Law:

Section:

Section 40A(3) of the income-tax act, 1961-Payments not deductible-Payments in cash exceeding rs. 2,500-assesses made several cash payments exceeding rs. 2,500 to g after introduction of section 40A(3) with effect from 1-4-1969-however, to overcome disallowance of said payment under section 40A(3) assessee claimed that these cash payments were made in discharge of certain outstanding dues of g pertaining to period prior to 1-4-1969 and, therefore, they were not hit by section 40A(3)-whether in absence of appropriation of impugned cash payments towards outstanding dues by assessee, ito could appropriate them in a manner different from that claimed by assessee-Held, on facts, no-Whether assessee was entitled to appropriate payments in manner least disadvantageous to him and hence its claim that no amount was disallowable under section 40A(3) was justified-held, on facts, yes Facts During the financial year 1969-70, the assessee-firm had purchased goods worth Rs. 86,002 from G and paid for them partly by crossed cheques and partly in cash. The total of individual cash payments to G exceeding Rs. 2,500 in each case came to Rs. 24,500. To overcome disallowance of this amount under section 40A(3), introduced with effect from 1-4-1969, the assessee claimed that the abovementioned-cash payments were made towards the outstanding dues of Rs. 75,684 of G as on 1-4-1969 and, hence, were outside the purview of section 40A(3). The ITO, however, did not treat the entire cash payments as being in discharge of outstanding dues but adjusted outstanding dues chronologically against payments in accounting period under consideration, whether in cash or in kind. Making appropriation in the aforesaid manner, the ITO held that only Rs. 3,184 out of cash payments of Rs. 24,500 were made in discharge of outstanding dues and the remainder, i.e., Rs. 21,316, was disallowable under section 40A(3). On appeal, the AAC confirmed the ITO's order. On further appeal, the Tribunal held that the impugned payments did not constitute "expenditure" within the meaning of section 40A(3) and set aside the disallowance. On reference: Held 1. Section 59 of the Indian Contract Act provides that where a…

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