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Issues: (i) Whether the disallowance made under section 40A(3) of the Income-tax Act, 1961 was sustainable on the facts. (ii) Whether the addition made by estimating book profit at 2% was sustainable without rejection of the books of account.
Issue (i): Whether the disallowance made under section 40A(3) of the Income-tax Act, 1961 was sustainable on the facts.
Analysis: The assessee produced bank statements, TDS details, and ledger extracts showing that payments were made through banking channels where the amount exceeded the prescribed limit and that the remaining expenses did not breach the statutory threshold. The lower appellate authority did not properly deal with the supporting material. On the record, the cash disallowance was based on assumption rather than a demonstrated statutory violation.
Conclusion: The disallowance under section 40A(3) could not be sustained and was deleted.
Issue (ii): Whether the addition made by estimating book profit at 2% was sustainable without rejection of the books of account.
Analysis: The books were audited under section 44AB of the Income-tax Act, 1961, and no specific defect in the accounts was found. The assessing authority did not rely on comparable industry data and did not reject the books before making the estimate. In the absence of foundational defects or rejection of accounts, an ad hoc estimation of profit at 2% was not justified.
Conclusion: The estimated addition on account of book profit was unsustainable and was deleted.
Final Conclusion: The additions made by the lower authorities were set aside and the assessee obtained complete relief in appeal.
Ratio Decidendi: A disallowance under section 40A(3) and an estimated profit addition cannot stand where the assessee's documentary evidence is not effectively considered, no statutory breach or account defect is established, and the books of account are not rejected before estimation.
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