Income Tax Appellate Tribunal - Pune
Narendra Mithailal Agarwal, Nashik vs Department Of Income Tax on 28 August, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
Before Shri Shailendra Kumar Yadav, Judicial Member,
and Shri R.K.Panda, Accountant Member.
ITA.No.811 & 808/PN/2010
(Asstt. Year : 2006-07 & 2000-01)
DCIT, Central Circle-1,
Nashik. .. Appellant
Vs.
Shri Narendra Mithailal Agrawal,
532, Near Hero Honda Show Room,
60, Feet Road, Sarda Circle,
Nashik. .. Respondent
PAN: ABGPA9107R
AND
ITA.No.813 & 812/PN/2010
(Asstt. Year : 2006-07 & 2000-01)
DCIT, Central Circle-1,
Nashik. .. Appellant
Vs.
Shri Arvind Mithailal Agrawal,
532, Near Hero Honda Show Room,
60, Feet Road, Sarda Circle,
Nashik. .. Respondent
PAN: ADPPA4146F
AND
ITA.No.807/PN/2010
(Asstt. Year : 2006-07)
DCIT, Central Circle-1,
Nashik. .. Appellant
Vs.
Shri Rajendra Mithailal Agrawal,
532, Phalke Road, Lokhand Bazar,
Nashik. .. Respondent
PAN: ADMPA6123D
2
AND
ITA.No.814 & 815/PN/2010
(Asstt. Year : 2005-06 & 2006-07)
DCIT, Central Circle-1,
Nashik. .. Appellant
Vs.
Shri Amritlal Mithailal Agrawal,
Kaut Ghat, Near SBI Colony,
Mumbai Agra Road,
Nashik. .. Respondent
PAN: AANPA7735K
AND
ITA.No.805 & 806/PN/2010
(Asstt. Year : 2001-02 & 2002-03)
DCIT, Central Circle-1,
Nashik. .. Appellant
Vs.
Shri Chandrabhan Gorakhnath Mishra,
27, Lata Kunj, Nashik Road,
Nashik. .. Respondent
PAN: AGGPM3645P
Assessee by : Smt.Deepa Khare
Department by : Shri S.K.Singh,CIT(DR)
Date of Hearing : 28.08.2012
Date of Pronouncement : 26.09.2012
ORDER
PER BENCH:
All these cases belong to Agrawal group so they are being disposed off by a common order.
ITA.No.811/PN/2010-A.Y.2006-07-Shri Narender Mithailal Agrawal.
2. This appeal has been filed by the Revenue against the order of the CIT(A) on various issues which are being dealt as under.
33. The assessee is an individual engaged in the business of steel trading. A Search and seizure action u/s.132 of the Act was conducted by the Department in Agrawal group of cases of Nashik wherein residential premises of the assessee alongwith various other assessees of this group were also covered. The assessee filed return of income on 31.10.2006 declaring total income of Rs.1,87,31,600/-. The Assessing Officer completed the assessment u/s.143(3) r.w.s. 153A of the Act by making following additions/disallowances:
a) Addition u/s.40A(3) Rs.69,07,964/- b) Cash available from undisclosed sources Rs. 27,865/-
c) Unexplained expenditure on renovation of flat Rs. 20,045/-
d) Other expenses Rs. 1,56,000/-
4. Being aggrieved by the order, the assessee filed appeal before the first appellate authority wherein assessee has filed detailed submissions on the issues under appeal. The submissions of the assessee were forwarded to the Assessing Officer for Remand Report vide office letter dated 29.09.2009, who had submitted his Remand Report vide letter dated 06.11.2009. The assessee filed further comments by his letter dated 08.01.2010. After considering the assessment order and the Remand Report of the Assessing Officer as well as the submissions of the assessee, the CIT(A) granted relief to the assessee on all accounts. Same has been opposed before us.
5. First issue is with regard to addition of Rs.69,07,964/- u/s.40A(3) of the Act on account of purchases. As per material seized during the course of search, unaccounted purchases made by the assessee during the A.Y. 2006-07 were quantified at Rs.6,90,79,640/-. As these purchases were out of unaccounted cash, the Assessing Officer therefore, confronted the assessee to show cause as to why 20% of the value of these purchases should 4 not be disallowed as per provisions of section 40A(3) of the Act. The assessee vide his reply dated 25.10.2007 submitted that provisions of 40A(3) of the Act were not applicable as these transactions were outside the books of account and also in view of the fact that profit was determined by applying a G.P. rate. He supported his contentions by various judicial pronouncements. The Assessing Officer after considering the submissions of the assessee and also decisions relied by him, rejected the assessee's contention and proceeded to make addition/disallowance u/s. 40A(3) of the Act @ 20% of unaccounted purchases and expenses claimed by the assessee resulting in addition of Rs.69,07,964/-. The relevant portion of the assessment order is extracted as under:
"I have carefully considered the submission of the assessee, the case laws relied upon by him and the material seized during the course of search action. The same is analyzed as under:
Section 40A(3) reads, "Where the assessee incurs any expenditure ........................... in a sum exceeding [twenty] thousand rupees otherwise than by [an account payee cheque drawn on a bank or account payee bank[ draft], twenty per cent of such expenditure shall not be allowed as a deduction ".
The main object of section 40A(3) of the Act is to regulate the financial transactions and to prevent the use of unaccounted money or reduce the chances of use of black money for business transactions. Plain reading of the above section reveals that the provisions of this section hit the assessee if two conditions are simultaneously satisfied. First there has· to be an expenditure claimed by the assessee. Secondly, he should have made payment exceeding Rs.20,OOO/- by any means otherwise than by an account payee cheque/draft. Nowhere, does the section refer to the regular books of accounts of the assessee.
In the instant case, search action has been carried out on the business of the assessee group. Documents showing that the assessee is carrying out his business outside the regular books of account, have been found and seized. The 5 unaccounted purchases, sales as well as expenditure have been worked out based on these seized documents. The unaccounted purchases made by the assessee have been accepted by the assessee, he has claimed this expenditure in the returns of income filed u/s 153A of the Act, and offered the additional income on these transactions for taxation. It is a different matter that the assessee chose to compute the additional income by adopting a certain percentage of the sales as income. It is nowhere assessee's contention that he has not made the payment for these purchases by account payee cheque/draft. Hence he is squarely hit u/s 40A(3) of the Act. Thus, the contention of the assessee, that provisions of section 40A(3) of the Act are not applicable in respect of transactions outside books of account, is rejected. It may be mentioned that the provisions of section 40A(3) were brought on the Statute by Finance Act to meet this kind of situation. The very purpose of the section is to discourage such transaction and parallel economy.
Alternately, the assessee who maintains the regular books of accounts discloses the profits which are charged to tax. In case he makes any purchases above the prescribed limits by any means otherwise than by a crossed account payee cheque or draft, which are claimed as a deduction, he is hit by the provision of section 40A(3). An assessee who does not disclose his true profits and conceals a part of his business for the purposes of Income Tax Act, cannot be placed at a premium vis-a-vis an assessee who has property maintained his books of accounts. In fact such a proposition will be violative of the basic principles of equality enshrined in the constitution. Thus the contention of the assessee, that the purchases made in cash above the prescribed limits, on the transactions not reflected in the regular books of accounts are not hit by the provisions of section 40A(3), is rejected.
In this regard the assessee has placed reliance on the decision of Hon'ble 1. T.A. T. in the case of Hynoup Food and Oil Industries cited at 48 ITD 202 (Ahd.). In the case of Hynoup, the assessee was carrying on business and was maintaining regular books of account. During the course of search proceedings, certain documents were seized and unaccounted business transactions in the same line of business were found. In the business, which was not reflected in the books of account, the transactions were in cash and after ascertaining the purchases, for such business, on perusal of seized documents, the Assessing Officer, made disallowances under section 40A(3) of the Act. The decision of Ld. 1. T.A. T, 6 Ahmedabad Bench cited by the assessee, has been reversed by the Hon'ble High Court of Gujarat cited at 290ITR 702 (Gujarat) and the findings of the Hon'ble Court are reproduced as under:
"Held, that the Tribunals order no where reflected how and in what manner the assessee had established the business expediency and thereafter exceptional and unavoidable circumstances. There was no evidence to show that payment by cross cheque or draft was not practicable having regard to the nature of the transaction and the necessity for expeditious settlement. There was also no evidence to show that payment by crossed cheque or draft would have caused genuine difficulty to the payee having regard to the nature of the transaction and the necessity of expeditious settlement. The assessee had not discharged the onus to establish the genuineness of the payment and identity of the payee. The Tribunal had not seen the distinction between an entire business that is illegal and a business that is otherwise lawful, where in the assessee resorts to unlawful means to augment his profits. Therefore, the reasoning of the Tribunal that once the business was not reflected in the regular books, payment by crossed cheque or draft would not have been practicable, considering the nature of the transaction was fallacious, when one considered the object with which the provision had been brought on the statute book.
