RAINBOW ENTERPRISES,NAINITAL vs. ITO- 3, NAINITAL

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER:

“1. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals), erred in confirming the addition. II. The Appellant respectfully, submits as under:-

1. 1. The learned Commissioner of Income Tax Appeals (CIT-A) has without going into the facts has sustained addition aggregating to Rs.10,17,229.00.

2. The Ld. CIT-A has sustained the additions on account of cash payments & balances of Sundry Creditors.

3. That the order is bad in law, not in agreement with facts and is against the principles of natural justice.”

2. Brief facts of the case are that the assessee is a partnership firm, deriving income from the business of colour lab i.e; processing of photographs and trading of relevant goods. The assessee had filed its return of income for the relevant year declaring a total loss of Rs. 8,57,524/- on 31.03.2009. During the course of assessment proceedings and on the examination of books of account, it was gathered by the AO that the assessee had cash payments and deposits. It was gathered by the AO that total purchases had been made in cash only. The AO records that though cash was available in the books of the assessee, the assessee made payments above Rs. 20,000/- to M/s.AAAR GEE & Co.. Thus, the AO specifically called upon the assessee regarding the same. The assessees neither filed any details such as name of the person to whom the payment was made nor provide any reason for making payments above Rs. 20,000/- was furnished by the assessee. Therefore, the AO rejected the books of account by invoking provisions of section 145 of the Act. The Ld A.O also disallowed cash payments aggregating to Rs. 10,17,229/- thereby reducing the loss to Rs. 69,561/-. Aggrieved by the assessment order, the assessee went into appeal before the Ld. CIT(A). The Ld. CIT(A) justified the act of ld.AO in disallowing cash payments and thereby making addition to the extent of Rs. 10,17,229/-. Aggrieved by the order passed by the Ld.CIT(A), the assessee is in appeal before us. We have gone through the orders of the authorities below; the judgments relied upon by both the parties; the compilation of judgments filed by the Assessee and the arguments of both the sides. It is observed that the ld.A.O rejected the assessee’s books of accounts under the proviso to section 145 of the Act had computed the assessee’s income by applying the gross profit rate of 17.84% as computed by the assessee The short issue that needs to be considered is as to whether in such a case any disallowance/deduction on account of purchases u/s.40A(3), at all be made/allowed(as the case may be) to the assessee, though it may be true that a gross profit rate of 17.84% as calculated by the assessee. Similar facts arose before the Hon’ble Allahabad High Court in the case of CIT vs. Banwari Lal Banshidhar, reported in(1998) 229 ITR 229 wherein it was held that once the books of account of assessee are rejected, profit has to be estimated on the by comparing the G.P rates adopted by the assessee in the preceeding years. No addition u/s.40A(3) can be made once the books are rejected. The ld. A.O as well as ld.CIT(A) committed error in making addition u/s.40A (3) after rejection of books of accounts. Applying the ratio to the facts of the present facts before us, the ld. A.O as well as Ld. CIT(A) has wrongly disallowed/granted deduction (as the case may be) u/s.40A(3) of the act. In our considered view, 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. Even otherwise, once the books have been rejected, the profits has to be arrived on estimation. We therefore following the same ratio, set aside the issue to ld.A.O, to arrive at the estimated profit on comparative basis of G.P rate, adopted by the assessee in the preceding years and decide the issue afresh after affording reasonable opportunity of being heard to the parties. Needless to say that net profit should be computed in the same manner in which it was computed for the preceding year.