Commissioner Of Income-Tax (Central), Ludhiana v. M/S Sai Metal Works

Income-tax Appeal No.125 of 2004 *** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income-tax Appeal No.125 of 2004 and other connected appeals being ITAs No.127 and 128 of 2004.Date of decision: 10.3.2011. Commissioner of Income-tax (Central), Ludhiana ...Appellant Versus M/s Sai Metal Works ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant. Mr. Pankaj Jain, Advocate for the respondent. **** ADARSH KUMAR GOEL, J (Oral). 1.This order will dispose of ITAs No.125, 127 and 128 of2004, as it is stated that question of law involved in these appeals iscommon. 2.ITA No.125 of 2004 has been preferred by the revenueunder Section 260A of the Income Tax Act, 1961 (hereinafterreferred to as “the Act”) against order dated 23.9.2003 passed bythe Income Tax Appellate Tribunal, Amritsar Bench, Amritsar in IT(SS)/No.3/(ASR)/2003, for the block period 1.4.90 to 6.4.2000,claiming following substantial question of law:- “Whether on the facts and in the circumstances of thecase, the ITAT was right in law in holding that the disallowance under Section 40A(3) cannot be made inblock assessment?” 3.The assessee filed its return for the block period 1.4.90to 6.4.2000. The assessing officer in the course of the assessmentmade addition on account of claimed expenses being found to be inviolation of Section 40A(3) of the Act. It was observed that theseized material revealed that ledger containing the details ofpurchases made against cash payment exceeding Rs.20,000/- whichcould not be allowed and on that account addition towardsundisclosed income had to be made. The assertion of the assesseewas that on that account disallowance could not be made. Theassessing officer did not accept this plea with the followingobservations. “I do not agree with the argument put forth by theassessee because the examination of seized materialshows that cash book and ledger etc. have beenmaintained by the assessee. Although these cash bookand ledger have not been maintained in normal coursebut it has been noted that the assessee had developedhis own accounting system. It is noted that the balancesheet as on 4.4.2000 has been prepared after taking intoaccount the expenses debited in cash book and ledger.Thus, the assessee has taken care of all expenses whilepreparing the balance-sheet. As the assessee hasclaimed the expenses, the disallowance u/s 40A(3) has rightly been made in respect of those expenses whichhave been made in violation of provisions of Section 40A(3) of the Income-tax Act, 1961. Further, the rationale ofincorporating the provisions of Section 40A(3) wereexplained by the Hon'ble Supreme Court in the case ofAttar Singh Gurmukh Singh Vs. ITO Ludhiana, 191 ITR667. It was explained by Hon'ble Supreme Court thatwhile interpreting the taxing statutes, the Court cannot beoblivious of the proliferation of black money, which isunder circulation in our country. Any restraint intended tocurb the chances and opportunities to use or create blackmoney should not be regarded as curtailing the freedomof trade or business. It was held that the provisions ofSection 40A(3) and Rule 6DD intended to prevent use ofunaccounted money or reduce the chances to use blackmoney for business transactions. In the light of theseobservations, it would be going totally against thejudgment of the Hon'ble Supreme Court to hold that theprovisions of Section 40A(3) should not be applicable inrespect of unaccounted business. This view also is supported by the decision oflearned Andhra Pradesh High Court in the case ofS.Venkata Subarao Vs. CIT reported in 173 ITR 340 inwhich it has been held that:- “There is no doubt about the proposition that profits This view also is supported by the decision oflearned Andhra Pradesh High Court in the case ofS.Venkata Subarao Vs. CIT reported in 173 ITR 340 inwhich it has been held that:- “There is no doubt about the proposition that profits and gains derived from an illegal business are liableto be taxed. Such profits and gains are to bedetermined in accordance with the provisions of theAct. It is not possible to hold that some of suchprovisions do not apply to the taxable income in thecase of an illegal business while some others do.May be that in an illegal business it may not bepracticable to comply with the requirements ofsection 40A(3) but that only means that such illegalbusiness ought not be carried on. By carrying on abusiness out of his regular books of account hecannot be placed at an advantage as compared toother carrying on their business as per books inimplemented section 40A(3).” Reliance is also placed on the decision of Hon'bleIncome Tax Appellate Tribunal, Chandigarh Bench as pertheir order dated 06.3.2000 in appeal No.ITA No.1063(Chd.)