Nazir Ahmad, J.:— A statement of the case has been submitted by the Income-tax Appellate Tribunal, Patna Bench “A”, Patna, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act.”), as the instance of the Commissioner of Income-tax, Bihar-I, Patna, referring the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal were correct in law holding that the expenditure as contemplated in section 40A(3) of the Income-tax Act, 1961, does not include expenditure on purchases relating to the trading account?”

2. The relevant facts of the case can be culled out from the statement of the case. The assessee, a registered firm, had made payments of Rs. 50,360 in cash to two parties on different dates for the purchase of goods. The payment in each case exceeded Rs. 2,500 and it had not been made by a crossed cheque or by a crossed bank draft. The Income-tax Officer disallowed the same under section 40A(3) of the Act. The assessee's case before the Income-tax Officer was that the provisions of section 40A(3) were applicable to payment for expenditure only and not to the payment for purchase of goods. The Income-tax Officer did not accept this contention and he disallowed the entire amount of Rs. 50,360. The order of the Income-tax Officer has been annexed and marked as annexure “A” forming part of the statement of the case. On appeal before the Appellate Assistant Commissioner, it was contended on behalf of the assessee that one of the parties which was at Kanpur and from whom goods had been purchased had declined to accept the cheque from the person who had gone there for making purchases and it was for this reason that the payment to the Kanpur party was made in cash and so the payment was made under compulsion and in the exigencies of business interest. It was also argued on behalf of the assessee that in the case of the second party, the payment could not be made by cheque because of the strike in the bank concerned. It was further contended before the Appellate Assistant Commissioner that both the parties were genuine and were assessed to tax and that the Income-tax Officer had been given discretion that in hard cases when the dealings were genuine, the payments should not be disallowed. It was also contended before the Appellate Assistant Commissioner that the expenditure did not include purchase of goods.

3. The Appellate Assistant Commissioner relied on two decisions of the Patna Benches of the Tribunal in I.T.A Nos. 485 (Pat) of 1972-73 decided on October 8, 1973, and 402 (Pat) of 1972-73 decided on October 8, 1973, and also considering that the purchases were genuine and were made from genuine parties, he deleted the addition of Rs. 50,360. The order of the Appellate Assistant Commissioner has been annexed and marked as annexure “B” forming part of the statement of the case.

4. The Department filed an appeal before the Tribunal and the Tribunal held that both purchase and payment to the parties concerned have not been doubted by the Department and the Tribunal has always held the view that the word “expenditure” used in section 40A(3) does not cover purchases and the Tribunal agreed with the view taken by the Patna Bench “B” of the Appellate Tribunal in the two decisions referred by the Appellate Assistant Commissioner and the Tribunal dismissed the Department's appeal. The order of the Tribunal has been annexed and marked as annexure “C” forming part of the statement of the case.

5. The Tribunal also pointed out that, according to the Revenue, the term “expenditure” in section 40A(3) of the Act covers expenses of all categories including that of purchase of goods in emergencies and also payment for services.

6. Mr. K.N Jain, for the assessee, has raised a preliminary issue to the effect that the Appellate Assistant Commissioner had deleted the additions believing the case of the assessee and so the question referred by the Tribunal has become academic and so the question should not be answered. For this purpose, he has referred to paragraph 3 of the order of the Appellate Assistant Commissioner at page 6 which shows that purchases were made from M/s. L.K Industries, Kanpur, and M/s. Bihar Cable Co., Patna. It was stated before the Appellate Assistant Commis-missioner that the Kanpur party from whom the goods were purchased declined to accept cheque from the person who went there for purchases and hence cash was paid under compulsion and in the exigencies of business interest and in the second case, there was strike on the clearance side due to a dispute in Baroda Bank. The Appellate Assistant Commissioner also pointed out that it was also submitted that both parties are genuine and are assessed to tax and that the Income-tax Officer has been given discretion that in hard cases when the dealing is genuine, he should not disallow expenditure. It was also asserted before the Appellate Assistant Commissioner that the expenditure does not include purchase of goods. However, the Appellate Assistant Commissioner in paragraph 4 of his order held that in view of the two decisions of the Patna Tribunal which are binding and also due to the satisfactory evidence in regard to the genuineness of the purchases from genuine parties, he felt that in the interest of justice, the disallowance should be deleted. He, accordingly, deleted disallowance of Rs. 50,360. Mr. K.N Jain has also referred to the decision of the Tribunal at page 7, where the Tribunal has pointed out that apart from the fact that both purchases and payments to the parties concerned have not been doubted by the Department in this case, the Tribunal has always held the view that the word “expenditure” used in section 40A(3) of the Act does not cover purchases and the Tribunal held that there was no justification to interfere with the order of the Appellate Assistant Commissioner and the Department's appeal was dismissed.

