1991 (3) TMI 186 - AT - Income Tax

Summary

Issues:
1. Estimation of sales and gross profit rate
2. Addition under section 40A(3)
3. Addition of capital contribution under section 68

Estimation of sales and gross profit rate:
The appeal was filed against the order of the CIT(A) regarding the estimation of sales and gross profit rate for the assessment year 1987-88. The assessee argued that the sales and gross profit rate disclosed were accurate, while the CIT(A) estimated sales at Rs. 8 lakhs and gross profit rate at 10%, resulting in an additional profit of Rs. 7,643. The ITAT upheld the CIT(A)'s decision, noting discrepancies in the accounts and justifying the estimation based on unaccounted cash-memo sales. The ITAT found the estimates reasonable and declined to interfere with the CIT(A)'s order.

Addition under section 40A(3):
The issue revolved around the addition of Rs. 44,000 under section 40A(3) for cash payments exceeding Rs. 2,500 made to suppliers. The assessee contended that the payments were genuine and covered under rule 6DD(j) as per a letter from the supplier. The ITAT analyzed the legislative intent behind section 40A(3) to prevent false cash payments and referred to CBDT circulars and rule 6DD(j) to support genuine cash transactions. Considering the circumstances and supplier's insistence on cash due to the firm being new, the ITAT deemed the addition unjustified and directed the AO to allow the payment as a legitimate business expense.

Addition of capital contribution under section 68:
The final issue pertained to the addition of Rs. 54,000 from partners' capital contributions under section 68. The ITAT referenced decisions from the Allahabad and Patna High Courts, along with a Tribunal ruling, emphasizing that partner contributions are not firm profits. Confirmations from partners and the firm being new supported the contention that these were capital investments, not firm income. The ITAT concluded that the addition was unwarranted, as the partners' explanations and confirmations clarified the nature of the cash credits, leading to the direction to delete the addition. The appeal was allowed based on these findings.