/1996 for the block assessment in the case of Sh.Madan Lal Basi Vs. ACIT, Central Circle, Ludhiana. Withthese observations, I, therefore, disallow an amount ofRs.9,26,673/- @ 20% of Rs.46,33,364/- u/s 40A(3) of theIncome-tax Act, 1961 which is brought to tax in the handsof the present assessee.” 4.The CIT(A) set aside the addition which view has beenupheld by the Tribunal. It was held that Section 40A(3) could not be invoked in the case of the assessee where block assessment wasby estimate on the basis of GP rate. The finding recorded by theTribunal is as under:- “We have considered the rival submissions and carefullygone through the material available on the record. Theundisputed fact of this case is that a search wasconducted at the residential premises of the partners ofthe assessee and the assessee declared an undisclosedincome of Rs.14,54,500/- which was accepted by the A.O.by stating that income so declared was in agreement withthe information brought on record. However, the A.O.invoked the provisions of Section 40A(3) while passingblock assessment order and made the impugnedaddition. Admittedly, the entries which were taken intoconsideration by the A.O. were recorded in the books ofaccount found during the course of search, however, notrading and profit and loss account was prepared todetermine the income, but the income disclosed by theassessee was accepted and since no trading and profitand loss account has been prepared, there was noquestion of invoking the provisions of Section 40A(3). Ina similar case, the I.T.A.T. Cochin Bench while decidingthe issue in the case of Eastern Retreat Vs. ACIT (2000)66-ITJ-839 held that:- “No doubt, if there was violation of the provisions of section 40A(3) there could be disallowance of theexpenses in computing the total income, but thenthe disallowance should be made in a regularassessment under section 143(3). In view of theprovisions of Explanation below 158BA(2), it is opento the A.O. to make a regular assessment even inrespect of any assessment year included in theblock period and make disallowance under anyprovisions of the Income Tax Act. But suchdisallowance cannot be made in a blockassessment, as in that case the assessee would be burdened with a higher rate of tax. As theprocedure for assessment of the undisclosedincome of the block period appears in a separateself-contained code, that assessment should bemade strictly in accordance with the provisions inChapter XIV-B. The addition on this account cannotbe, therefore, sustained.” From the above, it would be clear that thedisallowance under section 40A(3) cannot be made in block assessment.” 5.We have heard learned counsel for the parties. 6.Learned counsel for the revenue submitted thatexpenditure revealed from the seized documents which were notpermissible being in contravention of Section 40A(3) had been taken burdened with a higher rate of tax. As theprocedure for assessment of the undisclosedincome of the block period appears in a separateself-contained code, that assessment should bemade strictly in accordance with the provisions inChapter XIV-B. The addition on this account cannotbe, therefore, sustained.” From the above, it would be clear that thedisallowance under section 40A(3) cannot be made in block assessment.” 5.We have heard learned counsel for the parties. 6.Learned counsel for the revenue submitted thatexpenditure revealed from the seized documents which were notpermissible being in contravention of Section 40A(3) had been taken into account while preparing the balance sheet and thus profitelement declared by the assessee did not truly reflect the income ofthe assessee. The Assessing Officer was justified in making additionon that account. The observations of the Tribunal that disallowancecould be made in regular assessment under Section 143(3) and notin block assessment was not tenable in law. Explanation belowSection 158BA(2) to the effect that block assessment was in additionto regular assessment was no bar to Section 40A(3). Reliance hasbeen placed upon judgment of Madras High Court in M.G.Pictures(Madras) Ltd. Vs. Assistant Commissioner of Income Tax (2003)185 CTR (Mad) 185 and judgment of Hon'ble Supreme Court inCommissioner of Income -Tax Vs. Suresh N.Gupta (2008) 297ITR 322 (SC). 7.Learned counsel for the assessee supported the viewtaken by the Tribunal. It was submitted that Section 40A(3) couldhave no application to block assessment which was a completeCode by itself. Reliance has been placed upon the judgment ofGujarat High Court in Cargo Clearing Agency (Gujarat) Vs. JointCommissioner of Income Tax (2008) 218 CTR (Guj) 541. It wasalso submitted that when assessment was made on the estimation ofincome by applying GP rate, Section 40A(3) could not be invoked.For this proposition reliance has been placed upon the followingjudgment. (i)Commissioner of Income-Tax Vs. BanwarilalBanshidhar (1998) 148 CTR (All) 533; *** (ii)Commissioner of Income-Tax Vs.Smt. SantoshJain (2008) 296 ITR 324 (P&H); and (iii)Commissioner of Income-Tax Vs.S.MohammadDharubudeen (2008) 4 DTR (Mad) 218. 