2004 (11) TMI 302 - AT - Income Tax

Summary

Issues:
1. Sustaining trading addition and disallowance of expenses.
2. Confirming addition made under section 40A(3).

Issue 1 - Sustaining trading addition and disallowance of expenses:
The appeal was filed against the order of CIT(A), Jodhpur, for the assessment year 1995-96. The assessee did not press ground No. 1 related to sustaining a trading addition and disallowance of rickshaw expenses. The only issue now agitated in this appeal was confirming an addition made under section 40A(3). The Assessing Officer (AO) made a trading addition by rejecting the book results and applying a Gross Profit (GP) rate higher than the declared rate. The CIT(A) upheld the addition. Additionally, the AO made cash payment additions under section 40A(3). The CIT(A) reduced the addition, stating the assessee failed to prove exceptional circumstances under rule 6DD(j). The assessee challenged this decision.

Issue 2 - Confirming addition made under section 40A(3):
The assessee argued that since the AO rejected the book results and estimated income using the GP rate, no disallowance could be made under section 40A(3). The Departmental Representative relied on previous orders. The Tribunal considered the facts and arguments. It noted that once the GP rate was applied to compute income, expenses were deemed considered, and no further disallowance under section 40A(3) could be made. The Tribunal cited judgments from the Allahabad High Court and the Madhya Pradesh High Court to support its decision. Consequently, the Tribunal set aside the CIT(A)'s order and deleted the disallowance. The appeal was allowed in favor of the assessee.

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside the disallowance made under section 40A(3) based on the application of the GP rate to compute income.