2022 (1) TMI 899 - HC - Income Tax

High Court Upholds Tax Disallowance and Income Addition Decisions

M/s. Keld Ellentoft India Pvt Ltd. Versus The Assistant Commissioner of Income Tax Central Circle III (3), Chennai

M/s. Keld Ellentoft India Pvt Ltd. Versus The Assistant Commissioner of Income Tax Central Circle III (3), Chennai - [2022] 441 ITR 506 (Mad) Issues Involved:1. Disallowance under Section 40A(3)2. Addition of outstanding credits as income under Section 41(1)3. Levy of interest under Section 158BFAIssue-wise Detailed Analysis:1. Disallowance under Section 40A(3):The Assessing Officer (AO) disallowed Rs. 72,32,972 under Section 40A(3) of the Income Tax Act, 1961, stating that the assessee made grey market purchases exceeding Rs. 20,000 in cash per instance from unidentified sources. The assessee contended that no single purchase exceeded Rs. 20,000, and thus, the provisions of Section 40A(3) were invoked on presumption. The appellate authority agreed with the assessee, stating that further disallowance under Section 40A(3) is invalid when net profit is determined on estimation. The Tribunal upheld this decision.2. Addition of Outstanding Credits as Income under Section 41(1):The AO treated four items of outstanding credits totaling Rs. 11,14,465 as income under Section 41(1), based on the entries in the books of accounts. The assessee argued that these amounts were withheld due to disputes over the quality of supplies and were not written off in the books of accounts. The appellate authority partly allowed the appeal, reducing the addition to Rs. 1,56,776, noting that two trade liabilities were written off in the regular books for the financial year 2002-03 and offered to tax in the return for 2003-04. However, the Tribunal reversed this decision, restoring the AO's order, stating that the amounts were no longer payable and hence taxable, relying on the Supreme Court decision in CIT vs. T.V. Sundaram Iyengar and Sons Limited.3. Levy of Interest under Section 158BFA:The appellate authority found that interest under Section 158BFA is chargeable but directed the AO to re-compute the interest while passing the appeal effect order. This aspect was not further contested in the Tribunal or the High Court.High Court's Judgment:The High Court dismissed the assessee's appeal, affirming the Tribunal's decision. It held that the AO's addition of Rs. 11,14,465 as undisclosed income under Section 41(1) was justified, as the amounts were shown as outstanding credits without confirmatory letters from the parties. The court noted that the assessee filed returns only after the search, and the AO's determination based on the books of accounts was valid. The High Court referenced the decisions in R. Rangasamy v. Deputy Commissioner of Income Tax and Commissioner of Income Tax, Central, Patna vs. Harsh Kochar, supporting the AO's approach. The court also cited the Supreme Court's ruling in Assistant Commissioner of Income Tax, Chennai v. A.R. Enterprises, emphasizing that income disclosed in returns filed before the search cannot be considered undisclosed income.