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TMI Blog1992 (2) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; ... for certain purchases Rs. 1,60,428 ... in respect of expenses which were also not verifiable and which were deducted by the assessee in arriving at his returned income as above. The Assessing Officer, therefore, disallowed the same along with other amounts which, according to him, were disallowable. He, accordingly, computed the income from unaccounted business as follows: Rs. 11,28,863 ... &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer stated that it was clarificatory in nature and so it did not help the assessee. Before the Commissioner the same contentions were put forward and it was also urged that since the transactions were unaccounted, the proviso to section 145(1) had to be invoked which would take the case out of computation of business income so that the question of disallowability under section 40A(3) would not survive. It was urged that the diary which was found in the raid was not a complete and regular book and so there could only be a best judgment assessment which would take the case out of the purview of section 40A(3). The Commissioner observed that there was no scope for applying the proviso to section 145(1) and even if it was applied, separate disallowance could still be made because the officer may be able to pinpoint the specific defects, omissions or non-genuine entries sufficient to make additions in respect of particular items. He repeated the reasoning of the Assessing Officer that section 40A(3) was mandatory. He also pointed out that according to the facts, submissions of the assessee and the assessment order, the diary found in the search had been fully relied on to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon the decision of the Andhra Pradesh High Court in the case of S. Venkata Subba Rao relied upon by the Assessing Officer. In rejoinder the assessee's counsel again relied upon his earlier arguments that there was no scope for applying section 40A(3) where an estimate of income had been made and also submitted that since the cash transactions were with the very parties with whom transactions by cheque were made, the genuineness of those cash transactions was proved. 4. We will now consider the above contentions. Broadly speaking, there are two submissions, the first is that the Assessing Officer is bound to apply section 145(1) as laid down by the Supreme Court in the case of British Paints India Ltd. and that when that section is applied, section 40A(3) would be inapplicable. The second is that if section 40A(3) is applied, the assessee's case would fall under the exceptions as provided therein and rule 6DD(j) made thereunder. 5. Regarding the first point, it is true that in the case of British Paints India Ltd., the Supreme Court did say that "it is, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause the income had been computed not on the basis of specific items of expenditure allowed as deduction. The Tribunal observed, "how the assessee made these purchases, whether it was on one day or on various dates and what quantity and for what price, whether by cheque or cash and whether payments exceeded were not at all matters for our consideration. Those are alien to an estimate of reasonable profit. When estimates are made, it is not possible to say that specific items of expenditure exceeding Rs. 2,500 in cash have gone into the computation of those estimates. So that such items can be disallowed under section 40A(3)". 6. All depends upon the manner of making the estimate. If it has been made in a way which covers the entire position regarding income and expenditure, naturally there would not be any scope for further deductions. In the present case, however, the assessee revised its return after detection of certain incriminating material. When that data is available, it is as if that is part of the assessee's regular books before the assessment. The assessee has taken all that data into account and filed the return as shown from the following passage of the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; -------------- The assessee has disclosed profit from its unaccounted business in the return of income. In reply to question No. 1 in the statement of Shri B.A. Patel, Chairman of the Company, recorded under section 131 on 21-3-1989, he has clearly stated that there were certain transactions of sale and purchase of oil which were recorded in the diary Annex. D-66/A-36/M.B. Patel and Annex. A-28/K.V. Patel. The profit derived from such unaccounted business has been disclosed in the disclosure petition and, accordingly, the Income-tax returns for assessment years 1986-87 and 1987-88 have been revised'. From the above version of the Chairman of the Company, it is clear that the income disclosed in the revised return is represented by the transactions written in the two seized diaries mentioned above. Further in reply to question No. 2, Shri B.A. Patel has stated that--- 'entries in the diary were summarised. The purchases and the expenses as recorded in the diary were deducted from the sale proceeds and the profit was thus derived.' In reply to question No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Hasanand Pinjomal in support of the contention that application of section 40A(3) is mandatory and more particularly on the decision of the Andhra Pradesh High Court in the case of S. Venkata Subba Rao. 9. Now although the application of this section is mandatory, it is not without exceptions that are found in the rule made under this section. The Andhra Pradesh High Court has dealt with this application in the above case. That was a case of a person dealing in smuggled goods and claimed immunity from application of this section on the ground that since the business was illegal, it was not possible to comply with that section. The High Court rejected the assessee's contention stating, "may be that in an illegal business, like smuggling, it may not be practicable to comply with the requirements of sub-section (3) of section 40A, but that only means that such illegal business ought not to be carried on. It is a business prohibited by law. By taxing its income, it is not legalised or validated". The High Court held that the assessee must establish the genuineness of the payment and the identity of the payee and unless he does that, he cannot take advantage of clause (j) of rule ..... 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