7. Mr. K.N Jain, for the assessee, has referred to rule 6DD(j) of the Income-tax Rules, 1962 (hereinafter referred to as “the Rules”), which lays down that no disallowance under sub-section (3) of section 40A of the Act shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in a case “where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft—

(1) due to exceptional or unavoidable circumstances, or

(2) because payment in the manner aforesaid was not practicable or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof,

and also funishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee”

8. From the order of the Appellate Assistant Commissioner, it appears that he only held that there was satisfactory evidence in regard to the genuineness of the purchases from genuine parties. He has not believed the case of the assessee that the payments were made due to the exceptional or unavoidable circumstances, or because payment in the manner aforesaid was not practicable or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof. Thus, neither the Tribunal nor the Appellate Assistant Commissioner has given findings as required under rule 6DD(j) of the Rules. It appears that the Appellate Assistant Commissioner and the Tribunal both considered the genuineness of the purchases from genuine parties only for the purpose of holding whether purchases of stock-in-trade were included within the meaning of section 40A(3) of the Act.

9. The learned senior standing counsel for the Revenue, Mr. B.P Raj-garhia, invited our attention to the order of the Income-tax Officer at page 3, where he has pointed out that the applicability of rule 6DD of the Rules has not been pressed by the assessee nor rule 6DD of the Rules is applicable. Unless there is a clear-finding by the Appellate Assistant Commissioner as required under rule 6DD(j) of the Rules, it cannot be said that the Appellate Assistant Commissioner has accepted the case of the assessee and deleted the addition on that ground. The only finding in paragraph 4 of the order of the Appellate Assistant Commissioner is that the purchases were genuine from genuine parties. This finding was necessary for the purpose whether purchases of goods were covered by the provisions of section 40A(3) of the Act. Hence, the preliminary objection is liable to be rejected on this ground alone.

10. However, the learned senior standing counsel for the Revenue submitted that the Appellate Tribunal had not referred the question whether expenditure on purchases relating to trading account was covered by rule 6DD(j) of the Rules. The learned counsel has further submitted that when the Tribunal has not referred this question for the opinion of the High Court, the High Court cannot allow the assessee to raise that question at this stage. For this purpose, he has relied on the case of Anil Kumar Roy Chowdhuri v. CIT, [1976] 102 ITR 12 (SC), where it has been held that in a reference under section 66 of the Indian Income-tax Act, 1922, the High Court exercises advisory jurisdiction and does not function as a court of appeal and the High Court has no jurisdiction in a reference to go behind the order of the Appellate Tribunal to investigate what case the assessee had initially made when the agreed statement of the case sets out the assessee's claim as finally made and considered. He has also referred to the decision of the Supreme Court in the case of Agha Abdul Jabbar Khan v. Cit, M.P, [1971] 82 ITR 872, where it has been held that the High Court had no jurisdiction to raise new questions of law; the questions raised by it did not flow from the question referred by the Tribunal and that if the High Court thought that the question referred to it did not bring out the real point in issue, it was open to it to call for a fresh statement of the case and direct the Tribunal to submit for its opinion the real question arising for decision and that the High Court was not entitled to deal with the reference as if it was dealing with an appeal before it.

