INCOME TAX ACT, 1961

Business disallowance under section 40A(3) - Cash payment exceeding prescribed limits -Addition made on basis of estimation of GP

Search was carried out in the premises of the assessee. From the account books and other documents seized at the time of search, it was found that the assessee was doing business outside the books of account. AO applied GP of 4.27 per cent against 3.23 per cent shown by the assessee on the ground that in the earlier years, GP of 4.27 per cent had been applied and there was no justification for showing the lesser GP. CIT (A) held that there was no justification for disallowance of cash payments in excess of limit laid down under section 40A(3) of the unrecorded transactions. Tribunal held that provisions of section 40A(3) could not be invoked in the case of estimation of GP. Held: 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 was 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.

Income-tax Act, 1961, Section 40A(3)

Decision: In favour of assessee.

Case Law Analysis:CIT v. Banwari Lal Banshidhar (1998) 229 ITR 229 (All).

CIT v. Smt. Santosh Jain