2023 (3) TMI 758 - AT - Income Tax

Disallowance u/s. 40A(3) - unaccounted purchases - AR submitted that neither the Ld AO nor the CIT(A) have doubted the genuineness of the payment that it is for purchase of boulders but have invoked section 40A(3) only for the reason that the payments in cash under a single voucher were exceeding Rs.20, 000/-. - As argue when the income declared during the course of search is based on estimation then there cannot be a separate disallowance u/s. 40A(3) - HELD THAT - Unaccounted purchases were the basis for estimation of the additional income and such unaccounted purchases were arrived at based on the purchase vouchers seized during the course of search We also notice that the same seized material has been used by the AO for analysing the payments made in excess of Rs.20, 000 and accordingly to arrive at the disallowance u/s. 40A(3). The ratio laid down in the case of Banwarilal Bansidhar ( 1997 (5) TMI 37 - ALLAHABAD HIGH COURT is that when the income of the assessee is 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). From the table extracted in the earlier part of this order it is an undisputed fact that the additional income of the assessee is arrived at based on estimated profit rate without allowing any specific deduction towards purchases. Therefore in our view the ratio laid down by the Hon ble Allahabad High Court is applicable to assessee s case and respectfully following the same we hold that no separate disallowance u/s. 40A(3) can be made in assessee s case. The disallowance made by the AO for all the assessment years is deleted.Appeals are allowed in favour of the assessee.

Issues Involved:
1. Disallowance under Section 40A(3) of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance under Section 40A(3):
The primary issue in this appeal is the disallowance made under Section 40A(3) of the Income-tax Act, 1961, which pertains to payments made in cash exceeding Rs. 20,000. The assessee, a PWD contractor and owner of a stone crusher business, was subject to a search and seizure operation where unaccounted sales and purchases were discovered. The assessee admitted to these unaccounted transactions and filed returns of income under Section 153A, including the unaccounted income.

The Assessing Officer (AO) completed the assessment under Section 153A read with Section 143(3) and made disallowances under Section 40A(3) for cash payments exceeding Rs. 20,000. The disallowances were as follows:
- AY 2016-17: Rs. 67,54,114
- AY 2017-18: Rs. 27,57,875
- AY 2018-19: Rs. 3,29,35,190
- AY 2019-20: Rs. 9,34,694

The assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)], who upheld the AO's order. Consequently, the assessee appealed to the ITAT.

Assessee's Arguments:
The assessee contended that the disallowance under Section 40A(3) was unwarranted because the income was determined on an estimated basis. The assessee argued that:
- Payments were made to farmers through tractor drivers who distributed the cash, and no single payment exceeded Rs. 20,000 per day per farmer.
- The payments were covered under Rule 6DD(g) of the Income-tax Rules, 1962, as there were no banks near the crusher site and the farmers did not have bank accounts.
- The income was declared based on the turnover and profit estimated by the AO during the search proceedings, and no specific deduction for purchases was claimed in the return of income.

The assessee relied on several judicial precedents, including:
- Allahabad High Court in Banwari Lal Banshidhar (1998) 229 ITR 229 (Allahabad)
- Madras High Court in CIT v S Mohammed Dhurabudeen [Tax Case (Appeal) No. 885/2007]
- Punjab & Haryana High Court in CIT (Central) v Smt Santosh Jain (2008) 296 ITR 324 (Punjab & Haryana)
- Punjab & Haryana High Court in CIT (Central) v Gobind Ram (2014) 48 taxmann.com 14 (Punjab & Haryana)
- Madras High Court in CIT v Amman Steel & Allied Industries (2015) 377 ITR 568 (Madras)
- Rajasthan High Court in PCIT v Jadau Jewellers & Manufactures (P) Ltd (2018) 409 ITR 85 (Rajasthan)

Respondent's Arguments:
The Departmental Representative (DR) supported the lower authorities' orders and relied on the decision of the Mumbai bench of the ITAT in ITO v. D.D. Hazare, (1994) 48 ITD 595 (Mum).

ITAT's Findings:
The ITAT examined the rival submissions and the material on record. The tribunal noted that the Hon'ble Allahabad High Court in CIT v. Banwarilal Bansidhar, [1998] 229 ITR 229 (All) had held that when income is computed by applying the gross profit rate and no specific deduction is allowed for purchases, there is no need to invoke the provisions of Section 40A(3).

In the present case, the additional income was computed on an estimated basis at 10% of sales, based on unaccounted purchases evidenced by seized vouchers. The ITAT observed that the AO had used the same seized material for both estimating additional income and making disallowances under Section 40A(3).

Applying the ratio laid down by the Hon'ble Allahabad High Court, the ITAT concluded that no separate disallowance under Section 40A(3) could be made when the income was determined on an estimated basis without allowing specific deductions for purchases. Consequently, the ITAT deleted the disallowances made by the AO for all the assessment years.

Conclusion:
The appeals were allowed in favor of the assessee, and the disallowances under Section 40A(3) were deleted. The judgment was pronounced on February 9, 2023.

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