Estimated profit computation limits Section 40A(3) disallowance when no separate purchase deduction is claimed.

Where business income is determined on an estimated profit basis by applying a gross profit rate to unaccounted turnover, and no separate deduction is allowed for the relevant purchases or expenditure, Section 40A(3) cannot be used to make an additional disallowance. The computation already captures the profit element embedded in the turnover, so there is no separately deductible expense to which the provision can apply. On that footing, the disallowance was held inapplicable and the Revenue's challenge failed.

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Issues: Whether disallowance under Section 40A(3) of the Income-tax Act, 1961 could be applied when the assessee's income was determined by applying a percentage rate on unaccounted turnover and no deduction was claimed for the relevant expenditure.

Analysis: The assessment had proceeded on an estimated basis by applying a gross profit rate, and the purchases on which disallowance was sought were not separately allowed as deductions. In such a situation, the computation already captured the profit element of the turnover, leaving no separate expenditure deduction to which Section 40A(3) could be applied. The reasoning adopted by the lower authorities was consistent with the earlier view that where income is estimated and no deduction is allowed in respect of purchases, a further disallowance under Section 40A(3) is not warranted.

Conclusion: The disallowance under Section 40A(3) was not applicable, and the Revenue's challenge failed.

Ratio Decidendi: Where business income is determined on an estimated profit basis and no separate deduction for the relevant purchases or expenditure is allowed, Section 40A(3) cannot be invoked to make an additional disallowance.

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