2016 (1) TMI 455 - AT - Income Tax

Disallowance of expenditure recorded in the seized material - Applicability of provisions of sections 40A(3) and 40(a)(ia) invoked - Held that - The undisputed facts are that the assessee has accepted that books found and seized during the course of search pertain to the assessee and that the receipts and payments mentioned therein are also relating to the business operations of the assessee. Whatever may be the reason for accepting the receipts mentioned in the books, the lone contention of the assessee before us is that the expenditure relating to the receipts should be allowed. We agree with the contention of the Ld. D.R. that the expenditure which has been incurred wholly and exclusively for the purpose of business alone can be allowed and it is not verifiable from the seized material that this expenditure is incurred wholly and exclusively for the purpose of business of the assessee. We also agree with the Ld. D.R. that most of the expenditure being incurred in cash and some of which may be for illegal purposes is also not allowable under sections 40A(3) and 40(a)(ia) of the I.T. Act. Therefore, the contention of the Ld. Counsel for the assessee that the entire payments mentioned in the seized material is to be allowed while treating the receipts as income of the assessee is not tenable. However, we also agree with the Ld. Counsel for the assessee that the entire receipts recorded in the registers can not be treated as the income of the assessee. The relatable business expenditure has to be allowed from the receipts to compute the undisclosed income of the assessee. Therefore, the only course open to the Revenue would be to reject the books of account maintained by the assessee and to estimate the business income of the assessee. As the facts relating to the computation of gross profit or net profit of the assessee for the earlier or subsequent assessment years or relating to other assessees in similar business are not before us, we are of the opinion that the issue needs re-look/reconsideration by the A.O. for estimation of the assessee s income. Since payments mentioned in the seized material are not being considered as the expenditure of the assessee, the applicability or otherwise of the provisions of sections 40A(3) and 40(a)(ia) of the I.T. Act is also not relevant at this stage. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Assessee's appeals challenging addition made by AO for unallowed expenditure and application of sections 40(a)(ia) and 40A(3) to the assessee.

Analysis:
1. The case involved appeals by the assessee against the order of the Ld. CIT(A) confirming the addition made by the AO for unallowed expenditure recorded in seized material and sustaining the addition under sections 40(a)(ia) and 40A(3). The seized material included incriminating documents from the Managing Director's residence, indicating undisclosed receipts and payments not accounted for in regular books.

2. The AO concluded that the seized data was non-verifiable, treating the receipts as income but disallowing the payments as expenditure. The assessee contended that the payments should be allowed, citing mismanagement by staff and lack of clarity in the seized books. The Ld. CIT(A) upheld the additions, requiring payee details for expenditure verification and citing sections 40A(3) and 40(a)(ia) non-compliance for disallowance.

3. In the second appeal, the assessee argued for expenditure allowance, referencing precedents and disputing the disallowance under sections 40A(3) and 40(a)(ia). The Revenue supported the lower authorities, emphasizing the unexplained nature of entries and disallowance under section 40A(3) for cash payments exceeding Rs. 20,000.

4. The Tribunal found the seized books related to the assessee's business, accepting the undisclosed receipts but denying blanket allowance for payments. It agreed that only business-related expenditure could be allowed, rejecting the contention that all payments should be allowed. The Revenue was directed to estimate the business income after rejecting the books of account, ensuring a fair hearing and cooperation from the assessee.

5. Consequently, the appeals were treated as allowed for statistical purposes, granting relief to the assessee while requiring re-evaluation of the undisclosed business income by the AO. The applicability of sections 40A(3) and 40(a)(ia) was deemed irrelevant due to the non-consideration of payments as expenditure.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the Tribunal's decision, providing a comprehensive understanding of the legal complexities involved in the case.