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Commissioner of Income Tax (Central) -I, Kolkata Versus Mohanlal Agarwal

2016 (6) TMI 1121 - CALCUTTA HIGH COURT

Disallowance under section 40A(3) - whether fall within the ambit of undisclosed income within the meaning of Section 158B(b) - Held that:- It is not a case where the assessing officer has adopted one of the courses permissible in law which has resulted in loss of revenue. It was not open to the assessing officer to ignore the provision of Section 40A(3) nor does he appear to have done so consciously. - We are inclined to agree with the CIT that the provision contained in Section 40A(3) did .....

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vocate for the Appellant Mr. J.P. Khaitan, SR. Advocate, Mr. Saurabh Bagaria, Mr. Niloy Sen Gupta, Advocates for the Respondents. ORDER: The Court : The appeal is directed against a judgment and order dated 15th June, 2007 passed by the learned Income Tax Appellate Tribunal, B Bench, Kolkata in I.T.(SS). A. No.28/Kol/2007 pertaining to the block assessment period 01-04-1996 to 25-09-2002 by which the learned Tribunal partly allowed the appeal preferred by the assessee modifying the order under s .....

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re as follows:- The assessment under section 158BC(c) of the I.T. Act, 1961, was completed on May 30, 2004 for the block period between April 1, 1996 and March 31, 2002; and April 1, 2002 and September 25, 2002. The Assessing Officer decided to apply a rate of profit to the undisclosed sales which, according to him, was necessary in the following facts and circumstances of the case. The assessee in working out his undisclosed income has adopted varieties of interpretations regarding different se .....

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ting out the receipts which leads to taking stand by assessee as per his own discretion. All receipts are relatable to sales and as such all gross receipts are considered as unaccounted sales and on the same rate of profit are applied to arrive at the undisclosed income. All expenses claimed therefore become irrelevant. Once the rate of profit is applied then the question of further allowing of any expenses is against any provision of the I. tax Act. The order passed by the Assessing Officer was .....

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g provision which operates in spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head profits and gains of business or profession. Thus, it was pointed out to the A.R. that even in cases of block assessment, such as the instant case, where income had been arrived at by estimation of net profits, the non-obstante nature of the provision and the ratio of the Supreme Court s decision in the aforementioned case made it mandat .....

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nt to the facts of this case. As discussed in para 7 above, the provisions of sec.40A(3) are necessarily attracted in the light of the nonobstante nature of the provision and the ratio of the Supreme Court s decision in the aforementioned case. Thus, this is not a case where two views are possible. Moreover, from the assessment order and the records of the assessment proceedings it emerges that this is not a case where the A.O. took a conscious decision regarding the applicability of sec.40A(3) .....

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erest of revenue. 11.For the reasons discussed in detail in the foregoing paras, and after hearing the assessee through his Ld. A.R., I find that in the impugned assessment order dated 30.09.2004, not only has net profit been taken without basis of ₹ 16,80,287/-, i.e. at lower than the figure of net receipts of ₹ 59,55,494/-, offered by the assessee himself (vide para 7(ii) of this order), but also the disallowance u/s. 40A(3) has not been made, though it was due. Such non-applicatio .....

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of the statute and the ratio of a host of decisions, including from CIT Vs. Gabriel India Ltd. (1993) 203 ITR 102, Bom.; CIT Vs. Executors of the Estate of late H.H. Rajkuherba Dowager Maharani Sahab of Gondal, (1978) 115 ITR 301 etc. Since both these preconditions are fulfilled in the instant case, and looking to the nature of mistakes in the Assessment Order, in exercise of my revisionary powers u/s. 263 of the Income Tax Act, I set aside the Assessment order u/s. 158BC, dated 30.09.2004 and .....

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ecision of ITAT in the case of Sushil Kumar Mohta(supra) wherein the ITAT held as under:- We have carefully considered the arguments of both the sides and perused the material placed before us. We find that in this case block assessment was framed u/s. 158BC(c) on the basis of seized documents. After scrutinising the seized documents, the A.O. has determined undisclosed income of the block period. The CIT has held the assessment order to be erroneous and prejudicial to the interest of Revenue on .....

