Madras High Court
Mr.K.R.Ganesh Kumar vs The Assistant Commissioner Of Income ... on 25 November, 2015
Author: M.Jaichandren
Bench: M.Jaichandren
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 25-11-2015 THE HONOURABLE MR.JUSTICE M.JAICHANDREN AND THE HONOURABLE MRS.JUSTICE S.VIMALA Tax Case (Appeal) No.2408 of 2006 Mr.K.R.Ganesh Kumar .. Appellant. Versus The Assistant Commissioner of Income Tax, Central Circle I, Trichy. .. Respondent. Prayer: Appeal filed against the order of the Income Tax Appellate Tribunal "B" Bench, Chenai, dated 16.6.2006, in IT(SS)A No.21/MDS/2006, under Section 260 A of the Income Tax Act, 1961. For Appellant: Mr.K.R.Ganesh Kumar For Respondent: Mr.S.Sridhar JUDGMENT
(Judgment of the Court was made by M.JAICHANDREN,J.) This Tax Case appeal has been filed against the order passed by the Income Tax Appellate Tribunal `B' Bench, Chennai, in IT(SS)A No.21/Mds/2006, relating to the assessment years 1998-99 to 2003-2004 and 2004-2005 (Part) (Block period), dated 16.6.2006, under Section 260A of the Income Tax, Act, 1961.
2. The Income Tax Appellate Tribunal had confirmed the order of the Commissioner of Income Tax (Appeals)-II, sustaining the disallowance, under Section 40A(3) of the Income Tax Act, 1961, in the computation of `undisclosed income', under Section 158 BC of the Act.
3. The brief facts of the case are as follows:
3.1. The appellant is the proprietor of A.R.C.Ganesh Kumar and Company dealing in gold jewellery. The department had carried a search, in terms of Section 132 of the Act, on 23.5.2003, simultaneously, at the residential, as well as at the business premises of the appellant, at Mayiladuthurai, Neyveli and at Chennai.
3.2. Consequent to the search operations, a notice, under Section 158BC of the Act, had been issued, calling for the block return relating to the block period, from 1.4.1997 to 31.3.2003, and the part period, upto the date of the search i.e. 23.5.2003, in Form-2B, within 45 days of the service of the notice. The notice, dated 12.1.2004, issued by the department, had been served on the appellant, on 14.1.2004. In response to the said notice the appellant had filed the return of income for the block period under consideration, on 26.2.2004, admitting an undisclosed income of Rs.53,27,060/-.
3.3. While completing the block assessment, on 30.5.2005, the Assessing Officer had invoked Section 40A(3) of the Act, to make a disallowance of Rs.40,11,818/- in the computation of undisclosed income, for the block period. While holding so, the Assessing Officer had concluded that the offer of the value of peak purchase of gold jewellery would in no way prohibit the disallowance contemplated in terms of Section 40A(3) of the Act.
3.4. It was held in the block assessment order, that certain transactions, as per the seized documents, had been found to be unaccounted and outside the books of accounts and having not disputed the purchase of gold jewellery to the extent available in the said documents, finally offering the value of peak purchase, the cash purchases could not be denied. Thus, it had been held that the disallowance under Section 40A(3) of the Act was called for. While making the disallowance in the block assessment order, the Assessing Officer had held that, apparently, all the purchases, as per the seized documents, had been made by payment of cash and the details of the quantity contained in the loose sheets, in respect of each purchase, indicate that the quantity purchased is more than 40 grams of gold jewellery. As such, it could be seen that the purchase expenditure would be more than Rs.20,000/-, adopting the rate of Rs.500/- per gram. Thus, the expenditure towards the entire purchase of gold jewellery would work out to 40,118.179 grams. The statutory disallowance of 20% of the said amount, as per Section 40A(3) of the Act, is arrived at Rs.40,11,818/-. The said amount is disallowed and added to the income returned by the assessee.
3.5. The assessee had challenged the said order passed by the Assessing Officer, before the Commissioner of Income Tax (Appeals) II, Chennai. The assesseee had contended that, having noticed the fact that no books of accounts had been maintained and no profit and loss account had been prepared and having not claimed expenditure relating thereto, in terms of Section 30 to 37 of the Act, the pre conditions envisaged in Section 40A(3) of the Act had not been satisfied and hence, the disallowance resulting in the assessment of the undisclosed income was wrong, erroneous and unjustified in the facts and circumstances of the case.
3.6. It had been further contended that the purchase of 40,118.179 grams of gold jewellery were related to unaccounted business. The said position having been admitted it could be reasonably inferred that no proper books of accounts had been maintained relating to the said business. Further, having accepted the value of peak purchase of 3000 grams of gold jewellery, as a capital of the unaccounted business, it was wrong to invoke Section 40A(3) of the Act, especially, when the undisclosed income was determined on presumptive basis.
3.7. It had also been contend that the disallowance made in terms of Section 40A(3) of the Act could not treated as undisclosed income, as the disallowed amount was not a real income and that it had arisen on account of the legal fiction envisaged in Section 40A(3) of the Act. Considering the contentions raised on behalf of the assessee the Commissioner of Income Tax (Appeals)-II, Chennai, had held that the present case is a search and seizure case, where the addition had been made on the basis of the materials found, evidencing unaccounted purchase in cash. It could be distinguished from a case in which there was no search and seizure. As such, Section 40A(3) could be applicable to the facts and circumstances of the present case.
