Disallowance us 40A(3) when income-profits are estimated. ITAT following Allahabad High Court judgment deletes additions for cash payments

Disallowance us 40A(3) when income-profits are estimated. ITAT following Allahabad High Court judgment deletes additions for cash payments u/s 40A(3)

ABCAUS Case Law Citation:
ABCAUS 1154 (2017) (03) ITAT

The Ground of Appeal:
In the present appeal, the assessee, inter alia raised a ground challenging the order of CIT(A) confirming the addition u/s 40A(3).

Assessment Year : 2004-05
Date/Month of Pronouncement: March, 2017

Important Case Laws Cited/relied upon:
CIT vs. Banwari Lal Banshidhar

Brief Facts of the Case:
The Assessing Officer (‘AO’) observed that assessee had made payments in violation to section 40A(3) of the Income tax Act, 1961 (‘the Act’). Consequently, the AO completed the assessment by estimating the net profits by applying rate of 8% and further added 20% of the said sum to the net profit so derived.

Aggrieved with the assessment order the assessee filed the Appeal before the CIT(A), who partly allowed the appeal of the assessee.

Contentions of the Appellant assessee:
It was stated that the settled law is that when the gross profit/net profit is applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchase made by the assessee. Therefore, the addition may be deleted.

Observations made by the Tribunal:
The Tribunal noted that the Hon’ble Allahabad High Court in the case of Banwarilal Banshidhar had held as under:-

“When 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 s. 40A(3) and r. 6DD(j). No disallowance could have been made in view of the provision of section 40A(3) r/w r. 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchase. When gross profit rate is applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases by the assessee.”

Following the precedent, the Tribunal opined that the action of the AO in making the addition in dispute and confirmation thereof by the Ld. CIT(A) was contrary to law.

Held:
The addition was deleted.