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e disallowance u/s. 40A(3) does not fall within the ambit of undisclosed income within the meaning of Sec.158B(b). The above order of the ITAT is followed in the cases of G.P. Mondal & Sons vide IT(SS)A No.3(Kol)/1997 and Tapan Kumar Dutta vide IT(SS)A No.174(Kol)/2003. Similar view is also taken by the ITAT, Pune Bench, in the case of Janta Tiles vs. ACIT 66 TTJ (Pune) 695 and ITAT Jaipur Bench in the case of ACIT vs Dr. Mohallal Swarnakar 95 TTJ(Jp) 969. The CIT can assume jurisdiction u/s .....

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essing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless .....

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ment. The CIT may be of the view that the A.O. should have made disallowance u/s. 40A(3). However, that by itself will not make the block assessment to be erroneous and prejudicial to the interests of the Revenue. The course adopted by the A.O. is certainly permissible in law. In view of above, we respectfully following the decision of the Hon ble Apex Court in the case of Malabar Industrial Co. Ltd. (supra) and orders of different Benches of the Tribunal relied on by the assessee s ld. Counsel .....

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d. The revenue has once again come up in appeal. Mr. Khaitan, learned Senior Advocate appearing for the assessee respondent, submitted that the view taken by the Assessing Officer could not be criticised as erroneous because the view of the Assessing Officer had the support of the judgment in the case of CIT -vs- Banwari Lal Bansidhar, reported in (1998) 229 ITR 229 (Allahabad), wherein the following views were taken:- The question for consideration is when no deduction was sought and allowed un .....

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s 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. No law contrary to the view taken by the Tribunal has been shown by the standing counsel. In the alternative, the Tribunal recorded a finding on the ingredients of section 40A(3) and rule 6DD(j). Since we have agreed with the primary .....

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it rate thereby taking into consideration the whole amount which was transacted below the permissible limit under section 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 section 40A(3). We are of the considered opinion that the submission of Mr. Puruhit has substantial force and the Tribunal has rightly treated that section 40A(3) is not applicable when a net profit rate is appl .....

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provisions of section 40A(3) of the Act, as applying the gross profit rate takes care of the expenditure otherwise than by way of crossed cheque also. We are in agreement with the view taken by the Allahabad High Court in Banwari Lal s case, [1998) 229 ITR 229, to the following effect (page 232): …….. The question for consideeration is when no deduction was sought and allowed under section 40A (3), was there any need to go into section 40A (3) and rule 6DD(j). We see force in the .....

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lied, 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. No substantial question of law arises. The appeal is dismissed. In the case of CIT vs. S. M. Dohrabuddin, reported in (2008) 4 DTR 0218, the following views were expressed by the Madras High Court:- When the GP rate is applied, that will take care of everything and there is no need for the AO to make scrutiny of the amount incurred on .....

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d we do not find that there is any substantial question of law involved in view of the judgment of the Supreme Court in the case of Malabar Industries Company Ltd., reported in 243 ITR 83. Hence we dismiss this appeal being ITA No.540 of 2007. He also submitted that this court, by its order dated July 30, 2008, refused to admit the appeal in the case of CIT vs. M/s. Jaibalaji Jyoti Steel Ltd. (ITA NO.318 OF 2008) by passing the following order:- We are, therefore, of the opinion that the learned .....

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iews were taken:- The phrase prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income-tax Officer has taken one .....

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T [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT, [1973] 88 ITR 323 (SC). Mr. Khaitan submitted that the CIT could have revised the order passed by the Assessing Officer if the order sought to be revised was unsustainable in law. Far from being unsustainable, the order passed by the Assessing Officer was in conformity with the views expressed by the Allahabad High Court and the Madhya Pradesh High Court. He added that the mere fact that the CIT did not agree with the views of the As .....

