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2018 (3) TMI 1519 - AT - Income TaxDisallowance u/s 40A(3) on account of purchases made in cash from M/s. Hanuman Traders - addition u/s 68 - Held that - For considering the issue of peak credit, the authorities below have to laid-out the foundation that it was unaccounted money of the assessee having both debit and credit which assessee did not agree. It could not be taken into consideration for making such addition under section 68 in the hands of the assessee for making any alleged transaction with M/s. Hanuman Traders, which, according to the authorities below, did not exist and that no such entries appear in the books of account of the assessee. Some entries appeared in the books of account of the assessee regarding M/s. Hanuman Traders, according to the findings of the authorities below, such books of account of the assessee are not reliable. Therefore, the authorities below cannot rely upon the same entries in books of account for the purpose of making the addition of the nature of peak against the assessee. Thus, there is no justification for the authorities below to make addition of ₹ 6,92,25,000/- under section 40A(3) of the I.T. Act and addition under section 68 of the I.T. Act.
Issues Involved:
1. Rejection of books of account under section 145(3) of the I.T. Act. 2. Disallowance under section 40A(3) of the I.T. Act. 3. Addition under section 68 of the I.T. Act for unexplained cash credits. 4. Validity of assessment proceedings on account of jurisdiction of the A.O. Issue-wise Detailed Analysis: 1. Rejection of books of account under section 145(3) of the I.T. Act: The assessee's books of account were rejected under section 145(3) due to unrecorded transactions involving unbranded Aatta purchased from M/s. Hanuman Traders. The A.O. found that the purchases and corresponding sales were not recorded in the books, leading to the rejection of the books. The Ld. CIT(A) confirmed this rejection but noted that the A.O.'s recasting of the P & L A/c was incorrect. The Ld. CIT(A) determined that the profit from these transactions should be ?62,90,150/- instead of the A.O.'s addition of ?4,14,44,156/-. 2. Disallowance under section 40A(3) of the I.T. Act: The A.O. disallowed ?6,92,25,000/- under section 40A(3) due to cash payments made to M/s. Hanuman Traders. The Ld. CIT(A) upheld this disallowance, stating that the assessee violated the provisions by making cash payments. However, the Tribunal found that since the books of account were rejected and the profit was estimated, no separate disallowance under section 40A(3) should be made. This conclusion was supported by various judicial precedents, including the Hon'ble Allahabad High Court's decision in CIT vs. Banwari Lal Banshidhar (1998) 229 ITR 229 (Alld.) (HC). 3. Addition under section 68 of the I.T. Act for unexplained cash credits: The A.O. considered the amount of ?6,31,90,150/- as unexplained credit under section 68 but did not make a separate addition due to the disallowance under section 40A(3). The Ld. CIT(A) made an addition of ?7,12,15,150/- under section 68, noting that the assessee failed to prove the existence of M/s. Hanuman Traders and the genuineness of the transactions. The Tribunal, however, found that the authorities below could not rely on the same books of account for making additions under section 68 when they had already rejected the books. Furthermore, the Tribunal noted that the Ld. CIT(A) did not provide specific notice for enhancement under section 68, and the theory of peak credit was not properly applied. Consequently, the addition under section 68 was deleted. 4. Validity of assessment proceedings on account of jurisdiction of the A.O.: The assessee raised an additional ground challenging the validity of the assessment proceedings based on the jurisdiction of the A.O. However, this ground was not pressed by the assessee's counsel during the hearing, leading to its rejection. Conclusion: The Tribunal concluded that both the disallowance under section 40A(3) and the addition under section 68 could not be sustained. The orders of the authorities below were set aside, and both additions were deleted. The appeal of the assessee was partly allowed, specifically in relation to the disallowance under section 40A(3) and the addition under section 68. The rejection of the books of account and the estimated profit addition by the Ld. CIT(A) were not challenged and thus remained upheld.
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