8.On due consideration of rival contentions, we are of theview that the question has to be answered in the negative, in favourof the revenue. 9.Chapter XIV-B was inserted in the Act by the Finance Act,1995 providing special procedure for undisclosed income foundduring the search for the block period. The said Chapter lays downspecial procedure for the assessment and provides for special rate oftax. Section 158BH provides that unless otherwise provided in thesaid Chapter, all the provisions of the Act are applicable to theassessment under the Chapter. No doubt, the said Chaptercontained certain special provisions such as making assessment forblock period instead of assessment year, it prescribes higher rate oftax and lays down separate procedure for issuing notice etc. forassessment of undisclosed income as a result of search, Section158BH provides that except the said special provisions all otherprovisions of the Act apply to assessment under this Chapter. Inview of Section 158BH, argument on behalf of the assessee thatChapter was a complete Code by itself and except the provisionswhich are specifically mentioned for their application to theassessment under this Chapter, no other provision could be invoked.In Suresh N.Gupta Hon'ble Supreme Court while considering the said issue in the context of applicability of provision for surcharge toassessment under Chapter XIV-B held:- said issue in the context of applicability of provision for surcharge toassessment under Chapter XIV-B held:- “There is no conflict between the computation machineryunder Chapter XIV-B and normal computation machineryunder Chapter IV. This is the importance behindenactment of section 158BH which inter alia states that ifthere is no conflict between the provisions of ChapterXIV-B and any other provisions of the 1961 Act, then thelatter will operate. There is a fallacy in the argument ofthe assessee that the concepts of “total income” and“previous year” are given a go by in Chapter XIV-B. Theabove analysis of section 158BB indicates that both theconcepts are retained in Chapter XIV-B. The onlydifference is that section 4 of the 1961 Act charges thetotal income of a person of one single previous year (unitof assessment) whereas section 158BA(2) levies acharge on the income of a person for the block period ofprevious years relevant to 10/6 assessment years. In ourview, the words “block period”, as defined in section 158B(a), comprises previous years relevant to 10/6assessment years as one unit of time for the purposes ofassessment. As stated above, the object behind theenactment of Chapter XIV-B is to assess and compute“undisclosed incomes” relatable to different accountingyears in which the income is earned. Therefore, if the block period comprising of previous years relevant to 10/6assessment years is treated by Parliament as one unit oftime for assessment purposes, one has to correlate“undisclosed income” to each of the years in whichincome was earned by the assessee. It is true that underChapter XIV-B, computation of regular income andcomputation of undisclosed income has to be worked outseparately. However, to arrive at the figure ofundisclosed income, the said parallel calculations have toconverge in order to work out the difference between thefirst and the second aggregates of the totalincomes/losses of the previous year, in which undisclosedincome is taxed under section 113. Therefore, in ourview, the concept of a charge on the “total income” of theprevious year under the 1961 Act is retained even underChapter XIV-B. Therefore, section 158BB which dealswith computation of undisclosed income of the blockperiod has to be read with computation of total incomeunder Chapter IV of the 1961 Act. Once section 158BB is required to be read withsection 4 of the 1961 Act, then the relevant Finance Actof the concerned year would automatically stand attractedto the computation under Chapter XIV-B. Section 158BBlooks at section 113.” In M.J.Pictures (Madras) Ltd., Madras High Court *** considered applicability of Section 40A(3) to assessmentproceedings Chapter XIV-B and held:- Once section 158BB is required to be read withsection 4 of the 1961 Act, then the relevant Finance Actof the concerned year would automatically stand attractedto the computation under Chapter XIV-B. Section 158BBlooks at section 113.” In M.J.Pictures (Madras) Ltd., Madras High Court *** considered applicability of Section 40A(3) to assessmentproceedings Chapter XIV-B and held:- “In our opinion, in canvassing this, learned counsel isdoing harm to the logic and is seeking to read somethingwhich is not there in the section. If some