2016 (6) TMI 1121 - HC - Income Tax

High Court reverses ITAT decision on Section 40A(3) disallowance, upholds CIT revision. Assessing Officer's oversight prejudicial. (3)

The High Court held that the ITAT's decision on disallowance under Section 40A(3) was incorrect, siding with the CIT's revision under Section 263. The ... Disallowance under section 40A(3) - whether fall within the ambit of undisclosed income within the meaning of Section 158B(b) - Held that:- It is not a case where the assessing officer has adopted one of the courses permissible in law which has resulted in loss of revenue. It was not open to the assessing officer to ignore the provision of Section 40A(3) nor does he appear to have done so consciously. We are inclined to agree with the CIT that the provision contained in Section 40A(3) did not occur to him. It is not also a case where two views were possible and the assessing officer had taken one of them. As regards the applicability of Section 40A(3), whenever any expenditure was claimed, there were never two views. The judgement of the Apex Court in the case of Attar Singh ( 1991 (8) TMI 5 - SUPREME Court ) may in that regard be referred to. Issues Involved:1. Justification of ITAT's decision on disallowance under Section 40A(3) of the Income Tax Act.2. Applicability of Section 40A(3) in block assessments.3. Validity of CIT's revisionary powers under Section 263 of the Income Tax Act.4. Interpretation of judicial precedents related to Section 40A(3).Issue-Wise Detailed Analysis:1. Justification of ITAT's Decision on Disallowance under Section 40A(3):The primary question of law formulated was whether the ITAT was justified in holding that the disallowance under Section 40A(3) does not fall within the ambit of undisclosed income as per Section 158B(b) of the Income Tax Act. The ITAT had concluded that Section 40A(3) disallowance is not applicable in block assessments, relying on multiple precedents including the case of Sushil Kumar Mohta. The Tribunal argued that unrecorded expenditures naturally cannot comply with the requirement of payment by account payee cheque or bank draft, and thus disallowance under Section 40A(3) does not pertain to undisclosed income.2. Applicability of Section 40A(3) in Block Assessments:The CIT had revised the Assessing Officer's order under Section 263, asserting that the disallowance under Section 40A(3) should have been made. The CIT emphasized that Section 40A(3) begins with a non-obstante clause, making it an overriding provision. The CIT argued that even in block assessments, the provisions of Section 40A(3) apply, as supported by the Supreme Court's decision in Attar Singh Gurmukh Singh vs. ITO. The CIT concluded that the failure to apply Section 40A(3) in block assessments was prejudicial to the revenue's interest.3. Validity of CIT's Revisionary Powers under Section 263:The CIT invoked Section 263 to revise the Assessing Officer's order, arguing that the order was erroneous and prejudicial to the revenue's interest due to the non-application of Section 40A(3). The CIT's revision was based on the principle that the Assessing Officer had failed to apply his mind to whether Section 40A(3) was attracted, leading to an oversight that resulted in a loss of revenue. The ITAT, however, quashed the CIT's order, citing the principle that when two views are possible, and the Assessing Officer adopts one, the order cannot be termed erroneous.4. Interpretation of Judicial Precedents Related to Section 40A(3):The ITAT and the respondent relied on several judicial precedents to support their stance, including CIT vs. Banwari Lal Bansidhar, CIT vs. Purushottamlal Tamrokar, and CIT vs. Smt. Santosh Jain. These cases collectively held that when income is computed by applying a gross profit rate, there is no need to invoke Section 40A(3). The revenue, however, argued that these precedents were not applicable due to changes in the law and differing factual circumstances. The High Court distinguished these cases, noting that the assessee had claimed expenses for netting out receipts, unlike in Banwari Lal Bansidhar where no deduction was sought or allowed.Conclusion:The High Court concluded that the ITAT's reliance on precedents was misplaced and that the CIT was correct in invoking Section 263. The Court emphasized that the Assessing Officer's failure to consider Section 40A(3) was not a permissible view but an oversight. Therefore, the High Court set aside the ITAT's order, holding that the CIT was justified in revising the assessment to include disallowance under Section 40A(3). The appeal by the revenue was allowed, and the Court ruled in favor of the revenue.