JUDGMENT
O. Chinnappa Reddy, J.
1. The Income-tax Appellate Tribunal, Chandigarh, has referred the following question for our consideration :
” 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) of the Income-tax Act does not cover expenditure on purchase of raw material ?”
2. The assessee manufactures shapers and castings of machines. Raw material was purchased from M/s. Ludhiana Crucible & Cupola Association on various occasions and, on as many as five occasions in the course of the accounting year 1969-70, payment was not made by crossed cheque or crossed bank draft. It was not shown that there was any business expediency for making the payments in cash. The Income-tax Officer disallowed the payments under Section 40A(3). The order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner. Before the Income-tax Appellate Tribunal, it was urged on behalf of the assessee that payments made for the purchase of raw material or goods was not expenditure-within the meaning of Section 40A(3) since the amount expended did not leave the assessee’s books irretrievably but came back in the shape of stock-in-trade. The Tribunal accepted the submission made on behalf of the assessee and deleted the addition made by the Income-tax Officer on account of the disallowance of payments not made by crossed cheque or crossed draft towards purchase of raw material.
3. Section 28 defines income chargeable to income-tax under the head “profits and gains of business or profession”. Section 29 provides that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43A. Sections 30 to 43A contain various provisions dealing with deduction which may be allowed, the extent to which they may be allowed and deductions which may not be allowed. Sections 40 and 40A deal particularly with deductions which may not be allowed. Section 40A was introduced into the Income-tax Act with effect from April 1, 1968, by way of amendment, by the Finance Act of 1968. Section 40A(1) is significant and it enacts that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head “profits and gains of business or profession”. Section 40A(2) empowers the Income-tax Officer to disallow as a deduction expenditure in respect of which payment is made to any person specified in Clause (b) of the sub-section and which expenditure is considered by the Income-tax Officer excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made for the legitimate needs of business or profession of the assessee. Similarly, Section 40A(3) empowers the Income-tax Officer to disallow as a deduction any expenditure in respect of which payment is made of “any sum exceeding Rs. 2,500 otherwise than by crossed cheque or crossed bank draft, unless
the payment is made under the circumstances which may be prescribed by the Rules, having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. The object of Section 40A(3) is patent and is discernible from the provision itself. It is obviously designed to check tax evasion by claims of cash expenditure which are difficult of proper investigation by the revenue. Now, cash may be improperly claimed as laid out as much for purchasing goods required for the business as for the purposes enumerated in Sections 30, 31, etc. There is no reason why the expression “expenditure” occurring in Section 40A(3) should be confined to deductions claimed under sections 30, 31, etc., and not to cash laid out for the purchase of goods. To give such a narrow interpretation to the expression; “expenditure” and to exclude from its meaning payments made for goods purchased is to once again make it difficult for the revenue to properly investigate the payments, to open the door wide to allow evasion and thus to defeat the very object which the provision was designed to achieve. While it’ is ordinarily true that a taxing statute is to be construed, strictly, it does not mean that a taxing statute should be construed so strictly in favour of the subject as to defeat its very purpose. A provision which is capable of more than one construction should be construed in a manner which would achieve the patent purpose of the Act and not so as to render it sterile and inefficacious merely on the principle that taxing statutes should be construed strictly. To do otherwise, would be to carry the principle of strict construction too far and to allow a rule of construction to override clear parliamentary intention. That is not permissible. In State of Tamil Nadu v. Kandaswami [1975] 36 STC 191, 198 (SC), construing Section 7A of the Madras General Sales Tax Act, the Supreme Court observed :
“Its main object is to plug leakage and prevent evasion of tax. In interpreting such a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render at otiose or sterile. The view taken by the High Court is repugnant to this cardinal canon of interpretation.”
4. In the case before us, there is really no need to invoke any rule of construction since, to our minds, the language is clear and the meaning of the word “expenditure” cannot be confined in the manner suggested by the assessee. We have referred to the canon of construction only because the Delhi Bench of the Income-tax Appellate Tribunal whose view was adopted by the Chandigarh Bench of the Appellate Tribunal in the present case appeared to rely upon the so-called rule of strict construction of taxing statutes. “Expenditure”, according to the Chambers Twentieth Century Dictionary
means ” act of expending or lending out; that which is expended ; the process of using up ; money spent”. This is how the dictionary defines the word “expenditure” and that is how the word is understood in ordinary parlance. There is no justification for adopting any other view. In fact, a reference to Section 40A(2) further justifies the view that the expression “expenditure” is used in Section 40A to include amounts spent for the purchase of goods. Section 40A(2), as mentioned by us earlier, empowers the Income-tax Officer to disallow as a deduction expenditure in respect of which payment is made to any person specified in Clause (b) of the subsection and which expenditure is considered by the Income-tax Officer excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made for the legitimate needs of business or profession of the assessee. Thus, even payment for goods comes within the expression ” expenditure ” in Section 40A(2) and ” it may be disallowed if it is excessive or unreasonable and if it is made to any of the persons specified in Clause (b) of Section 40A(2). There is no reason to assume that payment for goods falls within the mischief of the expression “expenditure ” in Section 40A(2) but not within the mischief of the same expression in Section 40A(3).
5. We are, therefore, satisfied that the payments made for purchase of goods fall within the meaning of the expression “expenditure” occurring in Section 40A(3). Our view is supported by the decision of the Allahabad High Court in U. P. Hardware Store v. Commissioner of Income-tax [1976] 104 ITR 664 (All), the decision of the Orissa High Court in Sajowanlal Jaiswal v. Commissioner of Income-tax [1976] 103 ITR 706 (Orissa) and the decision of the Kerala High Court in P. R. Textiles v. Commissioner of Income-tax as yet unreported. The question referred to us is, therefore, answered in the negative. No costs.
