2013 (3) TMI 221 - HC - Income Tax

Disallowance u/s 40A(3) - AO disallowed 20% of the purchase price alleged to be paid in cash in respect of alternative purchases & also rejected books of account and estimated 6% extra profit in respect of purchases made from Kothari Group - Held that - CIT (Appeal) and the Tribunal, for deleting the said disallowance, placed reliance on the judgment of this Court in the case of Commissioner of Income Tax Vs. Purshottamlal Tamrakar 2003 (3) TMI 10 - MADHYA PRADESH HIGH COURT wherein held that Section 40A(3) is not applicable when the net profit rate was applied by the AO and once a net profit rate is applied the expenses are deemed to be considered while applying the net profit rate. As in the present case also net profit rate was applied by the AO there was no scope for further disallowance of any expenditure - no substantial question of law arises in the matter - against revnue.

Summary

Issues:
1. Admissibility of expenses under Section 40A(3) of the Income Tax Act, 1961.

Analysis:
The case involved a search at Bharat Kothari Group under Section 132 of the Income Tax Act, leading to the admission by various firms of issuing bogus bills without actual sales of iron and steel. The respondent assessee declared purchases from these bill providers, which the Assessing Officer deemed not genuine. Consequently, the Officer disallowed 20% of the purchase price paid in cash for alternative purchases and estimated 6% extra profit for purchases from Kothari Group. However, the CIT (Appeal) found that all purchases from Kothari Group were made by cheque, leading to the rejection of the disallowance under Section 40A(3) by the Assessing Officer. The Tribunal upheld this decision, prompting the Revenue to appeal.

The High Court found that the CIT (Appeal) and the Tribunal relied on a previous judgment in Commissioner of Income Tax Vs. Purshottamlal Tamrakar, which held that Section 40A(3) is not applicable when a net profit rate is applied by the Assessing Officer. As the net profit rate was applied in this case, the Court concluded that there was no basis for further disallowance of any expenditure. Therefore, the Court dismissed the appeal, stating that no substantial question of law arose in the matter.

In summary, the judgment centered on the admissibility of expenses under Section 40A(3) of the Income Tax Act, with the Court holding that the net profit rate application precluded any additional disallowance of expenditure, based on the precedent set by the Purshottamlal Tamrakar case.