11. The learned senior standing counsel for the Revenue has also relied on the case of CIT v. Krishna and, Sons, [1968] 70 ITR 733 (SC), where it has been held by their Lordships of the Supreme Court that since the jurisdiction of the Supreme Court arising in appeal over the judgment of the High Court on a reference under the Income-tax Act is also advisory, the Supreme Court can only record its opinion on questions which are referred and not on questions which could have been but have not been referred. Under such circumstances, the assessee cannot be allowed to argue that the case is covered by rule 6DD(j) of the Rules and on this ground also the preliminary objection raised by Mr. K.N Jain, for the assessee, has to be rejected. I, accordingly, reject the preliminary objection raised by the learned counsel for the assessee.

12. The next point which has been urged by Mr. K.N Jain is that the expenditure on purchases relating to trading account is not covered by the provisions of section 40A(3) of the Act. Section 40A(3) lays down that 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 Gazette, in a sum exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. The second proviso to section 40A(3) of the Act lays down that no disallowance under this sub-sec-tion shall be made where any payment in a sum exceeding Rs. 2,500 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Rule 6DD of the Rules has been framed in view of the second proviso to section 40A(3) of the Act.

13. Clearly, any expenditure incurred by an assessee in a sum exceeding Rs. 2,500 is not to be allowed as a deduction unless payment is made by a crossed cheque or a crossed bank draft. In other words, payments made in cash are to be disallowed. Now, in the instant case, there is no dispute that the assessee has made payments exceeding Rs. 2,500 in cash and the total of such payment comes to Rs. 50,360. Mr. K.N Jain, on behalf of the assessee, argued that the payment made for purchase of stock-in-trade cannot be called “expenditure” and as such section 40A(3) of the Act is not applicable. According to the learned counsel, the word “expenditure” must be restricted to expenditure which is allowed as a deduction under sections 30 to 43A of the Act and the payments made for the purchases of stock-in-trade is not covered by any of these provisions.

14. Section 28 of the Act deals with the profits and gains of business or profession and by virtue of section 29, the income referred to in section 28 would be computed in accordance with the provisions contained in sections 30 to 43A of the Act. The deductions contained in sections 30 to 43A are overhead expenses, such as rent, taxes, repairs and insurance, salary, etc., and depreciation-allowance. They are to be deducted out of the gross profits arising from business and it is only then that the net profits are arrived at which are liable to tax, but I see no justification fox-accepting the plea that the word “expenditure” used in section 40A(3) should be restricted to overhead expenses enumerated in sections 30 to 43A including depreciation allowance, etc. In my view, the word “expenditure” is of wide import. It will also cover the expense to be taken into account while determining the gross profit. The gross profit is determined by the difference between the opening stock and the purchases on the one side and the closing stock and sales on the other side. The payments made for purchases would also be covered by the word “expenditure” and such payments can be disallowed if they are made in cash in sums exceeding Rs. 2,500. Such disallowance will increase gross profit and would necessarily increase net profit.

15. Mr. K.N Jain, for the assessee, also submitted that capital expenditure is covered by section 40A(3). It cannot be doubted that capital expenditure is not an allowable expenditure and so the question of disallowance of capital expenditure under the provisions of section 40A(3) cannot arise.

16. Learned counsel for the assessee also urged that the money spent on purchase of stock-in-trade, etc., represents circulating capital and cannot be included in the term “expenditure” which means money spent away.

17. Mr. K.N Jain relied on an observation of their Lordships of the Supreme Court in the case of Indian Molasses Co. (P.) Lid. v. CIT, [1959] 37 ITR 66, where it has been held that “spending” in the sense of “paying out or away” of money is the primary meaning of “expenditure” and that “expenditure” is what is paid out or away and is something which is gone irretrievably.

