Tribunal rules no additional disallowance post income percentage determination under Section 40A(3)

The Tribunal held that once the income is determined as a percentage of turnover and books of accounts are rejected, no further disallowance under Section 40A(3) is permissible. The addition under Section 40A(3) was deleted. Additionally, the commission rate on bogus sales turnover was reduced from 1% to 0.15%. The Revenue's cross appeals were dismissed as time-barred. The assessee's appeals were partly allowed, and the revenue's cross appeals were dismissed.

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Issues Involved:
1. Disallowance under Section 40A(3) of the Income-tax Act.
2. Commission on bogus sales turnover.

Summary:

Issue 1: Disallowance under Section 40A(3) of the Income-tax Act

The assessee was aggrieved by the CIT(A)'s decision to sustain a disallowance under Section 40A(3) for Rs. 1,31,297/- even though the income was estimated as a percentage of turnover. The CIT(A) had rejected the books of accounts under Section 145 and estimated the net income at 5% of the estimated genuine turnover. The Tribunal noted that once the books of accounts are rejected and income is determined as a percentage of turnover, no further disallowance under Section 40A(3) is permissible. This view was supported by decisions from the Hon'ble Allahabad High Court in CIT Vs. Banwarilal Banshidhar and the Hon'ble Madhya Pradesh High Court in CIT Vs. Purshottamlal Tamrakar Uchehra. The Tribunal directed the AO to delete the addition under Section 40A(3).

Issue 2: Commission on bogus sales turnover

The CIT(A) had also estimated that the assessee received a commission at 1% on the bogus sales turnover to BBIL. The Tribunal referred to the Hon'ble Bombay High Court's decision in Pr. CIT Vs. Alag Securities Pvt. Ltd., which indicated that a reasonable commission rate in such cases is between 0.15% to 0.25%. The Tribunal directed the AO to reduce the commission rate from 1% to 0.15% on the bogus sales turnover.

Appeals by the Revenue

The Revenue's cross appeals were dismissed as they were time-barred and lacked legal sustainability. The Tribunal reiterated that no further disallowance under Section 40A(3) is permissible when the income is determined as a percentage of turnover and the books of accounts are rejected under Section 145.

Conclusion

All the appeals of the assessee were partly allowed, and all the cross appeals of the revenue were dismissed.

Order pronounced in the open Court on this 24th day of April 2023.

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