to above. In this view of the matter, the answer to question No. 1 is in the negative, i.e., in favour of the revenue and against the assessee.
- Question No. 2: In view of our answer to question No. 1 and because of Clause (e) of Rule 6DD, which reads, “where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered, by the assessee to such payee”, it is clear that there is a limited area within which payments by book adjustment can be considered to fall within the exception to the rule of prohibition contained in the said provision of law. According to the said Clause (e) it is the expenditure in respect of which the payment by way of book adjustment is made to the payee who directly supplied the goods or services to the assessce, that falls outside the mischief of the rule of prohibition. In this view of the matter, we are of the opinion that the Tribunal was right in holding that the prohibition in Section 40A(3)was attracted even in cases of payments by book adjustment and where the book adjustments were not made by the assessee directly in the accounts of the party who supplied the goods or services to the assessee. Thus, the answer to this question is in the affirmative.
- For the reasons recorded above, both the questions have been answered accordingly with no order as to costs.