18. It cannot be doubted that the money invested in the purchases of stock-in-trade and raw materials represents circulating capital and such payments are not covered by any of the provisions contained in sections 30 to 43A, but the value of stock-in-trade has to be taken into account while determining the gross profits under, section 28 itself on principles of commercial accounting. Rule 6DD of the Rules clearly contemplates payments made for stock-in-trade and raw materials. The rule provides that an assessee can be exempted from the requirements of payment by a crossed cheque or a bank draft where purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility. It also provides for cases where an assessee is able to satisfy the Income-tax Officer that due to exceptional and unavoidable circumstances, payment could not be made by cheques, etc., and also furnish evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payments and the identity of the payee.

19. Mr. K.N Jain has also submitted that if only purchases are made and no sales are made and payments are made exceeding Rs. 2,500 for each purchase without a cheque or a bank draft, then the entire purchases can be disallowed. However, the entire argument on behalf of the assessee has been considered in various decisions of the various High Courts where it has been held for detailed reasons mentioned by the various High Courts that the expenditure as contemplated in section 40A(3) of the Act includes expenditure on purchases relating to the trading account. The first decision on this point is in the case of Sajowanlal Jaiswal v. CIT, [1976] 103 ITR 706 (Orissa). In this decision, the assessee-firm was carrying on business in grocery articles on wholesale basis at Jharsuguda in the District of Sambalpur. Various purchases were made by the assessee-firm and it was claimed that since those payments were made for purchase of goods, section 40A(3) was not attracted. The purchases were made for re-sale and the Orissa High Court held that the purchases of stock-in-trade were expenditure.

20. In the case of U.P Hardware Store v. Commissioner Of Income-Tax, U.P, [1976] 104 ITR 664, the Allahabad High Court held that the payments made for purchase of stock-in-trade were also expenditure within the meaning of section. 40A(3) and the various grounds raised by the learned counsel for the assessee before us were raised in that case and for the detailed reasons mentioned therein, the contention was rejected. This decision of the Allahabad High Court was followed by the same High Court in the case of Ratan Udyog v. ITO, [1977] 109 ITR 1. This was also followed by the Allahabad High Court in the case of Add. CIT v. Nathimal Badri Prasad, [1979] 116 ITR 409 and in the case of Addl. Commissioner Of Income-Tax, Kanpur v. Ram Narain Kishan Gopal, [1979] 116 ITR 776. The Allahabad High Court followed the decision in U.P Hardware Store, [1976] 104 ITR 664 in the case of Ideal Tannary v. CIT, [1979] 117 ITR 34, and in the case of Commissioner Of Income-Tax, Kanpur v. Ganesh Trading Co., [1979] 117 ITR 975. Thus, the Allahabad High Court has consistently taken the view that the purchases of stock-in-trade or raw materials are covered by the word “expenditure” within the meaning of section 40A(3) of the Act.

21. The Punjab and Haryana High Court, following the decisions in Sajowanlal Jaiswal, [1976] 103 ITR 706 (Orissa) and U.P Hardware Store, [1976] 104 ITR 664 (All), in the case of CIT v. Grewal Group of Industries, [1977] 110 ITR 278, held that payments made for the purchase of goods fall within the meaning of the expression “expenditure” in section 40A(3). In this case, the assessee manufactured shapers and castings of machines and in that connection raw materials were purchased. In this decision, it was also observed that while it is ordinarily true that a taxing statute is to be construed strictly, it does not mean that a taxing statute should be construed so strictly in favour of the subject as to defeat its very purpose and a provision which is capable of more than one construction should be construed in a manner which would achieve the patent purpose of the Act and not so as to render it sterile and inefficacious merely on the principle that a taxing statute should be construed strictly and that to do otherwise, would be to carry the principles of strict construction too far and to allow a rule of construction so as to override clear parliamentary intention. It was also held in this decision that there is really no need to invoke any rule of construction since the language is clear and the meaning of the word “expenditure” cannot be confined in the manner suggested by the assessee. The Punjab and Haryana High Court referred even to section 40A(2) wherein payment for goods comes within the expression “expenditure” and it may be disallowed if it is excessive and unreasonable and if it is made to any of the persons specified in clause (b) of section 40A(2) and that there is no reason to assume that the payment for goods falls within the mischief of the expression “expenditure” in section 40A(2) but not within the mischief of the same expression in section 40A(3) of the Act. This decision was followed subsequently by the Punjab and Haryana High Court in the case of CIT v. Kishan Chand Maheshwari Dass, [1980] 121 ITR 232 and also in the case of Commissioner Of Income-Tax, Patiala v. New Light Tin Manufacturing Company., [1980] 121 ITR 229. An appendix has been made at page 237 (P.R Textiles v. CIT, [1980] 121 ITR 237), which is a decision of the Kerala High Court which has also taken the view that the purchase of stock-in-trade is “expenditure” within the meaning of section 40A(3) of the Act. The Punjab and Haryana High Court followed the decision in CIT v. Grewal Group of Industries, [1977] 110 ITR 278 (P&H) in the case of Hari Chand Virender Paul v. CIT, [1983] 140 ITR 148 and also in the case of CIT v. Avtar Singh and Sons, [1981] 129 ITR 671.