Thus, the contention of the assessee on this issue stands rejected. and in fact the said decision supports the view that Sec.40A(3) applies to purchases outside the regular books. Even the case of Hynoup was decided when the Rule 6DD(j) was in existence and an exception to the application to the section was provided. Presently no exception is provided to Sec.40A(3).
The counsel for assessee has further placed reliance on the decision of Ld. I.T.A.T., in the case of Sharma Associates V/s A.C.I.T. (1995) 55 ITD 171 (Pune). In that case, there was a difference of opinion between the Hon'ble Members of the Tribunal and hence the matter was referred to the third Member.
Here, it was held that, "for the purpose of applying section 40A(3), it is mandatory that one single payment 7 must exceed the prescribed limit. It was further held that, there is no material on record to suggest that the entire sum was paid as one transaction or the various payments on various dates or months exceeded the statutory limit laid down by the section 40A (3). To invoke section 40A(3), a clear finding with evidence is necessary that the single payment by an assessee exceeded the statutory limit. If the disallowance is based on mere guess work, untold harm is likely to visit an honest tax payer".
The decision of Ld. I.T.A.T. supra is clearly distinguishable on the facts and circumstances of the assessee's case. In the case of this assessee, search action was carried out and incriminating documents, detailing the transactions carried out by the assessee, outside the regular books of account were found and seized. Full details, date wise, party wise are found written in the documents seized during the course of search. The assessee is in the business of trading and manufacturing of steel products. All these transactions for purchase of unaccounted raw material for manufacturing operation as well as unaccounted purchases of finished steel products for trading operations are high value transactions and hardly any of them are below the prescribed limit of Rs.20,000/-. However, the contents of the entire seized material have been analyzed and the transactions of value less then Rs.20,000/- have been ignored for the purposes of the disallowances u/s 40A(3). Further, the assessee in his submission has not challenged the evidence of the payments being below the limits prescribed under the Act. The aforesaid discussion clearly shows that the assessee's case is distinguishable from the facts of the cited case. Under these circumstances, the contention of the assessee on this issue also stands rejected.
The counsel for assessee has further placed reliance on the decision of Ld. 1.T.A.T., in the case of Sadhuram Wadhwani (2003) 81 ITJ 839 (Nag.). In this case, it has been held that, "disallowance made by the AO u/s 40A(3) in respect of purchases duly recorded in the books was outside the ambit of chapter XIV-B of the Act. "
Even plain reading of the finding of the Ld. ITAT shows that the decision has no relevance to the facts and circumstances of the assessee's case. In the cited case, the purchases in respect of which, disallowances were made u/s 40A(3) of the Act were duly recorded in the regular books of account.8
Further the addition made by the AO under the provision of chapter XIV-B of the Act. However, the additions in the assessee's case relate to the purchases which have not been recorded in the regular books of account and the assessment is being done u/s 153A of the Act. The provisions of chapter XIV-B of the Act are no more on the statute. Chapter XIV is a separate and complete code for assessing undisclosed income what is sought to be assessed therein is "Total Income" and not undisclosed income as per the provisions of Chapter XIVB. Having regard to the above discussion, the contention of the assessee on this count is rejected.
The assessee has further relied upon the decision in the case of CIT Vis Banwarilal Bansidhar cited at 229 ITR 229 (All). In this case, the Hon'ble High Court has held that, "We see force in the view taken by the IT AT that when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in respect of purchases of the assessee, there was no need to look into the provisions of section 40A(3) and rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases"
This decision relied upon by the assessee is again distinguishable on the facts of the assessee's case. In the instant case, search action has been carried out on the business of the assessee group. Documents showing that the assessee is carrying out his business outside the regular books of account have been found and seized. The unaccounted purchases, sales as well as expenditure have been worked out based on these seized documents. The unaccounted purchases made by the assessee have been accepted by the assessee, he has claimed deduction for this expenditure in the returns of Income filed u/s 153A of the Act, and offered the additional gross profits on these transactions for taxation. Thus, the cited case does not come to the rescue of the assessee.
It is worthwhile to note that the constitutional validity of the provisions of section 40A(3) read with rule 6DD(j) has been challenged on two occasions. For the first time the validity of section 40A(3) was questioned on the ground that imposition of tax on assumed income amounts to putting a restriction on the right to carry on business and hence violative of articles 14 and 19(1)(g) of the constitution. The Hon'ble Supreme Court of India in the case of Attar Singh Gurmukh Singh V/s I.T.O. 191 ITR 667 upheld the validity of the said section on" the 9 premises that rule 6DD of the rules amply takes care of the assessee in cases of genuine transactions. The provisions are not intended to restrict the business activities of the assessee. The Hon'ble Court further held that "in interpreting a taxing statute, the court cannot be oblivious of proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunity to use or create black money should not be regarded as curtailing the freedom of trade or business".
Subsequently, w.e.f. 25.07.1995 clause (j) of rule 6DD was omitted. At this point, the constitutional validity of section 40A(3) was once again challenged. In the case of Smt. Mangayamma Vis Union of India, 239 ITR 687 (AP) it was held that, "there are absolutely no merits in the challenge made as to validity of section 40A(3) of the Act by mere deletion of sub- clauses (1) & (2) of rule 6DD(j). The said provision is perfectly valid and we may hasten to add that the deletion of sub- clauses (1) & (2) of rule 6DD(j) is only a step forward in achievement of the avowed object envisaged u/s 40A(3) of the Act.
Having regard to the entire discussion above, the assessee's contention in facts and in law that the transactions outside the regular books of account are not hit by sec.40A(3) of the Act, is rejected. On verification of details of the unrecorded purchases it is seen that the purchases have been made in cash exceeding Rs.20000/- on each occasion violating the provisions of sec.40A(3) total to Rs.69079640/-. The quantum of purchases, each purchases exceeding Rs.20000 have been communicated to the assessee vide this office show cause notice dated 8.10.07. The assessee has not disputed the quantum of such purchases but has only disputed the principles of application of Sec.40A(3).
Hence, 20% of the unaccounted purchases and expenditure claimed by the assessee in computation of the gross profits on transactions outside the books of account, which are above the limits prescribed under the Act, is disallowed at Rs.13815928/- and added back to the total of the period under assessment. 50% of the above disallowance is brought to tax in the hands of the assessee at Rs.69079640/- the balance 50% in the hands of his brother Shri Arvind M.Agrawal. I am satisfied that it is fit case for initiation of penal proceedings u/s.271(1)( c)."
105.1. During the course of appellate proceedings, the assessee filed detailed submissions on 18.06.2009. The assessee filed further submissions elaborately by way of paper book dated 15.09.2009. The relevant portion of assessee's submissions is extracted as under:
"1.1 The learned Assessing Officer has made the addition of Rs.69,07,964/- under the provisions of section 40A(3) in respect of purchases of steel etc. as found by him from the entries and noting in the seized documents. He found that such purchases were not recorded in the regular books,-"of accounts of any of the various business concerns of the group and concluded that they were made by making payments in cash. He identified the entries exceeding Rs.20,000/- out of such purchases and quantified the aggregate of such alleged cash purchase entries at Rs. 6,90,79,640/-. As discussed by him in para 6 of the assessment order he arrived at the amount of disallowance u/s 40A(3) at Rs.1,38,15,928/- being 20% of such purchases of Rs.6,90,79,640/-. The addition for such disallowance Rs.1,38,15,928/- was equally divided by him in the hands of two individual assesses of the group, namely the present appellant Shri Narendra Mithailal Agrawal and his brother Shri Arvind Mithailal Agrawal. Hence, the addition of Rs. 69, 07, 964/- made in the case of the present appellant is the issue contested in this ground of appeal.
