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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 ..... 28 ... 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 ... Net profit as returned Rs. 5,696 ... Understatement of sales Rs. 43,35,715 ... Purchases for which payments had been made in cash disallowed Rs. 1,76,017 ... Expenses disallowed for want of verification including Rs. 1,60,428 as above ------------- Rs. 56,46,291 ... Total It can thus be seen that the Assessing Officer made the assessment on the basis of both the returned income of the assessee and the above amounts, which, according to him, were disallowable. The assessee had submitted before him that the unaccounted transactions are always in cash and, therefore, the question of applying provisions of section 40A(3) did not arise and that they were covered by rule 6DD(j) of the Income-tax Rules and by the Board Circular No. 220, dated 31-5-1977. The Assessing Officer rejected this contention on the ground that sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process of manufacture and so it was not possible to clarify the stock position discrepancy. In fact, no day-to-day manufacturing and stock position details are maintained. He relied upon the Tribunal's decision in the case of M. Sreedhara Panicker v. ITO [1979] 7 TTJ (Cochin) 573 in support of the proposition that when an estimate is made, there was no scope for application of section 40A(3). On the other hand, the learned D.R. submitted that the application of section 40A(3) was mandatory and that this section was to be applied even if the proviso to section 145(1) was applied. He also submitted that the alternative claim based on application of rule 6DD(j) on specific payments made before the Tribunal should not be entertained at this stage because such a claim was not made before the Assessing Officer or the CIT (Appeals). In this connection, he pointed out from para 6 of the Assessing Officer's order the following: "However, certain exceptions have been enumerated in rule 6DD of the IT Rules. But the assessee has not made any attempt to establish that its case is covered by the aforesaid Rule. Therefore, in order to ascertain whether mitigating circumstances referred to in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch he has gathered. Therefore, when the accounts are not correct or complete, it is not as if the Assessing Officer is compelled to ignore internal material which he has gathered and merely depend upon some external material to make an estimate. Further, section 145(1) is an enabling provision. It is intended to enable the Assessing Officer to make the correct assessment which is the paramount object. This has been clearly stated in the above quotation from the Supreme Court judgment in the case of British Paints India Ltd., relied upon by the assessee. It is not intended to confer any right or benefit upon an erring assessee. The burden of the Supreme Court judgment is that section 145 is intended to make the correct assessment in compliance with the law and not to by-pass the statutory provisions. Now regarding the second part of the submission, it is a fair proposition that if an overall estimate of income has been made, there would not be any scope for making any disallowances and applying section 40A(3). This is not because the statutory provisions coin be ignored or excluded but because they must be deemed to have been applied in making the estimate so that there is no scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. 3, the Chairman specifically stated that--- 'the sale price was received in cash and the purchase price and expenses were paid in cash since the transactions were of unaccounted business'." 7. From the reply to question Nos. 2 and 3 reproduced above, it can be seen that the assessee has deducted all the expenses including those which are not allowable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hra 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 6DD. For ready reference, the relevant part of the rule is reproduced below: "No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding two thousand five-hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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