22. The learned senior standing counsel for the Revenue relied on the case of Hasanand Pinjomal v. CIT, [1978] 112 ITR 134 (Guj). However, in this decision, the Tribunal referred the following questions to the High Court of Gujarat.

“(1) Whether the Tribunal was right in holding that the cash payments in question relating to purchases fell within the mischief of section 40A(3) of the Income-tax Act, 1961?

(2) If the answer to question No. 1 is in the affirmative, whether the Tribunal was right in holding that the said payments were not covered by the exemption granted under rule 6DD(j) of the Income-tax Rules, 1962?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the disallowance of payments to the two co-operative societies (after excluding 10% paid for deposits) was proper?”

23. From page 140, it appears that the Gujarat High Court held that, in the facts and circumstances of the present case, the first question is entirely academic, for even if it is answered in favour of the Revenue, the assessee must still succeed so far as the other two questions are concerned, and so the Gujarat High Court did not enter upon a consideration of the first question and declined to express any opinion on the same. In such circumstances, this decision is not helpful to the Revenue.

24. The learned senior standing counsel for the Revenue also relied on the case of Fakhri Automobiles v. CIT, [1980] 126 ITR 417 (Raj). However, it appears from page 429, that the Rajasthan High Court only considered whether the question of law arose from the order of the Tribunal and directed the Income-tax Appellate Tribunal to state the case on various questions including question No. 3 which was as follows:

“3. Whether the Income-tax Appellate Tribunal was correct in holding that the purchases of diesel worth Rs. 14,026 recorded on July 4, 1970, was ‘an expenditure’ within the meaning of section 40A(3) of the Income-tax Act, 1961?”

25. Thus, this decision is also not helpful to the Revenue.

26. Mr. K.N Jain, on behalf of the assessee, has relied on an observation of their Lordships of the Supreme Court in the case of Commissioner Of Income Tax, Gujarat v. S.C Kothari, [1971] 82 ITR 794, where their Lordships have observed that the tax collector cannot be heard to say that he will bring the gross receipts to tax; he can only tax the profits of a trade or business and that cannot be done without deducting the loss and legitimate expenses of business. In this decision, their Lordships were not considering the question whether purchase of stock-in-trade is expenditure within the meaning of section 40A(3) of the Act. Hence, this decision is not helpful to the assessee. However, following the decisions of the Orissa, Allahabad, Punjab and Haryana and Kerala High Courts, I hold that the expenditure as contemplated in section 40A(3) of the Act includes expenditure on purchases relating to the trading account. In view of my discussions above, I hold that the Tribunal was not correct in law in holding that the expenditure as contemplated in section 40A(3) of the Act does not include expenditure on purchases relating to the trading account. The question is, accordingly, answered in the negative and in favour of the Revenue and against the assessee. However, in view of the peculiar circumstances of the case, the parties will bear their own costs.

S.K Jha, J.:— I agree.