TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1121
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.... ambit of undisclosed income within the meaning of Section 158B(b) of the Income tax Act ?" The facts and circumstances of the case, briefly stated, are as follows:- The assessment under section 158BC(c) of the I.T. Act, 1961, was completed on May 30, 2004 for the block period between April 1, 1996 and March 31, 2002; and April 1, 2002 and September 25, 2002. The Assessing Officer decided to apply a rate of profit to the undisclosed sales which, according to him, was necessary in the following facts and circumstances of the case. "The assessee in working out his undisclosed income has adopted varieties of interpretations regarding different seized documents. For some seized documents he has taken the entries as undisclosed sales and applied the rate of profit and for some seized documents has taken net of receipt and payments. For some of the undisclosed expenses and payments the assessee claimed that they are irrelevant as the rate of profit has been applied on undisclosed sales. The main activities of the assessee are clear from the seized documents as being related to unaccounted purchase and sales. He has claimed expenses for netting out the receipts which leads to taking ....
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....ook a conscious decision regarding the applicability of sec.40A(3) or otherwise. It is simply a case where the A.O. has failed to apply his mind as to whether the said provision is attracted. As the application of the provisions of sec.40A(3) to the unverified expenditure of undisclosed sales of Rs. 25,14,93,071/- would have led to 20% disallowances thereof, since the seized documents in this case of undisclosed income, the transactions have taken place mostly in cash, this oversight by the A.O. in not applying section 40A(3) has been prejudicial to the interest of revenue. 11.For the reasons discussed in detail in the foregoing paras, and after hearing the assessee through his Ld. A.R., I find that in the impugned assessment order dated 30.09.2004, not only has net profit been taken without basis of Rs. 16,80,287/-, i.e. at lower than the figure of "net receipts" of Rs. 59,55,494/-, offered by the assessee himself (vide para 7(ii) of this order), but also the disallowance u/s. 40A(3) has not been made, though it was due. Such non-application of mind by the Asseessing Officer, as held in numerous case laws, including the decision of the Hon'ble Supreme Court in Malabar Industria....
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....s not fall within the ambit of undisclosed income within the meaning of Sec.158B(b). The above order of the ITAT is followed in the cases of G.P. Mondal & Sons vide IT(SS)A No.3(Kol)/1997 and Tapan Kumar Dutta vide IT(SS)A No.174(Kol)/2003. Similar view is also taken by the ITAT, Pune Bench, in the case of Janta Tiles vs. ACIT 66 TTJ (Pune) 695 and ITAT Jaipur Bench in the case of ACIT vs Dr. Mohallal Swarnakar 95 TTJ(Jp) 969. The CIT can assume jurisdiction u/s. 263 only when the assessment order is erroneous as well as prejudicial to the interest of the revenue. The Hon'ble Apex Court has considered the same in the case of Malabar Industrial Co. Ltd. vs CIT 243 ITR (SC) and laid down the guidelines when the assessment order can be said to be erroneous and prejudicial to the interest of Revenue. Their Lordships held as under:- "The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses ....
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....w taken by the Appellate Tribunal that when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of section 40A(3) and rule 6DD(j). No disallowance could have been made in view of the provisions of section 40A(3) read with rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate is applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee. No law contrary to the view taken by the Tribunal has been shown by the standing counsel. In the alternative, the Tribunal recorded a finding on the ingredients of section 40A(3) and rule 6DD(j). Since we have agreed with the primary finding recorded by the Tribunal, we think it is not necessary for us to go into the alternative finding recorded by the Tribunal." The other judgment which supported the views taken by the Assessing Officer, according to Mr. Khaitan, is the judgment in the case of CIT -VS- Purushottamlal Tamroka....
