2008 (4) TMI 726 - HC - Income Tax

Unexplained investment u/s 69 - cash payment - survey conducted u/s 133A - during search found foreign made gold bar biscuits - Applicability of Section 40A(3) - Tribunal deleted the addition equivalent to purchase of gold on behalf of the assessee by his son Lalit Kumar - Deleted the additions made by the AO within the meaning of Section 40A(3) - Applicability of Section 40A(3) - HELD THAT - In our view, a bare reading of the language of this sub-section is enough to show, that the provisions of Section 40A(3) are not attracted with respect to either of the transactions; obviously because it only prohibits allowing of deduction as expenditure. Expenditure obviously means expenditure admissible to be deducted from out of the income, which may include the expenditure on purchase and the like, and the subsection provides that if any such expenditure is incurred after specified date, in a specified manner, then 20 per cent of such expenditure shall not be allowed as a deduction. In the present case the assessee has not claimed any deduction of any expenditure and therefore, there is no question of not allowing any part of that expenditure, as deduction. Thus, the finding arrived at in this regard, by the learned CIT(A), and the ld Tribunal cannot be said to be wrong. Accordingly answered in favour of the assessee, and against the Revenue. Unexplained investment u/s 69 - From a reading of the order of the ld Tribunal it is clear that the whole thrust of the order is that the assessee was having sufficient cash balance on the relevant dates inasmuch as on 13th May, 1998, the cash balance is Rs. 4,85,334, then on 14th May, 1998 the cash balance is Rs. 5,33,290, and then on 15th May, 1998, the cash balance is 5,78,545, and then from 15th to 19th it is static, at figure Rs. 5,78,545. This figure obviously exceeds Rs. 3,88,000, but then the million dollar circumstance which has been considered by the learned AO and the learned CIT(A) is that if the existing cash balance has been used for purchasing gold bars, obviously the available cash balance would have decreased, while it has not so decreased, and thus the only possible conclusion is that the gold bars were purchased worth Rs. 3,88,000 from the amounts available with the assessee from undisclosed source, obviously beyond the amount shown in the cash book to be lying with the assessee. Mere fact that the assessee alleges that the gold was sold is not enough to refuse to make addition u/s 69. So far as the allegation of the gold having been sold away is concerned, that can be an additional aspect, that the transaction is unrecorded transaction, but then thereby it cannot be said that the investment is shown to have been made from out of disclosed resources available with the assessee. The investment is clearly investment, on the face of it, made from out of the funds available with the assessee, from undisclosed sources, and is unexplained investment. What happened to the sale proceeds, where that money has gone etc., are all aspects, which are alien to the present controversy. Therefore, we have not been able to persuade ourselves to concur with the finding of the ld Tribunal on this question, rather the findings of the AO, and the learned CIT(A), are the findings in accordance with law. Accordingly answered in favour of the Revenue, and against the assessee. Consequently, the appeal is allowed in part. The judgment of the ld Tribunal is set aside, and that of the learned CIT(A) is restored.

Summary

Issues Involved:
1. Justification of the Tribunal in deleting the addition of Rs. 3,88,000 under Section 69 of the IT Act.
2. Justification of the Tribunal in dismissing the appeal filed by the Department regarding additions under Section 40A(3) of the IT Act.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal in deleting the addition of Rs. 3,88,000 under Section 69 of the IT Act:

The case revolves around the addition of Rs. 3,88,000, which was recorded during a personal search of the assessee's son, Lalit Kumar. The customs authorities found a bill for 8 gold bar biscuits valued at Rs. 3,88,000. The assessee contended that the bill was in Lalit Kumar's name, who was a minor at the time, and thus the transaction should not be attributed to him. However, the AO and CIT(A) found that the transaction was indeed on behalf of the assessee, as corroborated by the statement of Lalit Kumar and the sellers, Bhupat Bhai and Govind Bhai, who confirmed the cash payment.

The Tribunal initially deleted the addition, considering that the assessee had sufficient cash balance on the relevant dates and that the Department had not conducted further investigations beyond Lalit Kumar's statement and the bill. They argued that the explanation provided by the assessee was plausible and that the Department's stand was weak.

However, the High Court disagreed, emphasizing that the cash balance should have decreased if it were used for purchasing gold bars. Since the cash balance remained static, it suggested that the gold was purchased from undisclosed sources. The Court concluded that the investment of Rs. 3,88,000 was unexplained and rightly added under Section 69, restoring the findings of the AO and CIT(A).

2. Justification of the Tribunal in dismissing the appeal filed by the Department regarding additions under Section 40A(3) of the IT Act:

Section 40A(3) stipulates that if an expenditure exceeding Rs. 20,000 is made otherwise than by an account payee cheque or draft, 20% of such expenditure shall not be allowed as a deduction. The AO applied this provision to the transactions of Rs. 7,35,000 and Rs. 3,88,000, making additions of Rs. 1,47,000 and Rs. 77,600, respectively.

The CIT(A) deleted these additions, noting that the assessee had not claimed these amounts as expenditure in his trading account, and thus, Section 40A(3) was not applicable. The Tribunal upheld this view, stating that the assessee had not taken these transactions in the trading or P&L account, and therefore, the provisions of Section 40A(3) were not attracted.

The High Court agreed with this interpretation, noting that Section 40A(3) only applies to expenditures claimed as deductions. Since the assessee did not claim any deduction for the amounts of Rs. 3,88,000 or Rs. 7,35,000, there was no question of disallowing any part of that expenditure. Thus, the Court affirmed the findings of the CIT(A) and the Tribunal, answering the question in favor of the assessee.

Conclusion:

The appeal was allowed in part. The High Court set aside the Tribunal's judgment regarding the addition of Rs. 3,88,000 under Section 69, restoring the findings of the AO and CIT(A). However, the High Court upheld the Tribunal's decision regarding the non-applicability of Section 40A(3) to the transactions in question.