1.2 The appellant had filed the return of income of income for A.Y. 2006-07 on 31/10/2006 on the income of Rs.1,87,31,600/-. This return was accompanied by the computation of income and it is given at page No. ------ of the paper-book. The computation of income starts with the net profit as per Profit & Loss Account as per regular books of accounts to which items of income arising out of search matters was added as under:
Thus the additional income amount of Rs.1,82,00,000/- & Rs.40,00,000/- was shown in the return on account of cash found and seized while the additional income amount of Rs.76,06,864/- was shown on account transactions and entries recorded in the seized documents. This additional income of Rs76,06,864/- shown on account transactions and entries recorded in the seized documents was estimated as per the working given at pages of the paper book.11
1.3 During the course of search the statement u/s 132(4) of Shri Arvind Mithailal Agrawal was recorded on 22/09/2005.
In answer to question No.22 of the said statement, the income of Rs.2,45,64,226/- was disclosed jointly in the hands of the appellant Shri Narendra Mithailal Agrawal and Shri Arvind MithailaI Agrawal.
1.4 In particular in the cases of the present appellant and his brother Shri Arvind Mithailal Agrawal, the total sales as per seized documents were Rs.9,72,10,265/- and the gross profit thereon was estimated at Rs.82,19,438/-. From such estimated gross profit of Rs.82,19,438/-, the expenses as per seized records were deducted and the net profit was arrived at Rs.76,06,864/-. The detailed working of such net profit filed with the learned A.G. is given at page No.---- of the paper- book. This net profit of Rs.76, 06, 864/- was divided equally between the two brothers namely, the present appellant Shri Narendra Mithailal Agrawal and his brother Shri Arvind Mithailal Agrawal. Such half share of the appellant was Rs.38,03,432/-. Since, the gross profit was estimated on the sales and the net profit arrived at after deducting certain expenses from such estimated gross profit, it is claimed that the net profit was also estimated. This estimated net profit of Rs.38,03,432/- was further enhanced by the cash disclosed of Rs. 91, 00,000/- and total additional income of Rs. 1, 09, 03,432/- was shown in the return by the appellant. Similarly, the appellant's brother Shri Arvind Mithailal Agrawal also had shown the total additional income of Rs.1,09,03,432/- consisting of estimated net profit of Rs. 38, 03,432//and the cash disclosed of Rs.91,00,000/-. This cash disclosed was shown under the head business income. Thus, the estimated business income of Rs.1,09,03,432/- was shown in each the returns of the appellant and his brother Shri Arvind. This fact has been recognized by the learned A.O. and in para 6 on page 4 of the assessment order, he has stated as under:
"The assessee choose to compute the additional income by adopting a certain percentage of the sales as income'.
1.5 This estimated net profit figure has also been taken by the learned A.O. in the computation on page 14 of the assessment order. Thus the learned A.O. has also assessed the income by accepting the net business income computed on the basis of gross profit estimated on the turnover, which was taken as per transactions recorded in the seized documents. However, the 12 addition in respect of disallowance u/s 40A(3) was made by him.
1.6 We claim that the entire business transactions as per seized documents were genuine business transactions. Because of the peculiar circumstances, the appellant and his brother Shri Arvind were compelled to do such business without recording in the regular books of accounts. Obviously, the sales were in cash and purchases were also in cash but both are genuine transactions. The learned A.O. has accepted the figure of sales as per seized documents. We claim that purchases as per the same seized documents cannot treated as not genuine. The learned A.O. has also nowhere stated that he is accepting only sales out of the seized documents. He has not giving any finding that the purchases are not genuine. On the other hand, the provisions of section 292C inserted by Finance Act, 2007 with a retrospective effect from 01/10/1975, provide that the contents of seized books of account and other documents are true. Hence we claim that the purchases as per seized documents are genuine, though they are in cash and were unrecorded in the regular books of accounts. Considering such peculiar circumstances, the provisions of section 40A(3) are not applicable.
1.7. It is further claimed on behalf of the appellant that wherever the income is assessed by estimating the gross profit or net profit in such manner, the disallowance u/s 40A(3) cannot be made. In this respect, we rely on the following High Court decisions 1) CIT vs. Banwarilal Bansidhar (1998) 148 CTR (All) 533: (1998) 229 ITR 229 (All) - Business expenditure- Disallowance under s.40A(3)-Income assessed at G.P. rate- Where income is assessed at G.P. rate by rejecting the books of assessee under s.145(1) proviso, no disallowance can be made separately under s.40A(3).
This is one of the foremost decision on this point which is being followed by other several High Courts and ITAT Benches even after the subsequent amendments in section 40A(3) as well as in Rule 6DD(j). In para 3 of this decision, the Honourable High Court of Allahabad has stated as under:
"3. All the three questions, referred to this Court, revolve round the same controversy. The question for consideration is that when no deduction was sought and allowed under s.40A(3), was there any n.eed to go into s.40A(3) and r.6DD(j). We see force in the 'view taken by 13 the Tribunal that when income of the assessee was computed applying the gross profit rate and that when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of s.40A(3) and r.6DD(j). No disallowance could have been made in view of the provisions of s.40A(3) r/w r.6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When gross profit rate is applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases by the assessee.
No law contrary to the view taken by the Tribunal, has been shown by the standing counsel."
We claim that even now there is neither any law nor any judicial decision of any High Court contrary to this view.
2) CIT vs. S. Mohammad Dhurabudeen (2008) 4 DTR (Mad) 218 Business expenditure - Disallowance under s.40A(3) - Income estimated by applying GP rate-When disallowance under s.40A(3) is made, the overall income should not exceed the probable percentage of profit - Genuineness of the transaction, nature of the payments and the nature of the business are also to be taken into account - It was held that the disallowance under s. 40A(3) should not be applied mechanically and when such disallowances are made, it should not exceed the overall probable percentage of profit and the decision of CIT vs. Banwarilal Banshidhar (1998) 148 CIR (All) 533: (1998) 229 I1R 229 (All) was relied on.
3) CIT vs. Smt.Santosh Jain (2008) 296 ITR 324 (P&H): (2007) 159 Taxman 392 (P&H) - Business expenditure-Disallowance under s. 40A(3)-Estimation of income by applying GP rate- When income of the assessee is computed by applying GP rate, there is no need to invoke the provisions of s. 40A(3), as applying the GP rate takes care of expenditure paid otherwise by way of crossed cheque also (CIT vs. Banwari Lal Banshidhar (1998) 148 CTR (All) 533: (1998) 229 ITR 229 (All) concurred with.
4) CIT vs. Purushottamlal Tamrakar Uchehra (2003) 184 CTR (MP) 349: (2004) 270 ITR 314 (MP) - Search and seizure - Business expenditure - Disallowance under s.40A(3) - Application of net profit rate - Sec.40A(3) is not applicable 14 when income is determined by the AD by applying net profit rate - In para 8 of this decision, the Honourable High Court of Madhya Pradesh has held as under:
"8. It is submitted by Mr.Purohit that the AO has determined the income by applying the principle of net profit rate thereby taking into consideration the whole amount which was transacted below the permissible limit under s. 40A(3). It is contended by him that once the whole amount is computed on the formula of net rate income, there is no question of grant of deduction as envisaged under s. 40A(3). We are of the considered opinion that the submission of Mr. Purohit has substantial force and the Tribunal has rightly treated 'that s. 40A(3) is not applicable, when net profit rate is applied by the AO. "
5) Indwell Constructions vs. CIT (1999) 151 CTR (AP) 207:
(1998) 232 IIR 776 (AP) - Income - Addition - Rejection of books - Revenue cannot rely on same books for addition of expenditure shown in P & L a/c -
We claim that though this decision is in respect of income assessed on estimation by rejection of regular books of accounts and in respect of addition of expenditure, the ratio equally applies to the unrecorded transactions or to the transactions as per duplicate set of books of accounts and also to the disallowance u/s 40A(3).