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.... arises. The appeal is dismissed." In the case of CIT vs. S. M. Dohrabuddin, reported in (2008) 4 DTR 0218, the following views were expressed by the Madras High Court:- "When the GP rate is applied, that will take care of everything and there is no need for the AO to make scrutiny of the amount incurred on the purchases by the assessee." Mr. Khaitan added that the learned Tribunal relied upon the judgment in the case of Sushil Kumar Mohta. The revenue had unsuccessfully attempted to challenge that order. This court, by its order dated August 31, 2007, in the case of CIT vs. Sushil Kumar Mohta, (ITA 540 OF 2007), refused to admit the appeal by holding as follows:- "We have perused the order passed by the learned Tribunal. We are absolutely ad-idem with the opinion expressed by the learned Tribunal and we do not find that there is any substantial question of law involved in view of the judgment of the Supreme Court in the case of Malabar Industries Company Ltd., reported in 243 ITR 83. Hence we dismiss this appeal being ITA No.540 of 2007." He also submitted that this court, by its order dated July 30, 2008, refused to admit the appeal in the case of CIT vs. M/s. Jaibal....
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....l Banshidhar [supra] has no manner of application. At the time when the aforesaid judgement was rendered, disallowance under Section 40A (3) was 100 % of the expenditure claimed. In the case before the Allahabad High Court the Assessing Officer had applied profit rate @ 15%. If 100% disallowance was made under Section 40A (3), that would mean that for a transaction of Rs. 100/- taxable profit had to be assessed at Rs. 115/- which would be an absurdity. This was or could be the reason why the Allahabad High Court held that when the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee. Mr. Agarwal submitted that law has subsequently been changed. At the relevant point of time, disallowance under Section 40A(3) was restricted to 20% of the expenditure claimed to have been incurred. Therefore, the logic attributable to the judgement in the case of Banwari Lal Banshidhar [supra] decided by the Allahabad Bank is no longer available nor can the same logic be applied to the facts of this case. If Section 40A(3) is applied to an offending expenditure of the c....
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....relating to the computation of income under the head "Profits and gains of business or profession". The Legislature has thus made it clear that the provisions of s.40A will apply in suppression of other contrary provisions of the Act relating to the computation of income. Sub-s (3) empowers the Assessing Officer to disallow, as a deduction, any expenditure in respect of which payment is made of any sum exceeding Rs. 10,000 otherwise than by a crossed cheque or crossed bank draft. Sec. 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of s.40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the paym....
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....d there may be no case for applying Section 40A(3). But in the case before us assessee had in fact "claimed expenses for netting out the receipts" as would appear from the order of the assessing officer which we have quoted above. The assessing officer chose to apply the rate of profit. The assessing officer was not alive of the provision of Section 40A(3) of the Act. The CIT has rightly observed in his order that:- "this is not a case where the A.O. took a conscious decision regarding the applicability of sec.40A(3) or otherwise. It is simply a case where the A.O. has failed to apply his mind as to whether the said provision is attracted." The consequence of the aforesaid mistake on the part of the assessing officer was rightly indicated by the CIT as follows:- "As the application of the provisions of sec.40A(3) to the unverified expenditure of undisclosed sales of Rs. 25,14,93,071/- would have led to 20% disallowances thereof, since the seized documents in this case of undisclosed income, the transactions have taken place mostly in cash, this oversight by the A.O. in not applying section 40A(3) has been prejudicial to the interest of revenue." The judgement in the case of....
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....ere expressed:- "In all these cases there will be no judgment of the High Court replacing the judgment of the lower Court and the action of the High Court would only amount to a refusal by the High Court to admit the petition of appeal or the criminal revision and issue notice to the opposite party with a view to the final determination of the questions arising in the appeal or the revision. The order dismissing the appeal or criminal revision summarily or 'in limine' would no doubt be a final order of the High Court not subject to review or revision even by the High Court itself but would not tantamount to a judgment replacing that of the lower Court." In paragraph 29 their Lordships held as follows:- "In cases where the petition of appeal or the application for criminal revision is admitted by the High Court and a notice is issued to the opposite party and the High Court maintains the conviction with or without reducing the sentence passed upon the accused the judgment of the High Court in the exercise of its appellate or revisional jurisdiction would replace the judgment of the lower Court and there would be no occasion at all for the exercise by the High Court of its r....