3.8. Challenging the dismissal of the appeal, the assessee had preferred a second appeal before the Income Tax Appellate Tribunal, Chennai, `B' Bench, Chennai. Considering the various issues raised before it, the Appellate Tribunal had held in its order, dated 16.6.2006, that, while computing the undisclosed income of the block period, the provisions of Section 40A(3) of the Act would be applicable in respect of the payments made for the purchase of gold exceeding Rs.20,000/-, as such expenditure was found recorded in certain loose sheets discovered during the course of search and seizure operations. Accordingly, the order passed by the authorities had been upheld by the Tribunal.
3.9 Challenging the said order the assessee had filed the present Tax Case Appeal before this Court, raising three substantial questions of law. This court while admitting the Tax Case Appeal had entertained the following substantial question of law, for the consideration of this Court:
"Whether the Tribunal is correct in confirming the order(s) of the Lower Authorities in invoking Section 40A(3) of the Acct to make the disallowance which resulted in assessment of `undisclosed income' in spite of the purchases were assessed on an estimated basis in the said block assessment order?"
4. The learned counsel appearing on behalf of the appellant had submitted that the order of the Income Tax Appellate Tribunal, dated 16.6.2006, is contrary to the facts and circumstances of the case. The Tribunal had erred in confirming the disallowance of Rs.40,11,818/-, in terms of Section 40A(3) of the Act, being 20% of the value of the gold jewellery `purchased', as reflected in the loose sheets found at the time of the search made under Section 132 of the Act, while framing the block assessment, in terms of Section 158BC of the Act.
5. It had also been stated that the Tribunal had failed to appreciate that the provisions of Section 40A(3) of the Act, have no application to the facts of the case. The Tribunal had failed to appreciate that the pre-conditions incorporated in the said section had not been satisfied, to make the disallowance, in the computation of undisclosed income. Having accepted the peak purchase for the purpose of assessment of undisclosed income, consequent to the seizure of the loose sheets, the disallowance under Section 40A(3) of the Act was erroneous and incorrect and unsustainable in law. The Tribunal had failed to appreciate the fact that there was no evidence, whatsoever, to substantiate the fact relating to the purchase of gold jewellery, in cash, exceeding Rs.20,000/-, even though certain loose sheets had been seized during the search and seizure operations. It was a mere inference of cash purchase and therefore, the disallowance is erroneous. It had been further stated that the undisclosed income with reference to the loose sheets, having been assessed on the value of the `peek purchase', the assessment of undisclosed income of Rs.40,11,818/-, invoking Section 40A(3) of the Act, is erroneous.
6. It had been further stated that the Tribunal had failed to appreciate that there were no books of accounts found and that it was a matter of record that such purchases reflected in the loose sheets were not claimed as deduction, in terms of Sections 30 to 37 of the Act and therefore, the provisions of Section 40A(3) of the Act would have no application. It had also been stated that, as the assessment for the value of gold jewellery recorded in the loose sheets had been made on an estimated basis, by resorting to `peak purchase', the disallowance on cash purchase would amount to double taxation. Further, there was no proper opportunity given to the assessee before the impugned order had been passed, by the Appellate Tribunal, and as such, the impugned order of the Tribunal had been passed contrary to the principles of natural justice and therefore, it is void in the eye of law.
7. Having heard the learned counsels appearing on behalf of the appellant, as well as the respondent, and on a perusal of the records available, it is noted that the Appellate Tribunal had passed the impugned order holding that it is clear that where disallowance is made under Section 40A(3) of the Act in respect of entries made in regular books of accounts, which have no relation with the undisclosed income, or the entries not recorded in the books of accounts or documents unearthed during the search, such allowance cannot be treated as part of the undisclosed income. However, if such expenditure relates to undisclosed income found during the search, the disallowance under Section 40A(3) of the Act, would be justified. The Tribunal had held that while computing the undisclosed income of the block period, the provisions of Section 40A(3) of the Act would be applicable in respect of payments made for the purchase of gold, exceeding the amount of Rs.20,000/-, as such expenditure was found recorded in the loose sheets discovered during the course of search and seizure operations. Relying on the decision of this court, in M.G.Pictures (Madras) Limited, the Appellate Tribunal had dismissed the appeal filed by the assessee.
7. Having considered the reasons given by the Appellate Tribunal, we are fully convinced that there is no error in the impugned order passed by the Appellate Tribunal, dated 16.6.2006. In the given facts and circumstances of the case, it is clear that the provisions of Section 40A(3) of the Act would be applicable. As per the provisions of the said section, no deduction could be allowed for purchases exceeding Rs.20,000/-, as provided therein. However, the case of the assessee is not found to be falling in the exceptions provided in the proviso to the said Section. As such the purchases of gold jewellery had exceeded Rs.20,000/-, as found from the loose sheets discovered during the search and seizure operations. The disallowance of deduction by the Assessing Officer is correct in law. As such, we find no cause or reason to interfere with the order passed by the Appellate Tribunal, dated 16.6.2006. Accordingly, the question of law raised by the appellant in the present appeal, is decided in favour of the Revenue and against the assessee. Accordingly, the present appeal stands dismissed.
Index:Yes/No (M.J.,J) (S.V.J.)
Internet:Yes/No 25-11-2015
csh
M.JAICHANDREN,J.
and
S.VIMALA,J.
csh
The Assistant Commissioner of Income Tax,
Central Circle I, Trichy.
Tax Case (Appeal) No.2408 of 2006
25-11-2015