1.9 The same view is consistently taken by several ITAT Benches and they have held that disallowance u/s 40A(3) cannot be made in a case where in the income is assessed by estimating either the gross profit or net profit. We rely on the following ITAT decisions in this respect:
(i) Chhattisgarh Steel Casting (P) Ltd. vs. ACIT (2008) 8 DTR (Bilaspur)(Trib) 14 - Business expenditure - Disallowance under s.40A(3) - Estimation of income - Disallowance under s.40A(3) made by AO out of unrecorded purchases from the record seized by Excise Department was uncalled for where income was estimated - CIT vs. Smt.Santosh Jain (2008) 296 ITR 324 (P&H), CIT vs. Purshottamlal Tamrakar Uchehra (2003) 184 CTR (MP) 349: (2004) 270 ITR 314 (MP), CIT vs. Banwarilal Banshidhar (1998) 148 CTR (All) 533: (1998) 229 15 ITR 229 (All) relied on - In para 43 of the order the Honourable ITAT members have remarked as under:
(ii) J.K. Construction Co. vs. ITO (2006) 100 TTJ (Jodhpur) 1101 - after applying GP rate, it was not open to the AO to consider the expenses separately and therefore no separate addition under s. 40A(3) can be made - Obviously, when the GP rate of 5 per cent was applied by rejecting the books of account, the AO became powerless to again go through the books of account and make separate additions under s.
40A(3). Where the AO has made trading addition after rejecting books of account and applied GP rate, no separate addition under s. 40A(3) can be made. CIT vs. Bhanwari Lal Bansidhar (1998) 148 CTR (All) 533: (1998) 229 ITR 229 (All) followed.
(iii) ITO vs. Kenaram Saha & Subhash Saha (2008) 116 TTJ (Kol)(SB) 289: (2009) 116 ITD 1: (2008) 8 DTR 124 - Business expenditure - Disallowance under s.40A(3) - Estimation of income by applying net profit rate-Once a net profit rate is applied, there is no scope for further disallowance under s.40A(3) - CIT vs. Banwarilal Banshidhar (1998) 148 CTR (All) 533: (1998) 229 ITR 229 (All) followed
(iv) Armour Chemicals Ltd. vs. JT.CIT (2007) 17 SOT 467 (Mumbai) Accounts-Rejection-Estimation of net profits- Business expenditure-Disallowance under s. 40A(3)-Books rejected and net profits estimated-Amount equal to disallowance made under s.40A(3) is required to be reduced from estimated profits
(v) India Seed House vs. ACIT (2000) 69 TTJ (Del) (TM) 241 Search and seizure - Block assessment - Computation of undisclosed income - Assessee admitted unaccounted sales as worked out by AO and accepted G.P. rate of 7 per cent - Business expenditure - Disallowance under s.40A(3) - Assessment after applying gross profit rate - No disallowance under s. 40A(3) could be made when income is estimated after applying gross profit rate - CIT vs. Banwarilal Bansi Dhar (1998) 148 CTR (All) 533 : (1998) 229 ITR 229 (All) followed.
(vi) P.C.Mundra vs. ACIT (2003) 80 TTJ (Jp) 945 - Business expenditure - Disallowance under s.40A(3) - Estimation of income by applying gross profit rate-Where no books exist and trading addition has been made by estimating gross profit 16 rate, provision of s.40A(3) cannot be invoked - P.C.Mundra (ITA Nos.1342/Jp/1997 and 1448/]p/1997 dt. 7th April, 2000) followed
(vii) ACIT vs. Padam Chand Bhansali (2004) 85 TTJ (Jd) 215 Business expenditure - Disallowance under s.40A(3) - Income computed by applying net profit rate-Income having been computed by rejecting the book results and by applying the net profit rate, no addition under s.40A(3) could be made - CIT vs. Banwarilal Banshidhar (1998) 148 CTR (All) 533 : (1998) 229 ITR 229 (All) and Indwell Constructions vs. CIT (1999) 151 CTR (AP) 207: (1998) 232 ITR 776 (AP) followed
(viii) Jagadish Lal vs. ITO (2005) 94 TTJ (Jd) 1119 - Business expenditure - Disallowance under s.40A(3)-Rejection of book results and estimation of income - Once GP rate is applied to compute the income, expenses are deemed to be considered - Consequently, no further disallowance under s. 40A(3) can be made - CIT vs. Banwarilal Bansidhar (1998) 148 CTR (All) 533:
(1998) 229 ITR 229 (All) and CIT vs. Purshottamlal Tamrakar Uchehra (2003) 184 CTR (MF) 349: (2004) 270 ITR 314 (MP) followed.
(ix) Gopalsingh R. Rajpurohit vs. ACIT (2005) 94 TTJ (Ahd) 865
- Business expenditure - Disallowance under s.40A(3) -
Assessment under s.44AF - Assessee engaged in retail business disclosed net profit less than that prescribed under s.44AF, got his accounts audited and was assessed accordingly - Provisions of ss.28 to 43C, including s. 40A(3), are not applicable where the retail traders are taxed in a presumptive manner under the provisions of s.44AF - Assessee having agreed to assessment under sA4AF(l), AO is directed to apply net profit rate of 5 per cent on total turnover and delete the disallowance under s.40A(3).
(x) New Narayan Builders vs. ITO (1992) 43 IT] (Ahd) 508 Business expenditure - Disallowance under s.40A(3) - Cash payment exceeding Rs.2,500 - Assessment framed on best judgment basis after rejecting books of accounts - Provisions of s.40A(3) cannot be applied - This is an old decision given much before the decision of Allahabad High Court in the case of CIT vs. Banwarilal Bansidhar (1998) 148 CTR (All) 533:
(1998) 229 ITR 229 (All). Even other Benches of ITAT also had given similar findings, which are quoted by us separately. But in this particular decision, the ITAT Ahmedabad Bench had given the following reasoning in their judgment:17
"This is a case where the method of accounting as well as the account books have been rejected and the profits have been computed by applying a flat rate of net profit on the declared amount of contract receipts. Provisions of 145(2) have, therefore, been clearly invoked. The provisions of s. 40A enumerate exceptions of payments not deductible in certain circumstances. Sub-s (3) of s.40A provides for disallowance out of expenditure claimed by the assessee in respect of those expenditure the payment of which is made otherwise than by a crossed cheque of a sum exceeding Rs. 2,500. Since the entire amount of expenditure claimed by the assessee as the per books of accounts have been totally ignored and the profits have been estimated by applying a flat net profit rate before depreciation, the provisions of s.40(3) would not be applicable. The restrictions contained in s.40A(3) relating to allowability of any expenditure would come into play only when such expenditure is otherwise treated as allowable under ss.30 to
37. If the income of the assessee is determined by applying a flat net profit rate the question of considering the allowability of different items of expenses does not arise at all. Therefore in cases where the provisions of s.145(2) are invoked and the income of the assessee is estimated by applying a flat rate of net profit no separate addition by resorting to s.40A can be validly made.' As claimed earlier we state that though this decision is in respect of income assessed on estimation by rejection of regular books of accounts, the ratio equally applies to the unrecorded transactions or to the transactions as per duplicate set of books of accounts.
(xi) ITO vs. M.Sreedhara Panicker - (1979) 7 TTJ (COCH) 573 Accounts-Rejection-Disallowance under s.40A(3) - There is no rule that when accounts are rejected an addition to trading account is inevitable Business expenditure-Disallowance under s.40A(3) - Scope - Estimation of reasonable profits by best judgment assessment - Certain items were purchased on cash payment exceeding Rs.2,500 - It cannot be said that specific items of expenditure exceeding Rs.2,500 in cash have gone into the computation of the estimate of reasonable profits-No scope of disallowance therefore - Same deleted '
(xii) Sarwan Sigh Contractors vs. ITO (1995) 55ITD (CHD) 192 Assessment - Determination of income - Additions under s.
40A(3) - Rejection of account books and application of flat rate on gross receipts - There was no justification in again looking into accounts for making further additions under s.40A(3) 18 1.10 During the course of assessment proceedings we had relied on the decision of ITAT, Ahmedabad Bench in the case of Hynoup Food & Oil Industries (P) Ltd. vs. ACIT (1993) 47 TTJ (Ahd) 556. But in para 6 on page 4 of the assessment order, the learned A.O. has stated that the said decision of ITAT has been reversed by Gujarat High Court in CIT vs. Hynoup Food & Oil Ind. (P) Ltd. (2005) 199 CTR (Guj) 350:
(2007) 290 ITR 702 (Guj): (2006) 150 TAXMAN 194 (Guj).
