2016 (5) TMI 204 - HC - Income Tax

Disallowance u/s 40A(3) - Held that - Where disallowance is made under section 40A(3) of the Act in respect of entries made in regular books of account, which have no relation with the undisclosed income, or the entries not recorded in the books of account or documents unearthed during the search, such allowance cannot be treated as part of the undisclosed income. However, if such expenditure relates to undisclosed income found during the search, the disallowance under section 40A(3) of the Act, would be justified. The Tribunal had held that while computing the undisclosed income of the block period, the provisions of section 40A(3) of the Act would be applicable in respect of payments made for the purchase of gold, exceeding the amount of ₹ 20,000, as such expenditure was found recorded in the loose sheets discovered during the course of search and seizure operations. Relying on the decision of this court, in M. G. Pictures (Madras) Limited v. Asst. CIT 2002 (4) TMI 16 - MADRAS High Court the Appellate Tribunal had dismissed the appeal filed by the assessee. Having considered the reasons given by the Appellate Tribunal, we are fully convinced that there is no error in the impugned order passed by the Appellate Tribunal, dated June 16, 2006. In the given facts and circumstances of the case, it is clear that the provisions of section 40A(3) of the Act would be applicable. As per the provisions of the said section, no deduction could be allowed for purchases exceeding ₹ 20,000, as provided therein. However, the case of the assessee is not found to be falling in the exceptions provided in the proviso to the said section. As such the purchases of gold jewellery had exceeded ₹ 20,000, as found from the loose sheets discovered during the search and seizure operations. The disallowance of deduction by the Assessing Officer is correct in law. As such, we find no cause or reason to interfere with the order passed by the Appellate Tribunal, dated June 16, 2006. - Decided in favour of the Revenue and against the assessee

Summary

Issues:
Challenge to disallowance under section 40A(3) of the Income-tax Act, 1961 in the computation of undisclosed income for the block period.

Detailed Analysis:

1. Facts of the Case: The case involved a tax appeal against the order passed by the Income-tax Appellate Tribunal regarding the disallowance under section 40A(3) of the Income-tax Act, 1961 in the computation of undisclosed income for the block period.

2. Applicability of Section 40A(3): The Assessing Officer invoked section 40A(3) to disallow a specific amount in the computation of undisclosed income, based on cash purchases of gold jewellery exceeding a certain limit. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this disallowance, considering the evidence found during search operations.

3. Contentions of the Assessee: The appellant challenged the order, arguing that the provisions of section 40A(3) were incorrectly applied. The appellant claimed that the pre-conditions for disallowance were not met, as no proper books of account existed, and the purchases were assessed on an estimated basis using peak purchase.

4. Judicial Interpretation: The High Court analyzed the Tribunal's decision and held that the disallowance under section 40A(3) was justified in this case. The Court emphasized that if the disallowance related to undisclosed income found during the search, it would be justified under the Act. The Court relied on precedent to support the Tribunal's decision.

5. Decision of the High Court: After considering the arguments and the Tribunal's reasoning, the High Court found no error in the Tribunal's order. The Court concluded that the provisions of section 40A(3) were correctly applied in disallowing deductions for cash purchases exceeding the specified limit. Therefore, the Court dismissed the appeal, ruling in favor of the Revenue.

In conclusion, the High Court upheld the application of section 40A(3) in disallowing deductions for cash purchases of gold jewellery exceeding the specified limit, as found during search operations, and dismissed the appeal challenging the disallowance in the computation of undisclosed income for the block period.