MS AMRIT SUGAR CO. vs. INCOME TAX OFFICER

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ITA/31/2003HC Himachal PradeshHPHC01004073200317 December 2010Author: HONOURABLE MR. JUSTICE DEEPAK GUPTA,HONOURABLE MR. JUSTICE SANJAY KAROL5 pages
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What did the High Court hold?

The High Court held that the second question, concerning the addition back of amounts after rejecting books of account and computing income on a percentage basis, is a valid contention that can be raised. The Court found that the Assessing Officer, after rejecting the books of accounts and computing profit on a percentage basis, could not have added back amounts paid in cash in violation of Section 40-A(3). This would result in quantifying the assessee's income twice. The Court relied on the Allahabad High Court's judgment in *Commissioner of Income Tax Vs. Banwari Lal Banshidhar*, which held that when income is computed applying a gross profit rate and no deduction is allowed for purchases, there is no need to scrutinize Section 40-A(3) provisions, as the gross profit rate application takes care of everything. Therefore, the addition back of amounts paid in violation of Section 40-A(3) was not justified. The second question was answered in favour of the assessee, and the appeal was allowed to this extent. The Court did not explicitly decide the first question on its merits, as the second question's resolution rendered it moot in the context of the appeal's outcome.

What were the facts?

The appeal was filed by M/s. Amrit Sugar Company, Mandi (the appellant) against the Income Tax Officer, Mandi (the respondent). The assessment year(s) are not explicitly stated. The challenge is to the High Court's decision upholding the disallowance made under Section 40-A(3) of the Income Tax Act, 1961. The appellant argued that receipts were produced to prove each payment was a separate transaction, and the Tribunal erred in holding these receipts insufficient evidence. The appellant also raised a new contention that if books of account are rejected and assessment is made on a percentage basis, cash payments violating Section 40-A(3) cannot be added back to ascertain gross profits.

What were the issues?

1. Whether the Tribunal was correct in upholding the disallowance made under Section 40-A(3) even when the appellant had produced receipts to prove that each payment constituted a different transaction, and whether the Tribunal was right in holding that these receipts do not constitute evidence of separate transactions? (Question of law and fact, concerning Section 40-A(3)). Assessee's Contention: The receipts produced prove each payment was a separate transaction. The Tribunal's view to the contrary is incorrect. Furthermore, once books of account are rejected and assessment is made on a percentage basis, the same rejected books cannot be used to add back amounts paid in cash in violation of Section 40-A(3). Revenue's Contention: The objection regarding the addition back of amounts after rejection of books of account cannot be raised as it was not raised before the authorities below. Relied on *Chanana Associates Vs. Commissioner of Income Tax*. 2. Whether the Assessing Officer, after rejecting the books of accounts and computing income on a best judgment assessment basis by applying a percentage of profits, is entitled to add back amounts allegedly paid in violation of Section 40A(3) by relying upon the same rejected books of accounts? (Question of law, concerning Section 40A(3) and principles of best judgment assessment).

Which sections of the Income-tax Act were involved?

Section 40-A(3)

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IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA

I.T.A No. 31 of 2003 Date of decision: 17.12.2010

M/s.Amrit Sugar Company, Mandi

…. Appellant

Versus

Income Tax Officer, Mandi

….. Respondent Coram:

The Hon’ble Mr. Justice Deepak Gupta, J.

The Hon’ble Mr.Justice Sanjay Karol, J. Whether approved for reporting? No For the appellant: Mr.Vishal Mohan, Advocate

For the respondent: Mr.Vinay Kuthiala, Advocate

Deepak Gupta, J.(Oral)

This appeal was admitted on the following substantial question of law:-

1.

Whether the Tribunal was correct in upholding the disallowance made under Section 40-A (3) even when the appellant had produced receipt on record to prove that each payment constituted a different transaction. That further the Tribunal has been right in holding that the receipts issued by the persons to whom the payment has

2 been made does not constitute evidence in support of the contention that each payment constituted a separate and distinct transaction?

Sh.Vishal Mohan, learned counsel for the appellant candidly submits that as far as this question is concerned, the answer has to go against the appellant in view of the judgment of this Court delivered in Commissioner of Income Tax Vs. M/s.Dalip Chand and sons, I.T.R No.7 of 1996 decided on 2.1.2008. He further submits that another question arises out of the aforesaid question. According to him, once the books of accounts furnished by the assessee are rejected on any ground and the assessment of profit is made on the basis of percentage, then the same books which have been rejected cannot be relied upon and the amount paid in cash in violation of Section 40-A (3) cannot be added of this objection is “Whether the Assessing Officer after rejecting the books of accounts of the assessee and having computed the income of the assessee on best judgment assessment basis, by applying the principle of percentage of profits, is entitled to add back the amounts allegedly paid in violation of Section 40A(3) by relying upon the same rejected books of accounts.” follows:- “All the three questions, referred to this court, revolve round the same controversy. The question for consideration is when no deduction was sought and allowed under Section 40A(3), was there any need to go into section 40A(3) and rule 6DD(j). We see force in the view 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.”

5

In view of the above discussion, we are of the considered view that though the books of accounts of the assessee have been rejected, the Assessing Officer was not justified in adding back the amounts which were found to be paid in violation of Section 40A(3). The second question is answered in favour of the assesee. The appeal is allowed to this extent. No costs.

( Deepak Gupta )

Judge

December 17, 2010

(Sanjay Karol) (m) Judge

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