However, with due respect, we bring to your kind notice that the said decision was given by the Honourable High Court in absence of any representation on behalf of the respondent assessee. Further the Departmental Counsel in that case had not brought to the notice of the High Court that the gross profit was estimated by the A.O. and the issue of disallowance u/s 40A(3) under background of such estimation of gross profit was not at all referred and not all considered by the High Court. On the other hand, in this case the ITAT, Ahmedabad, had referred the following question for the opinion of the Honourable Gujarat High Court under s. 256(1) of the IT Act, 1961 (the Act), at the instance of the CIT, Gujarat Central, Ahmedabad:
"l. Whether the Tribunal is right in law and on facts in deleting the disallowance made under s.40A(3) holding that the exceptions to that section in r. 6DD(j) can be applied for payments which were made in the course of a business outside the books?"
There was no other question referred to the Honourable Gujarat High Court in this case. Hence it was held by the Honourable Gujarat High Court that "22. The question referred to the Court is, therefore, answered in the negative i.e., in favour of the Revenue and against the assessee." Hence, it cannot be said the Honourable Gujarat High Court has laid down any ratio contrary to the claim of the appellant that if the income is estimated on gross profits rate, no further disallowance can be made under s.40A(3)."
5.2. The Assessing Officer in his Remand Report dated 06.11.2009 submitted as under:
19"During the course of search and seizure action carried out in "Agrawal Group" of cases at Nashik., the AO noticed that certain purchases were not recorded in regular books of accounts and payments towards purchases were made in cash in contravention of provisions of section 40A(3) of the I.T. Act. The AO worked out such disallowance at Rs.1,38,15,928/- on total purchases of Rs. 6, 90, 79,640/-. Since the purchases were made by two brothers namely 1) Shri Arvind M.Agrawal &
2) Shri Narendra M.Agrawal, 50% of addition i.e. Rs.69,07,964/- were made in the hands of above assessee.
The assessee had claimed that the entire business transactions noticed during search action were genuine and never denied by the assessee. The sales/purchases in cash were also genuine and contended that the provisions of section 40A (3) are not applicable. The assessee in his written submission in support of above contention has quoted various case laws and High Court citations which are as under:
1) CIT Vis Banwarilal Bansidhar (1998)
2) CIT Vis Smt. Santosh Jain (2008)
3) CIT Vs. Mohammad Dhurabudeen (2008) (Mad)
4) CIT Vs. Purushottmlala Tamarakar Uchehra (2003) (MP)
5) Indwell Constructions Vs. CIT (1999) Apart from the above High Court decisions, the appellant has further relied on the following ITAT decisions.
1) Chhattisgarh Steel Casting (P) Ltd. vs. ACIT (2008) 8 DTR (Bilaspur) (Trib) 14
2) J.K.Construction Co. vs. ITO (2006) 100 TTJ (Jodhpur) 1101
3) ITO vs. Kenaram Saha & Subhash Saha (2008) 116 TTJ (Kol) (SB) 289
4) Armour Chemicals Ltd., vs. Jt.CIT (2007) 17 SOT 467 (Mumbai)
5) India Seed House vs. ACIT (2000) 69 TTJ (Del) (TM) 241
6) P.C.Mundra vs. ACIT (2003) 80 TTJ (Jp) 945
7) ACIT vs. Padam Chand Bhansali (2004) 85 TTJ (Jd) 215
8) ]agadish Lal vs. ITO (2005) 94 TTJ (Jd) 1119
9) Gopalsingh R. Rajpurohit vs. ACIT (2005) 94 TTJ (Ahd) 865
10) New Narayan Builders vs. ITO (1992) 43 TTJ (Ahd) 508
11) ITO vs. M.Sreedhara Panicker ( 1979)7 TTJ (COCH) 573 Sarwan Singh Contractors vs. ITO (1995) 55 ITD (CHD) 192 The above quoted judicial pronouncements from various High Courts and ITATs, relied on by the appellant are rather more academic than square applicability to the facts and the 20 circumstances of the case. The said judgments do not pertain to the cases identical to the case of the present appellant.
However, the most crucial decision squarely applicable to the facts and the circumstances of the appellant's case quoted by the assessee himself in his submission vide para 1.10 of the ground No.1 has been very conveniently twisted by the assessee so as to interpret in his favour, even though the said decision of the Hon'ble Gujarat High Court in the case of Hynoup Food & Oil Industries Pvt. Ltd., reported at 290 ITR 702 has reversed the findings of the ITAT Ahemdabad Bench, quoted by the appellant in his favour.
The findings of the Hon'ble High Court are reproduced as under:
"Held, that the Tribunals order no where reflected how and in what manner the assessee had established the business expediency and thereafter exceptional and unavoidable by cross cheque or draft was not practicable having regard to the nature of the transaction and the necessity for expeditious settlement. There was also no evidence to show that payment by crossed cheque or draft would have caused genuine transaction and the necessity of expeditious settlement. The assessee had not discharged the onus to establish the genuineness of the payment and identity of the payee. The business that is illegal and a business that is otherwise lawful, where in the assessee resorts to unlawful means to augment his profits. Therefore, the reasoning of the Tribunal that once the business was not reflected in the regular books, payment by crossed cheque or draft would not have been practicable, considering the nature of transaction was fallacious, when one considered the object with which the provision had been brought on statute book."
1.1 Section 40A(3) clearly provides for disallowance of expenditure exceeding Rs.20,000/- in cash. It is also clearly provided in Section 40A(3)/Rule 6DD the circumstances in which the cash payments shall not be disallowed under Section 40A (3). It is nowhere provided in the said Section or rule that where the payments are made out of books the disallowance shall not be made. Rules 6DD(j) in its original form has been amended w.e.f. 25/07/1995. On its substitution it is no longer possible to accept a transaction in cash merely because it is genuine and the payment in cash had been occasioned by unavoidable circumstances.
1.2 The main object of Section 40A(3) of the Act is to regulate the financial transactions and to prevent the use of 21 unaccounted money or reduce the chances of use of black money in business transaction. In the case of the appellant search action has been carried out and material showing that the assessee has carried out part of his business out of the regular books of accounts was found. The unaccounted purchases & sales have been worked out on the basis of the seized material and accordingly the profit of the business was arrived at the appellant and assessed by the A.O. If the contention of the appellant that as the transaction was out of the books it was impossible to make payment by account payee cheque or DD is accepted than the assesses who are maintaining regular books of accounts and accounting for cash payments in excess of Rs.20,000/- shall suffer disallowance u/s.40A(3) of the Act whereas the assessee not recording the transaction in the book of accounts for suppressing profit shall not suffer disallowance u/s.40A(3). It can not be the intention of the legislature to place the assessees suppressing their profit at a premium vis-a-vis the assessees who are properly accounting all transaction in their books of accounts. "
1.3 The contention of the assessee that the circumstances were peculiar in assessee's case which warranted payments in cash is not supported by evidence. Moreover, it can not be overlooked that it was revealed during search and seizure operation that the modus operandi of the assessee was to make part of the purchase and the sales out of books of accounts. Had not the department carried out the action u/s.132, such income would not have been brought to tax.
1.4 In the case of the present appellant during the search action it was revealed that the assessee was carrying out his business transactions outside the regular books of accounts and the unaccounted purchases have pee d by the assessee and have also been claimed expenditure in the I come tax return filed u/s.153A of the I.T. Act. Any decision in favour of the appellant will pass an adverse message to all those who are maintaining the regular books of accounts and making payments by the mode other than cash i.e. crossed cheques/DD etc. From the above discussions, on the ground No.1 of the appellant, it is crystal clear that provisions of section 40A(3) clearly hit the case of the present appellant and the disallowance worked out by the Assessing Officer was just, proper and logical."22
5.3. The CIT(A) having considered the assessment order and Remand Report as well as submissions of the assessee in this regard deleted the addition made by the Assessing Officer. While doing so, he dealt the factual position of present case as under:
i. There was a search & seizure action u/s.132(1) of the Act in the appellant's group of cases.
ii. During the course of the search action carried out by the Department, certain documents were seized showing that the appellant was carrying out a part of his steel business without showing it to the Department. iii. The appellant admitted during the course of the search that the transactions were not declared for the purpose of tax and agreed to disclose the income thereon. iv. Accordingly, the appellant estimated the gross profit based on the sales recorded in the seized documents and offered the same as business income in the computation memo.
v. During the assessment proceedings, the appellant filed the details of sales, purchases and other expenses and the workings of the estimated income. As per these details, the G.P. is estimated 8.46% of the unaccounted sales.
