The word "expenditure" used in Section 40A(3) of the Income-tax Act covers expenditure on purchase of raw material.

O.Chinnappa Reddy, J.

1. The Income-tax Appellate Tribunal, Chandigarh, has referred the following question for our consideration :

" 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) of the Income-tax Act does not cover expenditure on purchase of raw material ?"

2. The assessee manufactures shapers and castings of machines. Raw material was purchased from M/s. Ludhiana Crucible & Cupola Association on various occasions and, on as many as five occasions in the course of the accounting year 1969-70, payment was not made by crossed cheque or crossed bank draft. It was not shown that there was any business expediency for making the payments in cash. The Income-tax Officer disallowed the payments under Section 40A(3). The order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner. Before the Income-tax Appellate Tribunal, it was urged on behalf of the assessee that payments made for the purchase of raw material or goods was not expenditure-within the meaning of Section 40A(3) since the amount expended did not leave the assessees books irretrievably but came back in the shape of stock-in-trade. The Tribunal accepted the submission made on behalf of the assessee and deleted the addition made by the Income-tax Officer on account of the disallowance of payments not made by crossed cheque or crossed draft towards purchase of raw material.

3. Section 28 defines income chargeable to income-tax under the head "profits and gains of business or profession". Section 29 provides that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43A. Sections 30 to 43A contain various provisions dealing with deduction which may be allowed, the extent to which they may be allowed and deductions which may not be allowed. Sections 40 and 40A deal particularly with deductions which may not be allowed. Section 40A was introduced into the Income-tax Act with effect from April 1, 1968, by way of amendment, by the Finance Act of 1968. Section 40A(1) is significant and it enacts that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head "profits and gains of business or profession". Section 40A(2) empowers the Income-tax Officer to disallow as a deduction expenditure in respect of which payment is made to any person specified in Clause (b) of the sub-section and which expenditure is considered by the Income-tax Officer excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made for the legitimate needs of business or profession of the assessee. Similarly, Section 40A(3) empowers the Income-tax Officer to disallow as a deduction any expenditure in respect of which payment is made of "any sum exceeding Rs. 2,500 otherwise than by crossed cheque or crossed bank draft, unless the payment is made under the circumstances which may be prescribed by the Rules, having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. The object of Section 40A(3) is patent and is discernible from the provision itself. It is obviously designed to check tax evasion by claims of cash expenditure which are difficult of proper investigation by the revenue. Now, cash may be improperly claimed as laid out as much for purchasing goods required for the business as for the purposes enumerated in Sections 30, 31, etc. There is no reason why the expression "expenditure" occurring in Section 40A(3) should be confined to deductions claimed under sections 30, 31, etc., and not to cash laid out for the purchase of goods. To give such a narrow interpretation to the expression; "expenditure" and to exclude from its meaning payments mad