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2025 (2) TMI 402 - AT - Income TaxRevision u/s 263 - lack of enquiry and consequently non-disallowance of unaccounted purchases made in cash of Rs. 5, 83, 99, 000/- by not invoking the provision of section 40A(3) - HELD THAT - AO has framed assessment after considering the seized material which depicts that cash sales made by assessee AO estimated the profit rate after considering the facts of the case that the ledger account named MT 01 Chintu Capital found during the search on JBL Group of cases mixed the transaction relating to various parties which include assessee. It means that the cash payment of different transactions mentioned in seized ledger are trading receipts which was carried during the course of business and as such only the gross profit on unaccounted sales/purchases can be added as taxable income of the assessee. The AO has rightly added the same and there is no further scope of disallowance by invoking the provisions of section 40A(3) of the Act. Even Amman Steel Allied Industries 2015 (11) TMI 395 - MADRAS HIGH COURT has considered the same issue and ratio laid down that the addition made u/s 40A(3) of the act is faulted for the reason that the AO himself has estimated the income by estimating the gross profit. AO while completing assessment has taken one of the view which is plausible one as taken by various High Courts as noted above that once profit is estimated on purchases no disallowance can be resorted to by invoking the provisions of Section 40A(3) of the Act. In our view this is the only possible view. But if we consider that there are two views possible even then the revision proceedings u/s 263 of the Act cannot be initiated. If two views were possible and when the AO has accepted one of the view which is a plausible one it is not appropriate on the part of the PCIT to exercise his power u/s 263 of the Act solely on the ground that apart from estimating profit the AO has to invoke provisions of Section 40A(3) of the Act. As held in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT and Vimgi Investment P. Ltd. 2007 (2) TMI 176 - DELHI HIGH COURT once a plausible view is taken it is not open to the PCIT to exercise the power u/s 263 of the Act. As in the present case the AO after considering the facts of unaccounted purchases made by the assessee in cash has estimated the profit rate the PCIT wants revision of the same under Section 263. Whether the PCIT is right in directing the AO to invoke the provisions of Section 40A(3) for making disallowances of cash purchases. Provisions of section 40A(3) of the Act cannot be invoked in the given facts and circumstances of the present case for the reason that the AO himself has estimated the profit rate on the cash purchases made by assessee. Once cash purchases are estimated by applying gross profit rate and income is taxed no further disallowance u/s 40A(3) of the Act is possible. The reason for the same is that when income of the assessee is computed applying flat gross profit rate and when no deduction is allowed in regard to the purchases of the assessee there is no need to invoke the provisions of section 40A(3). We also noted above that it is clear from the facts of the case that on the date when PCIT passed revision order u/s 263 of the Act the view taken by the AO while framing assessment was in consonance with the view taken by various High Courts as noted above - Appeals of the Assessee are allowed.
ISSUES PRESENTED and CONSIDERED
The core legal question considered in this judgment revolves around whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act to revise the assessment order on the grounds of lack of enquiry by the Assessing Officer (AO) and failure to disallow cash purchases under Section 40A(3) of the Act. The specific issues addressed include:
ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework involves Section 263 of the Income Tax Act, which allows the PCIT to revise an assessment order if it is deemed erroneous and prejudicial to the revenue's interest. Section 40A(3) mandates disallowance of cash payments exceeding a specified limit unless covered by exceptions. The precedents considered include judgments from various High Courts, which establish that when income is computed by applying a gross profit rate, there is no need to invoke Section 40A(3). Court's Interpretation and Reasoning The Tribunal examined whether the AO had conducted adequate enquiry and whether the application of a 2% gross profit rate on unaccounted purchases was a plausible approach. The Tribunal found that the AO had indeed considered the seized material and applied a profit rate after due enquiry. The Tribunal further reasoned that once a gross profit rate is applied, it encompasses all expenses, including cash purchases, thus negating the need for additional disallowance under Section 40A(3). Key Evidence and Findings The evidence included digital data from the software "Hazir Johri" seized from the JBL group, which indicated unaccounted cash purchases by the assessee. The AO had applied a 2% profit rate on these purchases, which was contested by the PCIT for not invoking Section 40A(3). The Tribunal found that the AO's approach was consistent with established legal precedents and that the PCIT's revision was unwarranted. Application of Law to Facts The Tribunal applied the legal principles established in prior judgments, such as those from the Rajasthan, Allahabad, and Madras High Courts, which support the view that applying a gross profit rate obviates the need for further disallowance under Section 40A(3). The Tribunal concluded that the AO's assessment was not erroneous as it adhered to a plausible view supported by legal precedent. Treatment of Competing Arguments The Tribunal considered the arguments from both the assessee and the department. The department argued for the necessity of invoking Section 40A(3) despite the profit rate application, while the assessee contended that the AO had conducted sufficient enquiry. The Tribunal sided with the assessee, emphasizing that the AO's view was consistent with legal precedent and thus not open to revision under Section 263. Conclusions The Tribunal concluded that the AO's decision to apply a 2% profit rate was a plausible view, and therefore, the PCIT's invocation of Section 263 was not justified. The Tribunal quashed the revision order, affirming the AO's original assessment. SIGNIFICANT HOLDINGS Core Principles Established The judgment reinforces the principle that when an AO applies a gross profit rate to unaccounted purchases, it encompasses all related expenses, including cash purchases, thereby negating the need for disallowance under Section 40A(3). This principle is supported by precedents from multiple High Courts. Final Determinations on Each Issue The Tribunal determined that the AO's assessment was neither erroneous nor prejudicial to the revenue's interest, as it was based on a plausible interpretation of the law. The Tribunal quashed the PCIT's revision order under Section 263, thereby allowing the assessee's appeals for both assessment years 2015-16 and 2016-17. The judgment underscores the necessity for the PCIT to exercise caution when invoking Section 263, particularly when the AO's assessment aligns with established legal views and precedents.
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