5.4. He observed that while completing the assessment, the Assessing Officer took a stand that purchases were liable for disallowance u/s. 40A(3) of the Act as same were out of unaccounted cash. The assessee took a plea before the Assessing Officer that profit admitted on unaccounted business were outside the regular books of account and provisions of section 40A(3) of the Act would not be applicable. Even otherwise, no disallowance was called for as profits were estimated considering the nature of business. It was not in dispute that purchases of Rs.6,90,79,640/-
were out of unaccounted cash. However, assessee admitted the estimated gross profit on sales and claimed only the other expenses and arrived at net profit on these transactions as per the statement filed at the time of assessment proceedings. No separate deduction was claimed by the assessee in computation of income on account of such cash purchases. The assessee stated before the Assessing 23 Officer that provisions of section 40A(3) of the Act were not applicable to the facts of his case. However, the Assessing Officer rejected the contentions put forward by the assessee in support of his claim and following decisions of Hon'ble Gujarat High Court in Hynoup Food and Oil Industries (290 ITR 702), decided the case against the assessee. He noted that Hon'ble Gujarat High Court in Hynoup Food and Oil Industries (supra) has held that where income from undisclosed business is brought to tax, provisions of section 40A(3) and all other relevant provisions come into play and Rule 6DD(j) has no application in such a case. Facts of the said case are that assessee originally filed a return declaring nil income which was revised later showing income claiming cash purchases and sales of unaccounted business detected during the course of search action. When the said assessee claimed that unaccounted transactions were always made in cash, the provisions of section 40A(3) of the Act could not be applied and alternatively the case would be governed by exceptions carved out and Rule 6DDJ of the I.T.Rules, 1962. In these circumstances, Hon'ble Gujarat High Court in Hynoup Food and Oil Industries (supra) held that in case of an illegal business, the provisions of section 40A(3) of the Act alongwith other relevant provisions would come into play and taxable income has to be computed accordingly.
5.5. However, the Ld. Authorised Representative of the assessee on the other hand relied on the decisions of other High Courts as per which no disallowance u/s. 40A(3) of the Act could be made in respect of cash purchases when income is determined based on estimation. One of such decision is rendered by Hon'ble Allahabad High Court in the case of Banwarilal Bansidhar 229 ITR 229. Similar view was expressed by Hon'ble Madras High Court in case of Mohammed Dhurabuddin 4 DTR 218. In a similar case, Hon'ble Punjab & Haryana High Court in the case of Smt.Santosh Jain 296 24 ITR 324, held that while income of assessee is computed by applying G.P. rate, there is no need to invoke provisions of section 40A(3) of the Act as applying G.P. rate takes care of expenditure paid otherwise by way of cheque also. Same view has been expressed by Hon'ble Madhya Pradesh High Court in the case of Purushottam Tamrakar Uchehra 278 ITR 314. Thus, various High Courts have taken views which go in favour of the assessee. However, the Assessing Officer chose to rely on the case of Hynoup Food and Oil Industries (supra). It is not in dispute that gross profit on unaccounted business was arrived at based on seized documents and admitted by the assessee in the return of income. The assessee has not claimed any expenditure separately on account of cash purchases in computation memo. In fact it was evident from the finding of the Assessing Officer in the assessment order at page 4 that additional income was computed by adopting certain percentage of sales as income. The relevant portion is extracted below:
"The unaccounted purchases made by the assessee have been accepted by the assessee, he has claimed this expenditure in the returns of income filed u/s.153A of the Act, and offered the additional income on these transactions for taxation. It is a different matter that the assessee chose to compute the additional income by adopting a certain percentage of the sales as income."
5.6. The stand of the assessee has been that when the income from unaccounted business was estimated and admitted in the return, there should not be disallowance u/s. 40A(3) of the Act. Various decisions of the Hon'ble High Courts have laid down that there is no application of section 40A(3) if income is estimated applying gross profit rate as discussed above. In fact these decisions were rendered even in cases where regular books of account were maintained. Whereas in the instant case assessee's business was 25 unaccounted and purchases/sales were gathered based on seized documents and income was arriving at applying fixed gross profit rate without considering purchases as can be observed from statement filed at the time of assessment proceedings. Therefore, principles laid down by various High Courts apply to the facts of the present case. He accordingly deleted the addition made by the Assessing Officer u/s.40A(3) of the Act which has been opposed by the Revenue before us.
5.7. We have considered the rival arguments made by both the sides. It is not in dispute that provisions of section 40A(3) were introduced as a deterrent for checking unaccounted business transactions. However, assessee in the instant case was subjected to search and seizure action to bring out unaccounted income and assessee admitted such unaccounted income based on seized documents. Income admitted by the assessee was accepted by the department and no doubt was raised in respect of genuineness of purchases or sales as Assessing Officer adopted fixed percentage as gross profit. The Assessing Officer having accepted such unaccounted income in assessment has resorted to disallowance u/s.40A(3) which in our opinion was not in accordance with principles laid down by various High Courts. As discussed above, it has been held by various High Courts and Benches of the Tribunal that no disallowance u/s.40A(3) is called for when income was estimated applying gross profit rate. We are aware that Hon'ble Gujarat High Court in Hynoup Food and Oil Industries (supra) has taken a view contrary to the various decisions of other High Courts and once there is a divergent view, the view in favour of the assessee has to be followed as held by the Hon'ble Supreme Court in CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). In view of this, the CIT(A) in our opinion was factually and legally justified in holding that disallowance of Rs.69,07,964/- u/s. 40A(3) was not 26 correct in present facts of the case and same was rightly directed to be deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side. We uphold the same.
6. The next issue is with regard to addition of Rs.27,865/- as cash available from undisclosed sources. During the course of search proceedings, unaccounted cash of Rs.2.53 crores was seized. The assessee prepared and submitted cash book and cash flow statement from the period 01.04.2005 to 20.09.2005, as appearing on page 9 of the assessment order dated 31.10.2007. After considering the position of cash in hand as on 20.09.2005, the Assessing Officer found cash shortage of Rs.55,730/- and therefore, proceeded to make addition of Rs.27,865/- on this account being assessee's 50% share.
6.1. Similarly the other issue in the appeal is with regard to addition of Rs.20,045/- on account of renovation of the flat. During the course of search action, vide reply to question No.21 dated 22.09.2005, the assessee offered an amount of Rs.1,00,000/- on account of renovation of the flat. However, no such amount was offered to tax by the assessee. After verifying the seized material, the Assessing Officer arrived at the unexplained expenditure of Rs.40,091/ and therefore added an amount of Rs.24,045/- being assessee's 50% share on this account.
6.2. Similarly, other issue is with regard to addition of Rs.1,56,000/- as irregular expenses. The Assessing Officer noticed that in trading account of unaccounted transactions, Profit and Loss account was debited with expenses of Rs.3,12,000/- under nomenclature 'irregular expenses'. The Assessing Officer concluded that said expenses were not pertaining to business activity and made an addition of Rs.1,56,000/- as extra commercial expenses being 50% share of the assessee.
276.3. In respect of above disallowances/additions, stand of the assessee has been that he had disclosed an amount of Rs.3,00,000/- to cover any shortfall in respect of income computed. The Assessing Officer rejected such ground without proper appreciation of the stand taken by the assessee in this regard. Rather he commented in Remand Report that total disallowances were worked out to Rs.4,07,820/- against disclosure of Rs.3 lakhs. Hence, argument of assessee was not appreciated by the Assessing Officer. This reasoning by the Assessing Officer was not found correct by the CIT(A) who held that an amount of Rs.3,00,000/- disclosed by the assessee to cover any shortfall has to be looked into and give set off as there was no other material found for substantiating this disclosure. In view of this, out of total disallowances of Rs.2,03,910/- being assessee's 50% share out of total disallowances of Rs.4,07,820/- the amount of disclosure of Rs.1,50,000/- (being assessee's 50% share of total disclosure of Rs.3,00,000/-) was to be reduced and balance was amount of Rs.53,910/- was directed to be taxed by the CIT(A). This reasoned factual finding needs no interference from our side. We uphold the same.
