JUDGMENT
S.D. Shah, J.
1. On being moved under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question for our opinion :
“Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the amount paid for purchase of Guvar, an item of assessee’s stock-in-trade tantamounted to expenditure within the meaning of section 40A(3) of the Income-tax Act ?”
2. In order to answer the aforesaid question, a few relevant facts are stated herein :
(1) The assessee is a partnership firm dealing in grains and grocery on wholesale basis. For the assessment year 1971-72, it has made payments exceeding Rs. 2,500 to five parties in cash. The Income-tax Officer noticed this fact on scrutiny of the accounts and called upon the assessee to explain why deduction of the said payments should be disallowed under section 40A(3) of the Act. After considering the explanation of the assessee, the Income-tax Officer allowed deduction of payments to five parties, and disallowed the payments made to three parties, namely, (i) M/s. Gopal Punjabhai of Dholka, (ii) M/s. Sursangbhai Mulubhai of Dholka, and (iii) M/s. Shah Brothers of Ahmedabad.
(2) Being aggrieved by the said order passed by the Income-tax Officer, the assessee approached the Appellate Assistant Commissioner who also confirmed the disallowance of the aforesaid amounts.
(3) On the further appeal to the Tribunal, the Tribunal has confirmed the finding of the Appellate Commissioner. The Tribunal did not accept the contention put forth by the assessee that the payments were made in advance towards the purchase of goods, namely, Guvar. The Tribunal also came to conclusion that the payments were made to purchase the goods and such payments being expenditure would come within the purview of section 40A(3) of the Act.
3. At the hearing of this reference, Mr. R. K. Patel, learned counsel for assessee, has stated that, before the Tribunal, the claim for the third amount, namely, Rs. 3,079 of M/s. Shah Brothers of Ahmedabad, was not pressed by the assessee.
4. Section 40A(3) of the Act, in so far as it is material, reads as under :
“Section 40A(3). Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than March 31, 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 a crossed bank draft, such expenditure shall not be allowed as a deduction…
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.”
5. The aforesaid question is no longer res integral in view of the recent decision of the Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667. Before the Supreme Court, along with the question of the validity of section 40A(3) of the Income-tax Act, 1961, the question of the true interpretation of section 40A(3) and its true import were also examined. While dealing with the said provision, the Supreme Court noticed that, originally, section 40A(3) required payments in respect of expenditure which exceeded Rs. 2,500 to be made by a crossed cheque or a crossed bank draft. On failure to do so, the payments made were disallowed in the computation of income. In order to remove hardship to smaller assessees, the Amending Act, 1987, has raised this ceiling to Rs. 10,000. The court noticed that section 40A(3) begins with a non obstante clause. It is an overriding provision which operates in spite of 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”. The Legislature has thus made it clear that the provisions of section 40A will apply in supersession of other contrary provisions of the Act relating to the computation of income. The court, while construing the word “expenditure”, observed as under (at page 673) :
“As for the second question it may be stated that the ‘expenditure’ has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means that all outgoings are brought under the word ‘expenditure’ for the purpose of the section. The expenditure for purchasing stock-in-trade is one such outgoings. The value of profits under section 28 on principles of commercial accounting. The payments made for purchases would also be covered by the word ‘expenditure’ and such payments can be disallowed if they are made in cash in the sums exceeding the amount specified under section 40A(3). The rule provides that an assessee can be exempted from the requirement of payment by crossed cheque or a crossed bank draft where purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. Section 40A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials.”
6. From the aforesaid observations, it becomes clear that the expenditure for purchasing stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits under section 28 on principles of commercial accounting. Therefore, the contention of the assessee before us that the aforesaid payment was made to the aforesaid two parties towards advance payment for purchase of stock-in-trade stands directly answered by the aforesaid observations of the Supreme Court. The submission of Mr. R. K. Patel to the contrary cannot now be accepted.
7. Even otherwise also, the present reference involves pure questions of fact to be answered by this court and we would not have undertaken that exercise of answering pure questions of fact. However, in view of the direct decision of the Supreme Court, we have not declined to answer the question.
8. In the result, the question referred to us is answered in the affirmative, i.e., against the assessee and in favour of Revenue. No costs.
