1992 (2) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of section 40A(3) when an estimate of income is made.
2. Benefit of exceptions to section 40A(3) u/r 6DD(j) for payments made in the course of a business outside the books.

Summary:

Issue 1: Applicability of section 40A(3) when an estimate of income is made

The main ground in the assessee's appeal raises the question of whether section 40A(3) can be applied where an estimate of income has been made. The assessee was carrying on unaccounted business detected during a raid, leading to a revised return of Rs. 11,28,863. The Assessing Officer disallowed payments totaling Rs. 43,35,715 for purchases and Rs. 1,60,428 for unverifiable expenses under section 40A(3), computing the total income at Rs. 56,46,291. The assessee argued that unaccounted transactions are always in cash, thus section 40A(3) should not apply, and they were covered by rule 6DD(j) and Board Circular No. 220. The Assessing Officer and Commissioner rejected this, stating section 40A(3) was mandatory and applicable to illegal business, as held by the Gujarat High Court in Hasanand Pinjomal v. CIT and the Andhra Pradesh High Court in S. Venkata Subba Rao v. CIT. The Commissioner noted that the diary found in the raid was fully relied on to ascertain the correct profit, and no estimate was made, thus section 40A(3) applied.

Issue 2: Benefit of exceptions to section 40A(3) u/r 6DD(j) for payments made in the course of a business outside the books

The assessee contended that since cash payments were made to parties to whom cheque payments were also made, the genuineness of cash payments should be accepted. The Commissioner disagreed, stating that if cheque payments could be made, there was no reason for cash payments, thus disallowing them. The Tribunal noted that the assessee's case fell under the exceptions in rule 6DD(j) due to the exceptional circumstances of conducting business outside the books. The Tribunal distinguished the case from the Andhra Pradesh High Court's decision in S. Venkata Subba Rao, which dealt with illegal business. The Tribunal concluded that if the State claims a share in any income, it cannot deny the expenditure whereby the income is earned, thus the assessee's case would be covered by the exceptions provided in rule 6DD(j).

Conclusion:

The Tribunal held that section 40A(3) was applicable even when an estimate of income was made, but the assessee's case fell under the exceptions provided in rule 6DD(j) due to the exceptional circumstances of conducting business outside the books.