Satish Chandra, J.

1. THE assessee deals in sale of stone, timber and timber goods. For the assessment year 1970-71, the ITO disallowed a sum of Rs. 22,964 which represented purchases made by the assessee for its stock-in-trade but which were made in cash although the individual payments exceeded Rs. 2,500. It was held that Section 40A(3) of the Act applied and the assessee has failed to come within any of the exceptions of Rule 6DD of the Rules. On appeal, the AAC held that the assessee has 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 and sustained the disallowance only to the extent of Rs. 2,726. THE department went up in appeal to the Tribunal. THE Tribunal held that the word "expenditure" occurring in Section 40A did not include the amounts laid out 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 were not justified.

2. AT the instance of the department, the Tribun