2015 (9) TMI 1522 - AT - Income Tax

Addition u/s 40A(3) - whether payments were not exceeding ₹ 20,000.00 in a day? - rejection of books of accounts - Held that - As decided in the case of CIT vs. Banwari Lal Banshidhar, reported in (1997 (5) TMI 37 - ALLAHABAD High Court) once the books of account of assessee are rejected, profit has to be estimated by comparing the G.P rates adopted by the assessee in the preceding years. No addition u/s.40A(3) can be made once the books are rejected. The ld. A.O as well as ld.CIT(A) committed error in making addition u/s.40A (3) after rejection of books of accounts. Applying the ratio to the facts of the present case before us, the ld. A.O as well as Ld. CIT(A) has wrongly made the disallowance u/s.40A(3) of the Act. In our opinion when the gross profit rate is to be applied, that would take care of the leakage, if any. Even otherwise, once the books have been rejected, the profits has to be arrived on estimation by applying the gross profit rate or net profit rate by considering the past history of the case. Thus set aside the issue to the file of ld. A.O, to arrive at the estimated profit on comparative basis of G.P rate, adopted by the assessee in the preceding years and decide the issue afresh - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of cash payments under section 40A(3) by AO.
2. Justification of disallowance by CIT(A).
3. Applicability of Rule 6DD(j) of the Income Tax Rules.
4. Rejection of books of accounts by AO.
5. Estimation of profit in case of rejected books of accounts.

Analysis:
1. The case involved an appeal by the assessee against the order of the ld. CIT(A) for the assessment year 2009-10. The AO disallowed cash payments made by the assessee for purchasing damaged cement, invoking section 40A(3) of the Income Tax Act, as the payments were below Rs. 20,000. The AO also rejected the books of account, adding the cash payments to the income of the assessee.

2. The CIT(A) upheld the AO's decision to disallow the cash payments and make an addition to the income. The assessee contended that a portion of the purchases were made on Sundays or bank holidays, falling under Rule 6DD(j) of the IT Rules. The CIT(A) held that such purchases were exempt from section 40A(3) as per Rule 6DD(j).

3. The Tribunal observed that once the books of account are rejected, profit estimation becomes necessary. Citing a judgment of the Allahabad High Court, it was established that no addition under section 40A(3) can be made once the books are rejected. Therefore, the AO and CIT(A) erred in disallowing the cash payments under section 40A(3) after rejecting the books of accounts.

4. Following the precedent set by the Allahabad High Court, the Tribunal set aside the issue to the AO to estimate the profit based on the gross profit rate adopted in preceding years. The Tribunal emphasized that in cases of rejected books of accounts, profit estimation should be done based on historical data, and no disallowance under section 40A(3) should be made.

5. Ultimately, the Tribunal allowed the appeal filed by the assessee for statistical purposes, directing the AO to reevaluate the profit estimation based on the G.P. rate and provide a fair opportunity for the assessee to present their case.

This detailed analysis of the judgment highlights the key issues addressed by the Tribunal regarding the disallowance of cash payments, the application of Rule 6DD(j), and the estimation of profit in cases of rejected books of accounts, providing a comprehensive understanding of the legal implications and decisions made in the case.