1988 (9) TMI 95 - AT - Income Tax

Summary

Issues Involved:

1. Legality of the assessment proceedings.
2. Disallowance under Section 40A(3) of the IT Act, 1961.
3. Addition under Section 40A(8) of the IT Act.
4. Claim under Section 80J of the IT Act.
5. Charge of interest under Sections 139(8) and 217 of the IT Act.

Issue-Wise Detailed Analysis:

1. Legality of the Assessment Proceedings:

The assessee challenged the jurisdiction of the assessing officer, arguing that the notices under Sections 139(2)/148 of the Act were never served, rendering the entire assessment proceedings invalid. The Tribunal noted that the assessee's accounting year ended on 31st March 1984, and a return declaring a loss was filed on 15th January 1986. Despite the late filing, the Tribunal referenced the Supreme Court's decision in CIT vs. Kulu Valley Transport Co Ltd., which held that the ITO must determine the loss even if the return is delayed. The Tribunal found no force in the argument that the assessment was invalid due to the late return. Additionally, the Tribunal noted that no valid action under Section 147 was initiated as no reasons were recorded for such action, and the assessment was based on the return filed on 15th January 1986. Therefore, the Tribunal dismissed the challenge to the legality of the proceedings.

2. Disallowance under Section 40A(3) of the IT Act, 1961:

The main issue was the disallowance of Rs. 9,56,751 for purchases made in cash, violating Section 40A(3). The ITO noted that payments exceeding Rs. 2,500 were made in cash, which should have been made by crossed cheques or drafts. The assessee contended that the payments were genuine and covered by Rule 6DD of the IT Rules. The Tribunal observed that the genuineness of the payments was not in dispute and referenced the Rajasthan High Court's decision in Kanti Lal Purushottam & Co. vs. CIT, which held that Section 40A(3) is discretionary. The Tribunal found that the payments to M/s Sethia Oil Industries and Balaji Vegetable Products were made under exceptional circumstances, as evidenced by certificates from the sellers. Similarly, payments to M/s Ganesh Flour Mills, a Government of India undertaking, were also considered genuine and not disallowed. For M/s Modi Vanaspati Mfg. Co., the Tribunal noted that payments were made in cash due to impracticality and were covered by Rule 6DD(j)(ii). Consequently, the disallowance of Rs. 9,56,751 was deleted.

3. Addition under Section 40A(8) of the IT Act:

The assessee did not press the issue of an addition of Rs. 2,849 under Section 40A(8), and the Tribunal accordingly rejected this contention.

4. Claim under Section 80J of the IT Act:

The claim under Section 80J became redundant and infructuous due to the allowance of the expenditure on purchases, resulting in no income for the assessee.

5. Charge of Interest under Sections 139(8) and 217 of the IT Act:

Similarly, the issue of charging interest under Sections 139(8) and 217 became redundant due to the allowance of the expenditure on purchases.

Conclusion:

The assessee's appeal was partly allowed, and the addition of Rs. 9,57,751 made by the ITO was deleted. The levy of interest under Sections 139(8) and 217 was also cancelled.