The word expenditure used in Section 40A(3) of the Income-tax Act, 1961, covers expenditure on purchases of goods and the prohibition in Section 40A(3) is attracted even in cases of payments by book adjustments and where the book adjustments are not made by the assessee directly in the accounts of the party who supplied the goods or services to the assessee.

J.V.Gupta, J.

1. At the instance of the revenue, the Income-tax Appellate Tribunal, Chandigarh Bench, 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 Tribunal was right in law in holding that the word expenditure used in Section 40A(3) does not cover expenditure on purchases of goods ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the prohibition in Section 40A(3) was attracted even in cases of payments by book adjustments and where the book adjustments were not made by the assessee directly in the accounts of the party who supplied the goods or services to the assessee?"

2. The assessee, M/s. Kishan Chand Maheshwari Dass, is a registered firm. It has four partners, namely, Sarvashri Amar Nath, Manohar Lal, Bhan Chand and Kishan Chand, with varying shares in the firms profits. For the assessment year 1972-73, the ITO completed the assessment at a total income of Rs. 78,440 as against the declared income of Rs. 22,280. The ITO purported to apply the prohibition contained in Section 40A(3) of the Income-tax Act, 1961 (hereinafter called "the Act"), and on this account made an addition of Rs. 56,156 to the declared income of the assessee. The said addition was confirmed by the AAC on appeal. In second appeal to the Appellate Tribunal, the assessee made a number of contentions in favour of his plea that the addition was not warranted by law. The Tribunal accepted the assessees contention that the prohibition laid down in Section 40A(3) of the Act was attracted only in a case of expenditure in respect of which a deduction \vas otherwise allowable under Sections 30 to 37 of the Act and held that the expenditure in question having been incurred by the assessee on purchase of goods dealt with by it, it did not attract the said prohibition. The reason stated was that, according to the very wording of the said section, the prohibition was against the allowability of the expenditure as a deduction.

3. The assessees another contention that it was only cash payments, which were hit by the prohibition contained in Section 40A(3) was, however, rejected by the Tribunal. The Tribunal in this regard referred to Clause (e) of Rule 6DD of the I.T. Rules, 1962, and noted the limited area within which payments by book adjustments could be considered to fall within the exception to the rule of prohibition contained in the said provision. The said limited area was where the payment by book adjustment was made to a person directly who supplied the goods or services to the assessee. The Tribunal, consequently, held that payments by book adjustments in the accounts of third parties were hit by the prohibition contained in Section 40A(3).

4. Question No. 1.--The learned counsel for the revenue submitted that the question of law referred to this court has already been dealt with in a judgment of this court in CIT v. Grewal Group of Industries [1977] 110 ITR 278, wherein it has been held that Section 40A(3) is obviously designed to check fax evasion by claims of cash expenditure which are difficult of proper investigation by the revenue. To exclude from the meaning of the expression "expenditure"payments made for goods purchased is to once again make it difficult for the revenue to properly investigate payments and to open the door wide to evasion. Payment for goods comes within the expression "expenditure" in Section 40A(3). Therefore, payments made for the purchase of goods fall within the meaning of the expression "expenditure" in Section 40A(3) of the Act. This judgment has also been subsequently followed by this court in CIT v. New Light Tin Manufacturing Company, Income-tax Reference No. 63 of 1974, decided on 27th August, 1979 (since reported in [1980] 121 ITR 229). The learned counsel in support of his contention further relied upon the Allahabad High Court judgments in U. P. Hardware Sto