2012 (12) TMI 902 - AT - Income Tax

Disallowance u/s 40A(3) - Assessee engaged in the business of jewellery Cash purchase of jewellery Exchange of old jewellery with new Jewellery - Rule 6DD - Held that - The assessee used to account the purchase of old Jewellery/diamond from the customer as cash purchase for control purpose though actual cash outflow is not made, these are only day book entries. Therefore, such transactions could not be considered as violative of Section 40A(3), just for a reason that contra entries appeared in the cash book. In favour of assessee Violation of Rule 46A Held that - As the A.O. has nowhere mentioned that assessee had failed to produce any records or books called for. Just because assessee could point out to CIT (Appeals), by producing the same cash book as produced before the A.O., that there were no cash purchases whatsoever effected by it from its customers, will not be a reason to say that there was any violation of Rule 46A. Bogus Purchase Held that - In the nature of trade of the assessee, it may not always be possible to get the address of all its customers. Even if customers give their address, there is no means available to the assessee to ensure that such addresses were right. Assessee, in the nature of its trade, cannot insist for an identification process akin to Know Your Customer (KYC) rules applied by banks. Just for the reason that purchases effected from certain parties did not carry full address, in our opinion, a disallowance ought not have been made. In favour of assessee

Summary

Issues Involved:
1. Deletion of addition under Section 40A(3) of the Income-tax Act, 1961.
2. Deletion of addition for unsubstantiated purchases.
3. Alleged violation of Rule 46A of Income-tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40A(3) of the Income-tax Act, 1961:
The Revenue was aggrieved by the CIT (Appeals) deleting an addition of Rs. 1,32,34,396/- made by the Assessing Officer (A.O.) under Section 40A(3) of the Income-tax Act, 1961. The A.O. had observed that payments exceeding Rs. 20,000/- were made in cash for purchases of old gold and diamonds, thus attracting Section 40A(3). However, the assessee contended that these were not actual cash transactions but contra entries in the cash book for control purposes. The CIT (Appeals) verified the books and concluded that there were no actual cash payments, and the transactions were merely exchanges of old jewellery for new jewellery, with only the differential amount being settled. The CIT (Appeals) thus held that Section 40A(3) was not applicable, except for a sum of Rs. 11,67,280/- which was not supported by necessary vouchers.

2. Deletion of Addition for Unsubstantiated Purchases:
The Revenue also contested the deletion of an addition of Rs. 58,62,020/- made by the A.O. for purchases deemed unsubstantiated due to the lack of complete details or addresses of the vendors. The CIT (Appeals) opined that in the nature of the assessee's trade, customers might not always provide complete addresses. The CIT (Appeals) noted that the assessee had furnished all possible details and recorded the purchases in the stock register, which were also considered in the closing stock. Therefore, the CIT (Appeals) found no justification for the addition and deleted it.

3. Alleged Violation of Rule 46A of Income-tax Rules, 1962:
The Revenue argued that the CIT (Appeals) had violated Rule 46A by considering fresh evidence (stock register, bills, and vouchers) not produced before the A.O. The Tribunal, however, noted that the assessee had indeed produced books of accounts before the A.O., including purchase vouchers for old jewellery and diamonds. The Tribunal found no violation of Rule 46A as the records produced before the CIT (Appeals) were the same as those before the A.O. The Tribunal also highlighted that the A.O. had not effectively rebutted the assessee's contention of no actual cash outflow for purchases.

Conclusion:
The Tribunal upheld the CIT (Appeals) decision, confirming that there was no violation of Section 40A(3) and that the disallowance for unsubstantiated purchases was unjustified. The appeal of the Revenue and the cross-objection of the assessee were both dismissed.