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icer had applied profit rate @ 15%. If 100% disallowance was made under Section 40A (3), that would mean that for a transaction of ₹ 100/- taxable profit had to be assessed at ₹ 115/- which would be an absurdity. This was or could be the reason why the Allahabad High Court held that when the gross profit rate was 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. Mr. Aga .....

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e the rate of profit by 20%. He, therefore, submitted that the judgement in the case of Banwari Lal Banshidhar [supra] has no manner of application. He submitted that in the case of C.I.T. vs. Purshottamlal Tamrakar, [supra], Their Lordships of the Madhya Pradesh High Court did not disclose any reasons. Therefore, that judgement is not of any assistance to the assessee. He submitted that the judgement in the case of C.I.T. vs. Smt. Santosh Jain [supra] rendered by the Division Bench of Punjab an .....

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show that the views expressed therein were affirmed by this court. He added that the same is also true as regards the order dated 30th July, 2008 passed by this Court in the case of C.I.T. vs. M/s. Jai Balaji Jyoti Steels Limited [supra]. This Court had refused to admit the appeal. He contended that there is no quarrel with the proposition laid down in the case of Malabar Industrial Co. Ltd. vs. C. I. T. [supra], but care should be taken to remember that Their Lordships in the case of Malabar I .....

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ilure to do so, the payments made were disallowed in the computation of income. In order to remove hardship to smaller assessees, the Amending Act, 1987, has raised this ceiling to ₹ 10,000. Sec. 40A(3) begins with a non-obstante clause. It is an overriding provision which operates in spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head Profits and gains of business or profession . The Legislature has thus made i .....

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ossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of s.40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisf .....

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r. 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. [See Mudiam Oil Co. vs. ITO (1973) 92 ITR 519 (AP) : TC 18R.450]. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a .....

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rlier judgement of the Tribunal in the case of Sushil Kumar Mohta [supra], but failed to realise that Section 40A(3) starts with a non-obstante clause and is intended to override all other provisions. The learned Tribunal also failed to notice that the judgement in the case of Attar Singh Gurkukh Singh [supra] was not considered by the Bench which heard the matter in the case of Sushil Kumar Mohta [supra]. He therefore, submitted that the judgement of the learned Tribunal is wrong and should be .....

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Section 40A(3). But in the case before us assessee had in fact claimed expenses for netting out the receipts as would appear from the order of the assessing officer which we have quoted above. The assessing officer chose to apply the rate of profit. The assessing officer was not alive of the provision of Section 40A(3) of the Act. The CIT has rightly observed in his order that:- this is not a case where the A.O. took a conscious decision regarding the applicability of sec.40A(3) or otherwise. It .....

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ce mostly in cash, this oversight by the A.O. in not applying section 40A(3) has been prejudicial to the interest of revenue. The judgement in the case of Malabar Industrial Co. Ltd. does not really help the assessee. It is not a case where the assessing officer has adopted one of the courses permissible in law which has resulted in loss of revenue. It was not open to the assessing officer to ignore the provision of Section 40A(3) nor does he appear to have done so consciously. We are inclined t .....

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n does not really answer the question. The assessee admittedly had claimed expenses for netting out the receipts as indicated by the assessing officer himself whereas in the case of Banwari Lal Bansidhar (supra) the Division Bench proceeded on the basis that when no deduction was sought and allowed under Section 40A(3) was, there any need to go into Section 40A(3) and Rule 6DD(j)(?). We also find some force in the submission of Mr. Agarwal as to why is the judgment in the case of Banwari Lal Ban .....

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case of CIT -Vs- Sushil Kumar Mohta, (ITA 540 OF 2007) and the order dated 30th July, 2008 in the case of CIT vs. M/s. Jaibalaji Jyoti Steel Ltd. (ITA NO.318 OF 2008) passed by this Court refusing to admit an appeal do not lend any assistance to the assessee, for the simple reason that these orders do not amount to a judgement replacing that of the Tribunal. Reference in this regard may be made to the judgement in the case of U.J.S. Chopra -Vs- State of Bombay reported in AIR 1955 SC 633. In par .....

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