ITAT rules in favor of assessee, allowing appeals & deleting disallowances under Section 40A(3) for all assessment years. (3)

The ITAT allowed the appeals in favor of the assessee, deleting the disallowances made under Section 40A(3) for all assessment years. The ITAT concluded that no separate disallowance under Section 40A(3) could be made when income was determined on an estimated basis without specific deductions for purchases, following the precedent set by the Allahabad High Court. The judgment was pronounced on February 9, 2023.

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Issues Involved:
1. Disallowance under Section 40A(3) of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance under Section 40A(3):
The primary issue in this appeal is the disallowance made under Section 40A(3) of the Income-tax Act, 1961, which pertains to payments made in cash exceeding Rs. 20,000. The assessee, a PWD contractor and owner of a stone crusher business, was subject to a search and seizure operation where unaccounted sales and purchases were discovered. The assessee admitted to these unaccounted transactions and filed returns of income under Section 153A, including the unaccounted income.

The Assessing Officer (AO) completed the assessment under Section 153A read with Section 143(3) and made disallowances under Section 40A(3) for cash payments exceeding Rs. 20,000. The disallowances were as follows:
- AY 2016-17: Rs. 67,54,114
- AY 2017-18: Rs. 27,57,875
- AY 2018-19: Rs. 3,29,35,190
- AY 2019-20: Rs. 9,34,694

The assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)], who upheld the AO's order. Consequently, the assessee appealed to the ITAT.

Assessee's Arguments:
The assessee contended that the disallowance under Section 40A(3) was unwarranted because the income was determined on an estimated basis. The assessee argued that:
- Payments were made to farmers through tractor drivers who distributed the cash, and no single payment exceeded Rs. 20,000 per day per farmer.
- The payments were covered under Rule 6DD(g) of the Income-tax Rules, 1962, as there were no banks near the crusher site and the farmers did not have bank accounts.
- The income was declared based on the turnover and profit estimated by the AO during the search proceedings, and no specific deduction for purchases was claimed in the return of income.

The assessee relied on several judicial precedents, including:
- Allahabad High Court in Banwari Lal Banshidhar (1998) 229 ITR 229 (Allahabad)
- Madras High Court in CIT v S Mohammed Dhurabudeen [Tax Case (Appeal) No. 885/2007]
- Punjab & Haryana High Court in CIT (Central) v Smt Santosh Jain (2008) 296 ITR 324 (Punjab & Haryana)
- Punjab & Haryana High Court in CIT (Central) v Gobind Ram (2014) 48 taxmann.com 14 (Punjab & Haryana)
- Madras High Court in CIT v Amman Steel & Allied Industries (2015) 377 ITR 568 (Madras)
- Rajasthan High Court in PCIT v Jadau Jewellers & Manufactures (P) Ltd (2018) 409 ITR 85 (Rajasthan)

Respondent's Arguments:
The Departmental Representative (DR) supported the lower authorities' orders and relied on the decision of the Mumbai bench of the ITAT in ITO v. D.D. Hazare, (1994) 48 ITD 595 (Mum).

ITAT's Findings:
The ITAT examined the rival submissions and the material on record. The tribunal noted that the Hon'ble Allahabad High Court in CIT v. Banwarilal Bansidhar, [1998] 229 ITR 229 (All) had held that when income is computed by applying the gross profit rate and no specific deduction is allowed for purchases, there is no need to invoke the provisions of Section 40A(3).

In the present case, the additional income was computed on an estimated basis at 10% of sales, based on unaccounted purchases evidenced by seized vouchers. The ITAT observed that the AO had used the same seized material for both estimating additional income and making disallowances under Section 40A(3).

Applying the ratio laid down by the Hon'ble Allahabad High Court, the ITAT concluded that no separate disallowance under Section 40A(3) could be made when the income was determined on an estimated basis without allowing specific deductions for purchases. Consequently, the ITAT deleted the disallowances made by the AO for all the assessment years.

Conclusion:
The appeals were allowed in favor of the assessee, and the disallowances under Section 40A(3) were deleted. The judgment was pronounced on February 9, 2023.

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