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Section 40A(3) of Income-tax Act, 1961 – Business disallowance – Cash payment exceeding prescribed limits – Assessment year 1970-71 – Whether purchase price of stock in trade constitutes item of expenditure, deductibility of which can be restricted by provisions of section 40A(3) - Held, yes - Whether, therefore, where assessee made payments in cash in excess of Rs. 2,500 for purchase of its stock-in-trade, ITO was justified in disallowing said payments by applying provisions of section 40A(3) – Held, yes FACTS The ITO disallowed a sum representing purchases made by the assessee for its stock-in-trade since payments were made in cash although the individual payment exceeded Rs. 2,500. It was held that section 40A(3) applied and the assessee had failed to come within any of the exceptions of rule 6DD of the Rules. On appeal, the AAC held that the assessee had been able to establish the genuineness of the payments as well as the identity of the persons to whom the payments were made and he, therefore, allowed the appeal. On revenue's appeal, the Tribunal held that the word "expenditure" occurring in section 40A did not include the amounts laid down for purchases of stock-in-trade but it had reference only to deductions that could be made from the gross profits computed after taking into account the sales and purchases only. In this view, it was held that the disallowance made by the ITO was not justified. On reference : HELD In U.P. Hardware Store v. CIT [1976] 104 ITR 664 (All.), Division Bench held that there was no justification for accepting the plea that the word ‘expenditure' used in section 40A(3) should be restricted to overhead expenses enumerated in sections 30 to 43A. The word ‘expenditure' was of wide import. It would also cover the expenses to be taken into account while determining the gross profit. The gross profit is determined by the difference between the opening stock and the purchases on the one hand and the closing stock and the sales on the other. The payments made for purchases would also be covered by the word ‘expenditure' and such payments could be disallowed if they were made in cash in sums exceeding Rs. 2,500. In view of aforesaid…

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