7. As a result, the appeal filed by the Revenue is dismissed.
ITA.No.808/PN/2010 for A.Y. 2001-02 - Shri Narender Mithailal Agrawal.
8. This appeal has been filed by the Revenue on two grounds. The first is with regard to disallowance made by the Assessing Officer u/s.40A(3) of Rs.12,13,862/- on the basis of material seized during the course of search. Matter was carried before the first appellate authority wherein the CIT(A) observed that disallowance u/s.40A(3) has been literally discussed and it is in assessee's own 28 case for A.Y. 2006-07 wherein contention of the Assessing Officer in the assessment order and Remand Report as also the submissions of the assessee were considered. As the facts of the present case were identical, decision taken by the CIT(A) vide order in Appeal No.Nsk/CIT(A)-II/267/08-09 dated 26.02.2010 was applicable. In present case as well under the said order of the CIT(A) on this issue has been upheld by us vide para 5 of this order. Facts being similar, so following same reasoning, we are not inclined to interfere with the finding of the CIT(A) who has deleted similar addition in question. Same is upheld.
9. The next issue is with regard to restricting addition made by the Assessing Officer towards unaccounted cash introduced into business from Rs.5,19,631/- to Rs.25,883/-. During the course of assessment proceedings, on the basis of the seized material, the Assessing Officer made analysis of assets detected, assets reported and income offered by assessee for taxation. Accordingly, the Assessing Officer arrived at total difference of Rs.10,39,262/- and made addition of Rs.5,19,631/- being assessee's 50% share and unrecorded cash introduced in the business. The relevant portion of the assessment order is reproduced as under, for the sake of convenience:
"During the search action certain books of accounts and documents were found and seized from the residence, shop and office premises of the sub-group of the assessee. From the seized materials, the copies of which were obtained by the assessee post search the assessee has filed cash flow statement wherein the assets detected during the search action were identified and incorporated in such cash flow. The sources of unrecorded assets as per seized material have also been given by the assessee in the cash flow statement. The summary of investment in unrecorded assets as filed by the assessee vide return of income filed in response to notice u/s.153A, for the year under consideration are as under.29
Flat Rs. 323532/- House Furniture Rs. 40092/- Television Rs. 7000/- Gold Rs. 4239/- Withdrawal Rs. 160848/- NMC Bank (Arvind) Rs. 57407/- NMC Bank (Narendra) Rs. 74668/- Closing cash balance Rs. 597417/- Total Rs.1265203/-
As against this the assessee has offered net profit from unrecorded transaction at Rs.505866/-, cash disclosure Rs.715000/- and misc. income Rs.42400/- all totaling to Rs.1263266/-.
The assessee as well as his brother both have controlling interest in Rajrani Steel Casting Pvt. Ltd., and M/s.Aarti Steel Industries. As discussed in the assessment order the year under consideration in the case of Rajrani Steel Casting Pvt. Ltd. which is not yet incorporated, the excess claim on account of burning loss has been determined at Rs.Nil and similarly the excess of burning loss in the case of Aarti Steel Industries wherein no business is done during the year, in that case has been determined at Rs.Nil .As discussed in the forgoing paragraphs of the assessment orders there are additions determined on account of inadequate G.P. shown at Rs.347875/- and unrecorded introduction of cash brought from home at Rs.2654340/-. The business of the assessee sub-group being same i.e. manufacturing and trading in steel goods and the unrecorded transactions detected as per search action running parallel to the regular books of the assessee, a telescopic set-off is considered necessary for the unrecorded assets emerging out of unrecorded business offered by the assessee in the return filed u/s.153A and the total of the additions on account of further addition to G. P. determined, addition on account of burning loss and cash introduction together.
The telescopic set-off is given as under.
Additions burning loss Rajrani Steel
Casting Pvt. Ltd., Rs. Nil
The introduction of cash -
addition annexure A-3 &A-4 Rs.2652340/-
Additional G. P. determined
as per trading account Rs. 347875/-
30
Less: The net assets as discussed above. Rs.1265203/-
Total Rs.1039262/-
Therefore after giving the telescopic set-off of the income offered and accounted for the assessee in form of assets investments the balance amount of Rs.l039262/- is added to the total income covering the additions determined under the head G. P. Addition, cash introduced and the burning loss determined in the case of Rajrani Steel Casting Pvt. Ltd., and Aarti Steel Industries. Penal proceedings u/s.271(l)(c) are separately initiated against this balance after the telescopic set-off. The 50% of the above amount working out to Rs.519631/- is taken in the hands of the assessee and 50% in the case of his brother Shri Narendra M.Agrawal."
9.1. During the course of appellate proceedings in this regard assessee submitted as under:
"As per our replied to the show cause dated 08.10.07 which is inserted in the assessment Order on pg. no.14 we have prepared detail chart of recorded as well as unrecorded transaction which is reflected in annexure A-3 and A-4 and submit the return accordingly, while preparing chart of the seized record, we have distinguished between recorded & unrecorded transactions & as recorded transaction are already shown in existing books of Mr. Narendra Agrawal i.e. books of accounts of Aarti Steel (Prop. Narendra Agrawal). We have prepared additional books of account for unrecorded transaction, while preparing this books of account by assessing officer he had not distinguished between recorded & unrecorded transaction of seized material hence difference arise in cash receipt sales, purchases & expenses, details of additional books of accounts prepared by us and additional books of accounts prepare by assessing officer are as follows.
Particulars Our Books of As per Books
Accounts prepare by
Assessing Officer
Cash receipt Sale Rs.1,64,59,297/- Rs.1,92,11,670/-
Purchase and Rs.1,74,16,896/-
Expenses
At the time of assessment the officer had not consider noting Ghar Se which is out of cash in hand, he consider as receipt 31 theirfore the difference occurs in receipt side as per our submission. In our submission on date 12.10.07 we requested A.O. to reconcile the seized records but the A.O. had rejected our request. We once again state that the assessing officer's figure whatever stated above is not correct and it is very difficult to explain in writing hence we request you to reconcile our chart with original sized record across the table.
9.2. The CIT(A) having considered the assessment order and submissions of the assessee, observed that while arriving at unaccounted investment of Rs.10,39,262/-, the Assessing Officer had not worked out introduction of the cash as per Annexures A3 and A4 correctly. The CIT(A) from para 6 of the assessment order observed that Assessing Officer worked out cash details. As per Annexure-A4 document, the closing balance was arrived at Rs.41,74,817/- and same was taken as opening balance while working out cash balance as per Annexure-A3. The closing balance as per Annexure-A3 was worked out at Rs.51,62,114/-. Thus there was an increase in cash balance of Rs.9,87,297/- (Rs.51,62,114/- minus Rs.41,74,817/-) which should have been considered while arriving at introduction of the cash of Rs.26,52,340/-. If this is considered, the total would become Rs.32,92,362/- (Rs.23,04,465/- + Rs.9,87,297/-). As the net asset worked out by the Assessing Officer is Rs.12,65,203/-, the difference would work out to Rs.51,965/- (Rs.12,65,203 + Rs,9,87,297 - Rs.23,04,465). Therefore, addition should have been 50% of Rs.52,965/- as against Rs.5,19,631/- made by the Assessing Officer. As there was a mistake while arriving at the cash deficit which has been worked out more, hence, Assessing Officer was rightly directed to restrict the addition to Rs.25,983/- as against Rs.5,19,631/-. This factual and reasoned finding of the CIT(A) needs no interference from our side. Same is upheld.
