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JUDGMENT R.L. Gulati, J.-This is a reference under section 256(1) of the Income-tax Act, 1961. The assessee is a registered firm carrying on the business of iron and hardware. The proceedings relate to the assessment year 1970-71. During the course of examination of the books of accounts of the assessee, the Income-tax Officer discovered that the assessee had made payments in cash exceeding the sum of Rs. 2,500 for some of the purchases. The total of such payments came to Rs. 55,471. Being of the view that under section 40A(3) read with rule 6DD of the Income-tax Rules, 1962, such payments could not be allowed as deduction, the Income-tax Officer required the assessee to show cause why the payments amounting to Rs. 55,471 be not disallowed. After considering the explanation filed by the assessee, the Income-tax Officer came to the conclusion that the conditions laid down in rule 6DD were not satisfied and he accordingly disallowed the sum of Rs. 55,471 claimed as deduction and added it to the income of the assessee. The assessee's appeal was dismissed by the Appellate Assistant Commissioner of Income-tax and its second appeal was also dismissed by the Income-tax Appellate Tribunal. However, at the instance of the assessee, the Tribunal 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 payments made to suppliers for purchase of goods are 'expenditure' within the meaning of the Income-tax Act, 1961? (2)If the answer to the first question is in the affirmative, whether the Tribunal was justified in maintaining the disallowance and/or addition of Rs. 55,741 in computing the taxable income of the assessee for the assessment year 1970-71?" Section 40A was added to the Income-tax Act by section 7 of the Finance Act of 1968, with effect from 1st April, 1968. We are concerned with the interpretation of sub-section (3) of this section which reads: "40A. (3) 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…

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