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2020 (8) TMI 45 - AT - Income TaxDisallowance u/s. 40A(3) - payments made through bearer cheques/in cash to the suppliers against supply of grits - AO estimated the GP/income after rejecting books of accounts - HELD THAT - AO while computing the income of the assessee had taken into account, the purchases made in cash and thereafter had calculated the income of the assessee. The ld. CIT(A) had reproduced the decision in the case of Banwarilal Bansidhar 1997 (5) TMI 37 - ALLAHABAD HIGH COURT wherein the High Court has deleted the addition over and above the estimation of profit done by the Assessing Officer, as the High Court was of the opinion that the said element of purchase in cash was subsumed in the income calculated by the Assessing Officer. No distinguishable facts of the said decision with the present case, as reproduced in paragraph No. (f) of the impugned order (supra). In view of the above, we find substantial force in the grounds of appeal on this issue and the same are allowed and the disallowance made u/s. 40A(3) is deleted. - Decided in favour of assessee.
Issues Involved:
1. Legality of proceedings initiated under Section 148 of the Income Tax Act. 2. Disallowance of truck repair expenses. 3. Disallowance under Section 40A(3) for payments made through bearer cheques. 4. Applicability of Rule 6DD exceptions. 5. Rejection of accounts and application of profit rate. 6. Legality of the orders passed by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)]. Detailed Analysis: 1. Legality of Proceedings Initiated Under Section 148: The assessee challenged the legality of the proceedings initiated under Section 148 based on an investigation report, arguing that the Assessing Officer (AO) did not apply his mind and relied solely on the findings of the Investigation Wing, which is illegal and bad in law. 2. Disallowance of Truck Repair Expenses: The assessee contended that the disallowance of ?36,883 in truck repair expenses, which were part of the trading expenses already included in the Trading Account, resulted in double addition and deserved to be deleted. However, no effective arguments were made by the assessee's representative on this ground, leading to its dismissal. 3. Disallowance Under Section 40A(3): The AO made an addition of ?52,12,392 under Section 40A(3) for payments made through bearer cheques to a single supplier, Shri Kishan Singh. The AO found that payments exceeding ?20,000 were made otherwise than by an account payee cheque or bank draft, contravening the provisions of Section 40A(3). The CIT(A) upheld this disallowance, noting that the supplier was located in Kanpur, a city with access to banks, and the payments were not made through any employee or agent but directly by the assessee. 4. Applicability of Rule 6DD Exceptions: The assessee argued that the payments were covered under exceptions provided in Rule 6DD of the Income Tax Rules, particularly Rule 6DD(e)(i), (g), and (k). However, the CIT(A) found that these exceptions did not apply as the supplier was not a producer of grit, and the payments were made in a city with banking facilities. The CIT(A) also noted that the facts of the case were materially different from the precedents cited by the assessee. 5. Rejection of Accounts and Application of Profit Rate: The AO rejected the assessee's books of accounts under Section 145(3) and estimated the gross profit at 5%, resulting in an addition of ?11,58,316. The assessee argued that once the books of accounts were rejected and a gross profit rate was applied, no further addition could be made under Section 40A(3). The CIT(A) and the tribunal found that the AO had already considered the purchases made in cash while computing the income, and the disallowance under Section 40A(3) was subsumed in the gross profit addition. The tribunal relied on the decision of the jurisdictional High Court in the case of Banwarilal Bansidhar, which held that no further disallowance could be made when the gross profit rate was applied. 6. Legality of the Orders Passed by the AO and CIT(A): The tribunal addressed the department's request for additional time to file a cross-objection, which was ultimately rejected due to the absence of a formal cross-objection and a significant delay. The tribunal emphasized that the revenue should be vigilant in prosecuting its rights within the time provided by the Act. Conclusion: The tribunal partly allowed the appeal of the assessee, deleting the disallowance made under Section 40A(3) but dismissing the ground pertaining to the disallowance of expenses. The tribunal upheld the legality of the proceedings initiated under Section 148 and the rejection of accounts, while emphasizing the importance of timely and proper filing of cross-objections by the revenue.
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