2025 (8) TMI 1168 - AT - Income Tax

Adhoc s.40A(3) disallowance deleted where books rejected and income estimated; s.69A additions remitted for fresh AO verification

Mr. Suresh Versus The ITO, Ward-3, Puducherry.

ITAT (Chennai) deleted the adhoc disallowance under s.40A(3), finding no requirement for a separate 40A(3) disallowance where the AO had rejected books ... Disallowance u/s. 40A(3) - AO has rejected the books and estimated the income - HELD THAT:- As we are of the view that adhoc disallowance made by authorities below cannot be countenanced. And since AO has rejected the books and estimated the income and we have not disturbed the rejection of books and estimated the income there was no requirement to make any separate disallowance u/s. 40A(3) of the Act. Recently this Tribunal has taken similar view in the case of ACIT vs Shri Irulandi Thevar Vetrivel [2025 (4) TMI 129 - ITAT CHENNAI] we direct the AO to delete the ad hoc disallowance made u/s.40A(3) Additions made u/s.69A - Unexplained source of investment for purchasing the immovable property - HELD THAT:- Even though assessee produced for the first time evidence regarding source of investment before the Ld.CIT(A), he has not taken any Remand Report from the AO to verify whether the assessee had received loan amount from the Indus Bank which was utilized for purchase of the land in question. Be that as it may, since the AO didn’t get opportunity to enquire about the veracity of explanation/relevant documents in support of it, we set aside the impugned order of the Ld.CIT(A) and restore this issue back to the file of the AO for de novo assessment. The assessee is directed to file his explanation and the relevant documents to substantiate the nature and source of the investment made in the immovable property in question and thereafter, the AO is directed to pass order in accordance to law on this issue only, without being influenced by the action of Ld CIT(A). ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer's estimation of business profit at 10% of total receipts, after rejection of books under section 145(3), is reasonable where the assessee carries on transport operations and had declared profit at 6% on a portion of turnover that represents receipts from transport clients through banking channels. 2. Whether a separate adhoc disallowance under section 40A(3) is sustainable where the books have been rejected and the Assessing Officer has estimated profits for assessment purposes. 3. Whether addition under section 69A (unexplained investment) in respect of purchase of immovable property is warranted where the assessee produced, before the first appellate authority, a sale deed and bank transaction records indicating a bank loan/transfer as source of funds, but the Assessing Officer was not given an opportunity to verify those documents (no remand). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reasonableness of AO's estimation of profit at 10% after rejection of books; applicability of presumptive rate for transport receipts. Legal framework: Where books of account are rejected under section 145(3), the Assessing Officer may estimate profits on a reasonable basis. Section 44AE and applicable presumptive rates for transport undertakings permit declaration of profit at prescribed presumptive percentages where conditions are satisfied, subject to verification of the nature and quantum of receipts. Precedent Treatment: The Tribunal relied on principles that estimation must be reasonable and take into account the nature of business and available evidence of turnover composition; prior decisions estimating profits for particular kinds of contracts or businesses were noted but were treated as fact-sensitive. Interpretation and reasoning: The Tribunal observed that the AO rejected books but proceeded to apply a blanket 10% rate on total receipts without segregating transport receipts that were supported by bank evidence and related to specified transport clients. The assessee consistently offered 6% on receipts from two identifiable transport clients (receipts routed through banking channels) thereby satisfying conditions relevant to presumptive treatment for transport operations. The Tribunal therefore directed that profit on the transport component (Rs. 1,88,12,296) be accepted at 6% (Rs. 11,28,737). The remaining unexplained receipts (Rs. 1 crore) were to be estimated at 10% because the assessee failed to furnish particulars for that portion. The Tribunal reduced the AO/Ld. CIT(A)'s estimation accordingly and quantified the relief. Ratio vs. Obiter: Ratio - estimation must reflect the nature and substantiation of distinct components of turnover; where a portion of receipts is properly evidenced as transport receipts via banking channels and within presumptive regime, that portion can be accepted at the presumptive rate even after rejection of books. Obiter - broader comparisons to profitability ranges in other industries or years (cited from other orders) were noted as fact-specific and not directly binding. Conclusion: The Tribunal allowed profit at 6% on the transport turnover evidenced through banks and confirmed 10% estimation only on the unexplained balance; directed adjustment of assessed income accordingly. Issue 2 - Validity of separate disallowance under section 40A(3) after books rejection and estimation of profits. Legal framework: Section 40A(3) provides disallowance for payments made otherwise than by account payee cheque or bank draft to certain specified entities beyond prescribed limits. However, where books are rejected and profits are estimated, the method of estimation ought to be comprehensive and inclusive of adjustments normally contemplated by tax law. Precedent Treatment: The Tribunal referred to a recent coordinate bench decision holding that once books are rejected and profits estimated, no further separate disallowance under section 40A(3) or section 40(a)(ia) is warranted, particularly where estimation is intended to compute income on a reasonable basis. Prior decisions cited by the lower authorities were treated as factually distinguishable. Interpretation and reasoning: The Tribunal held that the adhoc disallowance of 10% of cash withdrawals (Rs. 2,27,464) could not be sustained in addition to the profit estimation, because the AO had already determined income by estimation after rejecting books. Making an additional adhoc disallowance would amount to double adjustment without basis. The Tribunal therefore directed deletion of the 40A(3) disallowance and ordered the AO to delete the ad hoc disallowance in view of the estimation exercise (cross-reference to Issue 1 where estimation and its components were addressed). Ratio vs. Obiter: Ratio - when books are rejected and profits estimated, a separate adhoc disallowance under section 40A(3) is not warranted unless the estimation specifically excludes and leaves unaccounted payments that require distinct disallowance; the estimation should subsume such adjustments. Obiter - reliance on older decisions for arbitrary disallowances was characterized as inappropriate without factual parity. Conclusion: The Tribunal set aside the section 40A(3) disallowance and directed deletion of the addition; the AO was to proceed having regard to the estimation already made. Issue 3 - Addition under section 69A for alleged unexplained investment in immovable property where documentation (sale deed, bank transfer/loan) was produced before the CIT(A) but without remand to AO. Legal framework: Section 69A governs additions where any sum is found credited in the books as unexplained or where investments are not satisfactorily explained. The revenue must examine and verify the veracity of the source of funds; where the assessee produces documentary evidence showing a plausible source (e.g., bank loan, sale deed, bank transfers), the Assessing Officer should verify those documents before making an addition. Precedent Treatment: The Tribunal emphasized the requirement of giving the AO an opportunity to verify newly produced evidence and took the view that appellate authorities should, where appropriate, remit matters for verification rather than sustaining additions without a remand. Interpretation and reasoning: The AO made an addition of Rs. 53,75,000 as unexplained investment since no source was shown. The assessee, for the first time before the CIT(A), submitted a sale deed and bank statements indicating receipt/transfer of funds from a bank (asserted loan/transfer) used for the purchase. The CIT(A) rejected the explanation on the view that loan monies meant for housing were used to buy agricultural land, but did not obtain a remand report or direct the AO to verify the bank loan/transfer and other records. The Tribunal held that in such circumstances the matter must be remitted to the AO for de novo enquiry and verification of the source documents and the veracity of the claimed bank loan/transfer; it set aside the CIT(A)'s confirmation and directed the AO to examine the explanation and documents, afford opportunity of verification, and pass an order in accordance with law uninfluenced by the CIT(A)'s conclusion. Ratio vs. Obiter: Ratio - where material documentary evidence as to source of investment is produced first before the appellate authority and the Assessing Officer has not had the opportunity to verify it, the appropriate course is remand for verification rather than confirmation of an addition under section 69A. Obiter - conclusions about the precise quantification of the investment (assessee's contention of Rs. 56 lakhs vs AO's Rs. 53.75 lakhs) were left to the AO upon verification. Conclusion: The Tribunal set aside the addition under section 69A and remanded the issue to the Assessing Officer for de novo assessment and verification of the source and nature of the investment, directing the assessee to file supporting documents during the remand proceedings.