2010 (12) TMI 953 - HC - Income Tax

Disallowance made under Section 40-A (3) even when the appellant had produced receipt on record to prove that each payment constituted a different transaction - when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the assessee there was no need to look into the provisions of section 40A(3) and rule 6DD(j). No disallowance could have been made in view of the provisions of Section 40A(3) read with rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate is applied that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee Whether the Assessing Officer after rejecting the books of accounts of the assessee and having computed the income of the assessee on best judgment assessment basis by applying the principle of percentage of profits is entitled to add back the amounts allegedly paid in violation of Section 40A(3) by relying upon the same rejected books of accounts - though the books of accounts of the assessee have been rejected the Assessing Officer was not justified in adding back the amounts which were found to be paid in violation of Section 40A(3). The second question is answered in favour of the assesee. The appeal is allowed to this extent. No costs.

Summary

Issues:
1. Upholding disallowance under Section 40-A (3) based on receipts.
2. Rejection of books of accounts and computation of income on best judgment assessment basis.
3. Adding back amounts paid in cash in violation of Section 40-A (3) after rejecting books of accounts.

Analysis:
1. The first issue revolves around whether the Tribunal was correct in upholding the disallowance under Section 40-A (3) despite the appellant producing receipts to prove each payment as a separate transaction. The appellant's counsel conceded that the answer must go against the appellant, citing a previous judgment. Another question arose regarding the reliance on rejected books of accounts to add back cash payments under Section 40-A (3). The respondent's counsel objected, arguing that this objection was not raised earlier. However, the court held that once the books of accounts are rejected, the appellant can claim that income should not be computed twice.

2. Moving on to the second issue, the court addressed whether the Assessing Officer, after rejecting the books of accounts and computing income on a percentage basis, could add back cash payments made in violation of Section 40-A (3) using the same rejected books. The court found that the Assessing Officer, having computed profit based on percentages, could not add back cash payments as it would result in quantifying income twice. Citing a judgment from the Allahabad High Court, the court emphasized that when income is computed using the gross profit rate and no deduction is allowed, there is no need to delve into Section 40-A (3) and rule 6DD(j).

3. Lastly, the court concluded that even though the books of accounts were rejected, the Assessing Officer was not justified in adding back cash payments found to violate Section 40-A (3). The court ruled in favor of the assessee on this issue, stating that adding back such amounts would amount to quantifying income twice. As a result, the appeal was allowed in favor of the assessee with no costs incurred.