2009 (12) TMI 56 - HC - Income Tax

Deducion u/s 40A(3) whether an expenditure incurred in contravention to the provisions of sub clause 3 of Section 40A of the Act would be an undisclosed income within the meaning of sub clause (b) of Section 158 B of the Act? Whether expenditure incurred in contravention to the provisions of sub clause 3 of Section 40A of the Act would be an undisclosed income within the meaning of sub-clause (b) of Section 158B of the Act even though the transactions in respect thereof were found entered in the books of accounts prior to the date of search and no material in respect of such expenditure were found in course of search? - addition in relation to undisclosed expenditure treated as undisclosed income even though the condition precedent to the exercise of jurisdiction under the provisions of Chapter XIV B of the Act were conspicuously absent Held that - It is evident on a plain reading of the provisions that any claim for deduction exceeding rupees twenty thousand in a manner otherwise than by a crossed cheque or a crossed bank draft shall deprive the assessee of the benefit of deduction of the whole amount. We are satisfied that the transaction in question is hit by the bar of Section 40A (3) of the Act which disentitles the appellant to the claim of deduction. - that the transactions in question are violative of section 40A (3) of the Act were acts of fraud and are directly and clearly relatable to the materials which have been found during the course of search and seizure. The assessee had not disclosed this income in its original returns. Decided in favor of revenue and against the assessee

Summary

Issues:
1. Treatment of ownership of shares as undisclosed income.
2. Disallowance of unexplained expenditure and treatment as undisclosed income.
3. Interpretation of provisions under Section 40A(3) of the Income Tax Act.

Issue 1: Treatment of ownership of shares as undisclosed income:
The appellant, a company with operations in Bihar, submitted returns for the period 1994-95. Following a search and seizure at its premises in Gujarat, the authorities issued a notice under the Income Tax Act. The Assistant Commissioner treated certain investments in shares as undisclosed income. The Tribunal set aside the ownership of shares as undisclosed income for the assessment year 1995-96, remitting the matter for fresh consideration. The appellant did not contest this decision.

Issue 2: Disallowance of unexplained expenditure:
The Tribunal agreed with the assessing officer that certain business expenditures were fictitious transactions. The appellant had issued cheques that were later manipulated into bearer cheques, violating Section 40A(3) of the Act. The Tribunal confirmed the addition of undisclosed expenditure as undisclosed income, despite the absence of the necessary conditions under Chapter XIVB of the Act.

Issue 3: Interpretation of Section 40A(3) provisions:
The Court analyzed the transactions where cheques were manipulated into bearer cheques, exceeding the prescribed limit. The Court held that such transactions violated Section 40A(3), disentitling the appellant from claiming deductions. Additionally, the Court emphasized that fraud unravels everything, citing relevant legal precedents. The Court rejected the appellant's argument that undisclosed income must be exclusively related to materials found during the search and seizure, noting that the transactions were directly linked to the materials discovered during the search.

The Court found the appellant's transactions to be in violation of Section 40A(3) of the Income Tax Act, constituting acts of fraud. The Court emphasized that fraud unravels everything, and the appellant's failure to disclose the income in its original returns further supported the decision. Ultimately, the Court dismissed the appeal, ruling in favor of the Department and imposing costs on the appellant.