2016 (11) TMI 210 - HC - Income Tax

Addition u/s 40A(3) - Held that - There is no dispute that the provisions of s.40A(3) apply to block assessments in general. The provision however, would apply only where expenditure in question has been incurred and claimed in the computation of income. The Supreme Court, in the case of Attar Singh Gurmukh Singh Vs. Income Tax Officer, Ludhiana (1991 (8) TMI 5 - SUPREME Court) reiterates this position as well. In the present case, the Tribunal confirms as a finding of fact at para 17 of its order that no expenditure has been incurred except the investment in gold. The consideration paid towards the investment has been duly brought to tax as unexplained income, such income not having been claimed as expenditure in the computation of income. The objection of the Revenue is that the valuation of the gold per gram is not ₹ 500 but more as revealed by other disallowances made in the order of assessment and if the higher rate was taken into consideration, one could assume that certain expenditure has been incurred and claimed. We are not persuaded to accept this submission in so far as there is no necessity to consider any other valuation except that relating to the subject disallowance, being ₹ 500 per gram adopted by the Assessing officer after due consideration and application of mind. We are thus of the view that the provisions of 40A(3) are wholly inapplicable to the facts and circumstances of this case. The substantial question of law is answered in favour of the assessee

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal invoking Section 40A(3) for disallowance resulting in assessment of undisclosed income despite purchases being assessed on an estimated basis.

Analysis:
The case involved a challenge to an order of the Income Tax Appellate Tribunal concerning the block period from 1989-1999 to 2003-2004 and part of 2004-2005. The main issue pertained to the correctness of invoking Section 40A(3) of the Income Tax Act to make a disallowance leading to the assessment of undisclosed income, even though the purchases were assessed based on an estimated basis in the block assessment order. The appellant, engaged in the business of manufacturing and trading gold jewelry, faced additions and disallowances following a search and seizure action under Section 132 of the Act.

During the search proceedings, loose sheets indicated unaccounted purchase of gold jewels, and the appellant agreed to offer the value of these purchases as unexplained income. The Assessing Authority accepted the appellant's offer but enhanced the rate per gram for valuation. However, the Assessing Officer later invoked Section 40A(3) of the Act, claiming that the consideration was paid in cash, leading to a disallowance on the entire purchases of gold jewelry. Appeals were made to the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, both of which upheld the disallowance.

In the High Court's judgment, it was crucial to determine the justification of invoking Section 40A(3) in the given circumstances. The Court emphasized that Section 40A(3) applies to block assessments but only when the expenditure in question has been incurred and claimed in income computation. Referring to the Supreme Court's decision in Attar Singh Gurmukh Singh Vs. Income Tax Officer, Ludhiana, the Court noted that no expenditure had been incurred except the investment in gold, which was already taxed as unexplained income and not claimed as expenditure. The Court rejected the Revenue's argument regarding the valuation of gold per gram, stating that the rate considered by the Assessing Officer was appropriate. Consequently, the Court held that Section 40A(3) was inapplicable to the case, ruling in favor of the assessee against the Revenue.