expendituresmade are unearthed during the search are proved to bethe genuine expenditure, they would still have to beassessed in the light of the other provisions and cannotbe completely ignored merely because they ceased tobecome undisclosed income. It will be seen S.158BHspecifically provides that excepting those provisionswhich have specifically been made inapplicable, all theother provisions of the Act apply to the assessment madeunder this Chapter. Therefore, all such expenditure whicheven if proved to be genuine would have to be taken intoconsideration while arriving at the tax liability of theassessee and it cannot just be ignored on the broadprinciple that since it is the genuine expenditure made, itceased to be undisclosed income. There could be caseswhere even genuine expenditure which remainsundisclosed and which is unearthed because of thesearch could be taken as an income on the part of theassessee so as to increase his tax liability. If we acceptthe contention then it would obtain absurd results and allthe expenditures unearthed which were not disclosed by the assessee would automatically have to be left out ofconsideration on the broad ground that they cannot beundisclosed income. In short, though the hypotheses isestablished by the amendment, its antithesis, which istried to be argued by learned counsel, is not correct. We,therefore, reject this argument and hold that while makingthe assessment of the block period, such expenditure willhave to be taken into consideration in the light of theother provisions in the Act as per S.158BH. The plainmeaning of the amendment is only to the extent of thewords added and no further inferences can be drawn onthat basis as is being tried by learned counsel. The firstcontention is, therefore, rejected. 11. As regards the judgment of Gujarat High Court in Cargo Clearing Agency (Gujarat) relied upon on behalf of the assessee,the said judgment was before the judgment of Hon'ble SupremeCourt. In the said judgment it was observed:- “In the aforesaid circumstances, when one considers theentireschemerelatingtoprocedureforassessment/reassessment as laid down in the group ofsections from s.147 to s.153 of the Act and compares thesame with special procedure for assessment of searchcases under Chapter XIV-B of the Act it becomesapparent that the normal procedure laid down in Chapter-XIV of the Act has been given a go by when Chapter XIV-B of the Act itself lays down that the said Chapterprovides for a special procedure for assessment ofsearch cases. The stand of Revenue that s.158BH ofthe Act permits all other provisions of the Act to apply toassessment made under Chapter XIV-B of the Act doesnot merit acceptance.” 12.The above observations are in conflict with the viewexpressed by Hon'ble the Supreme Court and the Madras HighCourt. We are, thus, unable to be persuaded by the said view.Accordingly, we hold that Section 40A(3) applies to the proceedingsto assessment under Chapter XIV-B. XIV-B of the Act itself lays down that the said Chapterprovides for a special procedure for assessment ofsearch cases. The stand of Revenue that s.158BH ofthe Act permits all other provisions of the Act to apply toassessment made under Chapter XIV-B of the Act doesnot merit acceptance.” 12.The above observations are in conflict with the viewexpressed by Hon'ble the Supreme Court and the Madras HighCourt. We are, thus, unable to be persuaded by the said view.Accordingly, we hold that Section 40A(3) applies to the proceedingsto assessment under Chapter XIV-B. 13.As regards the said provision not being taken intoaccount where assessment is by estimation basis on GP rate, theprinciple invoked in the judgments relied upon is not of universalapplication. If the estimated income impliedly takes intoconsideration the expenditure incurred, the said principle may apply.If the expenditures which are legally not permissible has been takeninto account, the same can certainly be disallowed. The judgmentsrelied upon on behalf of the assessee did not discuss the issue ofimpermissible expenditure. Rule 6DD of the Rules allows cashexpenditure to be taken into account if circumstances in which theexpenditure is incurred can reasonably explained. In the presentcase, the assessee has not been able to cover its case under Rule6DD. In the circumstances, the assessing officer was justified indisallowing expenditures incurred in contravention of Section 40A(3). Accordingly, we hold that addition made by the assessing officer wasjustified and setting aside thereof by the CIT(A) and the Tribunal isnot sustainable. The question raised is answered in favour of therevenue and against the assessee. The appeals are allowed. 14.A photocopy of this order be placed on the file of eachconnected case. (Adarsh Kumar Goel) Judge March 10, 2011Pka (Ajay Kumar Mittal) Judge