1. This appeal raises a question of some interest. It involves the familiar game of hide and seek with legislative intent. The facts are simple.
2. The assessee-company carries on business as a wholesale dealer in wines and spirits. Accounts are kept on mercantile basis. Accounting year ended on 31-3-1978.
3. The company purchased a scooter in the previous year for Rs. 4,500.
It paid for the scooter in cash. There is no dispute that the scooter was in use as a business asset. Depreciation was claimed and presumably allowed also thereon.
4. The ITO, however, thought that Section 40A(3) of the Income-tax Act, 1961 ('the Act') applied in the matter. This section, to the extent relevant, reads as under : (3) 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 two thousand five hundred rupees 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.
5. The ITO held that the payment of Rs. 4,500 appears to have been made in violation of the above provision and that there was also no explanation for this. He, therefore, disalloweed depreciation of Rs. 4,500. The assessee appealed.
6. Before the Commissioner (Appeals), the assessee contended that the money laid out for the purchase of a business asset, viz., scooter was not 'expenditure' within the meaning of Section 40A(3). The section could never be applied to the purchases of capital assets. Reliance was also placed on the opinion of a text-writer (V.S. Sundaram Law of Income-tax in India, 11th edition, p. 1518). The opinion given there was that Section 40A(3) did not apply to repayment of loans or payment towards the purchase price of a capital asset, such as plant or machinery not for sale.
7. The Commissioner (Appeals) was not convinced. He held that expenditure on the purchase of a scooter, a business asset, was also 'expenditure' within the meaning of Section 40A(3). Since this expenditure was not covered by any of the exemptions mentioned in Rule 6DD, he upheld the disallowance. He also recorded his opinion that the intention of the Legislature was not to make any distinction between an expenditure on capital account and an expenditure on revenue account.
The Commissioner (Appeals) did not, however, indicate the reason for this opinion. The assessee is in further appeal.
8. I have heard Shri Harish Gambhir, the authorised representative of the assessee and Shri T.C. Khuller, the departmental representative. In my view the assessee's claim has substance.
9. The provision was introduced by the Finance Act, 1968. Section 40A carries the heading 'Expenses or payments not deductible in certain circumstances', Section 40A(1) says that the provisions of Section 40A shall have effect notwithstanding any other provision to the contrary in the Act relating to the computation of income under the head 'Profits and gains of business or profession'. Section 40A(2) relates to admissibility of expenditure in the computation of business profits which represents a payment for goods, services or facilities acquired by the taxpayer but which payment is not seen to be at arm's length as per the guidelines laid down in Section 40A(2) itself. Then comes Section 40A(3), which talks of 'expenditure', which is the subject of controversy here. Section 40A(3) is a consequential provision to Section 40A(3) (sic). Section 40A(5) deals with expenditure in respect of salary to employees, past and present, or in respect of perquisites or any allowance made to an employee. Section 40A(6) refers to expenditure by way of fees, salary for services rendered by a past employee. Section 40A(7) relates to allowance of gratuity liability.
Section 40A(8) relates to expenditure incurred by way of interest on deposits received by a taxpayer-company other than a banking-company or a financial-company.
10. From the above setting it could be said that, prima facie, Section 40A(3). like the provisions before it and those coming after it in Section 40A, concerns itself with a revenue deduction, which may or may not be allowed in the assessment in the computation of business profits depending upon the fulfilment of the conditions specified therefor. It goes against the grain of Section 40A to include capital expenditure also within the scope of Section 40A(3). Perhaps legislative history could be of some help in getting to know the purport of the provision.
11. It is true that reference to legislative history for interpretation is not ordinarily encouraged. Farwell L.J. stated the position in this regard thus : R. v. West Riding County Council  2 KB 676 : The mischief sought to be cured by an Act of Parliament must be sought within the Act itself. Although it may perhaps be legitimate to call history in aid to show what facts existed to bring about a statute, the inference drawn therefrom are exceedingly slight.
But in construing an enactment (as in this case) regard must be had not only to the words used, but to the history of the Act and the reasons which led to it being passed. One has to look to the mischief which had to be cured as well as to the cure provided [Per Lord Lindley M.R. in Thomsons Lord Chanmorris  1 Ch. 718. See also K.P. Varghese v.ITO  131 ITR 597 (SC)]. It would be permissible in such a context to see what reasons induced the mover of the relevant Bill in the House and what were the objects sought to be achieved. This is for the limited purpose of ascertaining the conditions prevailing at the relevant time which actuated the sponsor of the Bill and the extent and urgency of the evil which the Bill sought to remedy.
12. The Finance Bill, 1968 was introduced by the Deputy Prime Minister (as Finance Minister) on 29-2-1968 and in his Budget Speech, at paragraph 45 (Part B), he said : 45. Tax liability is sometimes artificially reduced by diverting profits to relatives and associate concerns in the form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often with a view to frustrating investigation as to the identity of the recipients and the genuineness of the claim. To plug these loopholes I propose to provide that payments made in business and professions to relatives or associate concerns will have to pass the test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after a date to be notified later, will be allowed as a deduction only if these are made by crossed cheques or by crossed bank drafts.
13. I think the above passage brings out the drift of Section 40A. The Finance Minister mentioned in the context 'deduction of expenses' as also 'excessive payments for goods and services'. Quite obviously general thrust of the provision is towards preventing artificial reduction by diversion of profits to relatives and associate concerns through payments ostensibly for goods, services or facilities. It is in this context that Section 40A(3) has also been enacted.
14. I find it difficult to tear out Section 40A(3) from its legislative matrix and give a special status to it so as to bring within its ambit (at arm's length) capital expenditure also. I would, therefore, hold that there is no case for the impugned disallowance. It shall be deleted.