SRI CHITTA RANJAN DAS,PURBA MEDINIPUR vs. I.T.O WD - 1,HALDIA, PURBA MEDINIPUR

The first common issue in these three appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in making addition of undisclosed purchase without allowing direct and indirect expenses relatable to undisclosed purchase at Rs.18,170/- in AY 2003-04, Rs.1,81,381/- in AY 2007-08 and Rs.3,50,574/- in AY 2008-09.

Briefly stated facts are that the assessee is engaged in the business of fertilizers and pesticides. A survey operation u/s. 133A of the Act was conducted on the business premises of the assessee on 27.03.2010. During the course of survey proceedings, it is noticed that the assessee has disclosed taxable income from his contract business as well as trading in fertilizers and pesticides. But actually the assessee has not disclosed income from trading in fertilizers and pesticides in these three years in the return of incomes filed by him. The assessee admitted this fact in his statement recorded during the course of survey. During the course of survey several documents were found and impounded. The assessee in response to notice u/s 148 of the Act filed return of income disclosing income from trading in fertilizers and pesticides at Rs.52,178/- on sales of Rs.18,52,684/-. The AO from the impounded books, marked as CRD-20, noted that assessee has purchased goods worth Rs.11,66,760/- from feed and seed. The AO conducted enquiry from various concerns and they informed that sales made by assessee to them were Rs.8,90,565/- as against the same purchase made by assessee are at Rs.21,05,726/-. But the assessee has disclosed purchase in the return of income at Rs.18,15,223/-. The AO recast the trading account based on GP disclosed by the assessee and from the recast trading account the GP derived was at Rs.1,09,989/-. The assessee disclosed GP was Rs.91,819/- and, therefore, difference was added as income amounting to Rs.18,170/-. Before the CIT(A) assessee claimed that the books of account were stolen and qua that police report i.e. an FIR was registered and accordingly there is no procedure to ascertain the undisclosed purchases made from the parties from whom purchases were shown in the impounded documents or from whom enquiries was conducted. The assessee disputed the figures of sales and purchases as per recast trading account of the AO. But the CIT(A) has not accepted the explanation of the assessee and confirmed the action of the AO. Similar are the facts in AY 2007-08 and 2008-09 and hence, we need not to discuss the facts of those years.

The second interconnected issue is as regards to the addition of working capital in the undisclosed purchases of pesticides and fertilizers business at Rs.54,536/- in AY 2003-04, Rs.69,749/- in AY 2007-08 and Rs.2,66,529/- in AY 2008-09. The facts and circumstances are exactly identical in all the three years and hence, we will discuss the facts of AY 2003-04 and apply the decision in all the years. According to AO and CIT(A), the unaccounted purchases worked out by AO were more than 50% of the disclosed purchases and it is reasonable to state that such increase in purchases would involve investment and the AO has rightly estimated the capital requirement at Rs.54,537/-. We find that now before us Ld. Counsel for the assessee has not seriously contested these two additions. He reiterated what was argued before the lower authorities and he mainly contested on the issue of recast trading account. We find that both the authorities below have rightly made differential additions and also estimated the working capital requirement. Accordingly, we confirm both the additions and these two issues of assessee’s appeals are dismissed. However, we allow the set off of availability of funds in respect to additions made on account of application of profit on unaccounted purchases and also the working capital estimated in first year, with that of the other years. The AO will compute the working of set off and allow the claim of the assessee accordingly.

The next common issue in these appeals of assessee is against the order of CIT(A) making disallowance of Rs.3,35,896/- in AY 2003-04, amount of Rs.2,37,587/- in AY 2007-08 and Rs.17,33,858/- in AY 2008-09 by invoking the provisions of section 40A(3) of the Act for making cash purchases.

At the outset, ld. Counsel for the assessee stated that once the books of account are rejected and estimated additions are made on account of GP and working capital no further disallowance u/s. 40A(3) of the Act can be made. For this, Ld. Counsel for the assessee relied on the decision of Hon’ble Allahabad High Court in the case of CIT Vs. Banwari Lal Bansidhar (1998) 229 ITR 229 (All) wherein the Hon’ble Allahabad high court has affirmed the decision of the Tribunal, that no disallowance could be made in view of the provisions of section 40A(3) read with rule 6DD(j) of the Income-tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything else and there was no need for the AO to make scrutiny of the amount incurred on the purchases made by the assessee. The Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Smt. Santosh Jain (2008) 296 ITR 324 (P&H) has held that where the income of the assessee has been computed by applying a gross profit rate, there is no need to look into the provisions of section 40A(3) of the Act, 1961, as applying the gross profit rate takes care of expenditure otherwise than by way of crossed cheques also. Hence, we are of the view that the addition made by AO and confirmed by CIT(A) by invoking the provisions of section 40A(3) of the Act cannot be sustained in the present case. Accordingly, we delete the addition in all the three years and this common issue of assessee’s appeals is allowed.

In the result, appeals of assessee are partly allowed.