10. As a result the appeal filed by the Revenue is dismissed.32
ITA.No. 813/PN/2010 for A.Y. 2006-07 and ITA.No.812/PN/2010 for A.Y. 2000-01 - Shri Arvind Mithailal Agrawal
11. In ITA.No.813/PN/2010, the Revenue has filed the appeal against the order of CIT(A) on various grounds which are being dealt as under. The first issue is with regard to addition of Rs.69,07,964/- by invoking provisions of section 40A(3) on the basis of seized material. Matter was carried before the first appellate authority wherein the CIT(A) following the reasoning in the case of Shri Narendra Mithailal Agrawal for A.Y. 2006-07, in its Appeal No.Nsk/CIT(A)-II/267/08-09 dated 26.02.2010, deleted the addition in question. The above said similar deletion of addition made u/s. 40A(3) of the Act in Shri Narendra Mithailal Agrawal's case has been upheld by us vide para 5 of this order. Facts being similar, following same reasoning, we are not inclined to interfere with the finding of the CIT(A) who has deleted the addition of Rs.69,07,964/- made by the Assessing Officer by invoking provisions of section 40A(3). Same is upheld.
12. Similarly, the Assessing Officer made following additions:
(a) Rs.27,865/- on account of cash available from unaccounted sources.
(b) Addition of Rs.20,045/- on account of unexplained expenditure renovation of flat.
(c) Addition of Rs.1,56,000/- made on account of irregular expenses.
13. Additions of similar amounts being 50% share of the assessee were made in the case of Shri Narendra Mithailal Agrawal in A.Y. 2006-07 which were deleted by the CIT(A). The order of the CIT(A) deleting the above three additions have been upheld by us vide para 6 of this order. Facts being similar, so following same reasoning, deletion of addition of Rs.27,865/-, Rs.20,045/- and Rs.1,56,000/- need no interference from our side. We uphold the same 33
14. As a result, the appeal filed by the Revenue is dismissed.
ITA.No.812/PN/2010 for A.Y. 2000-01 -
Shri Arvind Mithailal Agrawal.
15. This appeal has been filed by the Revenue against the order of the CIT(A) wherein deletion of addition of Rs.12,13,861/- made u/s. 40A(3) of the Act has been opposed. Similar issue arose in case of Shri Narendra Mithailal Agrawal in ITA.No.808/PN/2010 for same year i.e. A.Y. 2000-01, which has been deleted by the CIT(A) vide para 4 of his order, following its reasoning in the case of Shri Narendra Mithailal Agrawal for A.Y. 2006-07, which has been approved by us vide para 5 of this order. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of the CIT(A) who has deleted the disallowance of Rs.12,13,861/- made by the Assessing Officer u/s.40A(3) of the Act. Same is upheld.
16. The next issue in Revenue's appeal is with regard to restricting addition from Rs.5,19,631/- to Rs.25,983/- being unaccounted cash introduced in the business. Similar addition was made in the case of Shri Narendra Mithailal Agrawal being 50% share which was deleted by the CIT(A) in A.Y. 2000-01 and same has been deleted by us vide para 6 of this order. Facts being similar and so following same reasoning we are not inclined to interfere in the finding of the CIT(A) who has restricted the addition to Rs.25,983/- as against Rs.5,19,613/-. Same is upheld.
17. As a result, the appeal filed by the Revenue is dismissed.
34ITA.No.807/PN/2010 for A.Y. 2006-07 - Shri Rajendra Mithailal Agrawal.
18. This appeal has been filed by the Revenue against the order of the CIT(A) wherein deletion of addition of Rs.27,71,963/- made by the Assessing Officer u/s.40A(3) of the Act has been opposed. Similar addition was made in Shri Narendra Mithailal Agrawal's case in ITA.No.811/PN/2010 for A.Y. 2006-07 which has been deleted by the CIT(A) and we have upheld the same vide para 5 of this order. Facts being similar, so following the same reasoning, we are not inclined to interfere with the finding of the CIT(A) who has deleted the addition of Rs.27,71,963/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Same is upheld.
19. As a result, this appeal of the Revenue is dismissed.
ITA.No.814/PN/2010 for A.Y. 2005-06 - Shri Amrithlal Mithailal Agrawal
20. The first issue is with regard to deletion of addition of Rs.32,48,264/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Similar additions were made by the Assessing Officer in the case of Shri Narendra Mithailal Agrawal for A.Y. 2006-07 in ITA.No.811/PN/2010 which has been deleted by the CIT(A) and we have upheld the same vide para 5 of this order. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of the CIT(A) who has deleted the addition of Rs.32,48,264/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Same is upheld.
21. The next issue is against the deletion of addition of Rs.70,025/-. The Assessing Officer noticed that assessee has 35 shown his capital account of proprietory concern of Suraj Steel daily collection of Rs.70,025/-. As the said amount was not offered for taxation, assessee was confronted with the matter. The assessee submitted before the Assessing Officer that said amount was drawn by him from M/s.Suraj Steel as per revised account dated 26.10.2007. However, stated that introduction of cash as daily collection is as per excess capital account of assessee in audited accounts of Suraj Steel and same could not be claimed to be arising out of withdrawal from the revised account of Sal Steel. Therefore, the Assessing Officer made addition of Rs.70,025/- on this account. Matter was carried before the first appellate authority wherein various contentions were raised on behalf of the assessee. The CIT(A) after considering the same observed that during the assessment proceedings, the assessee explained that credit in Suraj Steel was out of withdrawals from Sal Steel. However, Assessing Officer rejected without verifying the same. The assessee was shown as a debtor in name of Suraj Steel in books of Sal Steel for the corresponding credit in his account and there was no need for any addition on the basis that withdrawals are unaccounted. Accordingly, the Assessing Officer was directed to delete the addition of Rs.70,025/- as withdrawals were fully reflected in audited books of accounts. This reasoned and factual finding needs no interference from our side because the assessee was shown as debtor in the name of Suraj Steel in the books of Sal steel for the corresponding credit in its account. So there was no necessity for any addition on this basis that withdrawals were unaccounted one. Same is upheld.
22. As a result, the Revenue's appeal is dismissed.
36ITA.No.815 for A.Y. 2006-07 - Shri Amrutlal Mithailal Agrawal
23. The only Ground in this appeal is with regard to deletion of addition of Rs.2,00,58,467/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Similar addition made by the Assessing Officer in the case of Shri Narendra Mithailal Agrawal for A.Y. 2006-07 in ITA.No.811/PN/2010 which has been deleted by the CIT(A) and we have upheld the same vide para 5 of this order. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of the CIT(A) who has deleted the addition of Rs. 2,00,58,467/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Same is upheld.
24. As a result this appeal of Revenue is dismissed.
ITA.No.805/PN/2010 for A.Y. 2001-02 - Shri Chandrabhan Gorakhnath Mishra
25. The only Ground in this appeal is with regard to deletion of addition of Rs.13,04,808/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Similar addition made by the Assessing Officer in the case of Shri Narendra Mithailal Agrawal for A.Y. 2006-07 in ITA.No.811/PN/2010 which has been deleted by the CIT(A) and we have upheld the same vide para 5 of this order. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of the CIT(A) who has deleted the addition of Rs. 13,04,808/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Same is upheld.
26. As a result, this appeal of Revenue is dismissed.
37ITA.No.806/PN/2010 for A.Y. 2002-03 - Shri Chandrabhan Gorakhnath Mishra
27. The only Ground in this appeal is with regard to deletion of addition of Rs. Rs.10,34,806/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Similar addition made by the Assessing Officer in the case of Shri Narendra Mithailal Agrawal for A.Y. 2006-07 in ITA.No.811/PN/2010 which has been deleted by the CIT(A) and we have upheld the same vide para 5 of this order. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of the CIT(A) who has deleted the addition of Rs. Rs.10,34,806/- made by the Assessing Officer by invoking provisions of section 40A(3) of the Act. Same is upheld.
28. In the result, this appeal of Revenue is also dismissed.
29. In the result, all appeals of Revenue are dismissed.
Pronounced in the open court on this the 26th day of September, 2012.
Sd/- Sd/-
( R.K.PANDA ) ( SHAILENDRA KUMAR YADAV )
ACCOUNTANT MEMBER JUDICIAL MEMBER
gsps
Pune, dated the 26th September, 2012.
Copy of the order is forwarded to:
1. The Assessee
2. The DCIT, Central Circle-I, Nashik.
3. The CIT(A)-II, Nashik.
4. The CIT(Central), Nagpur.
5. The DR "B" Bench, Pune.
6. Guard File.
By Order
//TRUE COPY//
Private Secretary,
Income Tax Appellate Tribunal,
Pune.