SHIVASHANKAR BHAT, J.

( 1 ) THE following question of law is referred for our answer at the instance of the assessee under the provisions of the Income Tax Act, 1961 ('the act' for short):-"on the facts and in the circumstances of the assessee's case, whether the Tribunal was justified in law in holding that the expenditure incurred by the assessee was hit by Section 40-A (3) of the Income Tax Act, 1961?"

( 2 ) IN the course of the assessment proceedings for the year 1976-77, a sum of Rs. 50,000/-was found to have been debited in the profit and loss account. This represented the loss sustained by the assessee on a picture called 'nirman'. The assessee is a distributor of films and sought sole distributorship of the film 'nirman' for Andhra pradesh for a consideration of Rs. 95,000/ -. The agreement was dated 6-12-1974. The assessee paid a sum of Rs. 5,000/- on one date in cash and further sum of Rs. 45,000/- subsequently. Since the picture was a failure, the assessee did not release the film and wrote off this sum of rs. 50,000/ -. The claim of the assessee for excluding this sum was rejected by the Income-tax officer on two grounds: i) the payment was made by cash in contravention of Section 40-A (3) of the Act; ii) the loss sustained by the assessee cannot be treated as a revenue loss since the picture was never released; it was a capital loss.

( 3 ) THE Commissioner of Income-tax (Appeals)accepted the contention of the assessee that the business of the assessee was distribution of films and therefore acquisition of a film for distribution was part of acquiring stock-in-trade. Hence the loss sustained by the assessee was a trading loss and not a capital loss. The Commissioner of Income-tax (Appeals) held that Section 40-A (3) of the Act was not applicable because this was not an 'expenditure' referred therein. For the assessment year 1977-78 a similar deduction of Rs. 20,000/- in the profit and loss account arising out of the transaction regarding another picture was disallowed by the Income-tax Officer. The Appellate Assistant commissioner affirmed the disallowance in the said case holding that it was an expenditure incurred without following the prescription laid down under Section 40-A (3) of the Act. The said picture was never produced and the whereabouts of the producer was not known.

( 4 ) BYEFORE the Appellate Tribunal the contention was confined to the applicability ofsection 40-A (3) of the Act in both the cases. The appellate Tribunal concluded that the payments were made to acquire stock-in-trade and therefore were in the nature of expenditure, consequently Section 40-A (3) was attracted; since the payments were made in cash, they cannot be taken note of in the proceedings. Hence this reference at the instance of the assessee.

( 5 ) THE question raised by Mr. Prasad,learned counsel for the assessee, is quite interesting. The learned counsel referred to Section 40-A (3) of the Act, which reads thus:"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 notification in the Official Ga/ettc, in a sum exceeding two thousand five hundred rupees otherwise than by a cross cheque drawn on a bank or by a crossed bank draf, such expenditure shall not be allowed as a deduction:" (two provisions ommitled, are not necessary.) according to the learned counsel this section governs only 'expenditure'. If a particular sum is spent or goes out of the asscsseer not as an expenditure, though deductible in the compulation of the profit and loss account, the prescription laid by Section 40-A (3) is not applicable. Under the Act there is a distinction between a deduction and an expenditure. A deduction is to be made while working out the profit and loss account, while expenditure is stalutorily recognised under Section 36 of the Act. The learned counsel referred to Section 28 of the A

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