Commissioner Of Income-Tax v. Banwari Lal Banshidhar

1. Heard counsel for the parties.

2. The Income-tax Appellate Tribunal (Allahabad Bench), referred the following questions for the opinion of this court under section 256(2) of the Income-tax Act, 1961 (briefly, “the Act”)

“(i) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that there was no question of any disallowance in a case where the assessee's income is computed by application of gross profit rate on sales as shown?

(ii) Whether, on the facts and in the circumstances of the case, there was material before the Tribunal to hold that the assessee's case comes within the meaning of the exceptions contemplated in rule 6DD of the Income-tax Rules, 1962?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in deleting the disallowance of Rs. 91,926 made by the Income-tax Officer under section 40A(3) of the Income-tax Act, 1961?”

3. The assessee, a registered firm, derives income from sale of Ayurvedic medicines. The proceedings relate to the assessment year 1971-72. The assessee disclosed a gross profit rate of 11 per cent, in respect of sales both at the head office and in the branch office at Rs. 1,01,020 and Rs. 90,547, respectively, as against gross profit rate of 13 per cent, shown in the last year. The Assessing Officer rejected the book version of the assessee and applied the gross profit rate of 15 per cent, and this is how an addition to the extent of Rs. 8,834 representing additional profit was made.

4. The Assessing Officer also found that the assessee made cash payments exceeding Rs. 2,500 to its suppliers in the head office and in the branch office to the extent of Rs. 54,588 and Rs. 37,340, respectively. As the payments were not supported by the requisite draft/crossed cheques, etc., they were disallowed in view of section 40A(3) of the Act. The alternative plea of the assessee that the payments in cash had been made to the genuine parties in exceptional circumstances was rejected.

5. The dispute was carried before the Appellate Assistant Commissioner and it was contended that section 40A(3) was not applicable. It was pleaded that section 40A(3) was applicable only to the expenditure and not to the price paid for purchases. In short, the plea was that the price paid for purchases did not amount to “expenditure”. Alternatively, it was contended before the Appellate Assistant Commissioner that the case of the assessee was covered under exceptional circumstances, as stated under rule 6DD(j) of the rules, framed under the Act. The Appellate Assistant Commissioner held that the payment for purchases was within the scope of section 40A(3) and that the ingredients of section 40A(3) having not been complied with, payments for purchases were rightly disallowed under section 40A(3), read with rule 6DD(j).

6. The assessee then appealed to the Appellate Tribunal which did not record a clear finding on the question whether the price paid for purchases amount to expenditure stating that the appeal could be disposed of on other grounds. The Appellate Tribunal, however, accepted the contention of the assessee that no addition could be made by the assessing authority under section 40A(3) of the Act as no deduction was claimed in respect of purchases.

7. The Tribunal observed that the Assessing Officer rejecting the assessee's trading results under the proviso to section 145(1) of the Act had computed the assessee's income by applying the gross profit rate of 15 per cent, on sales, as shown in the head office as well as in the branch office. The Tribunal further observed as follows:

“… The question arises whether in such a case any deduction on account of purchases is at all allowed to the assessee, though it may be true that a gross profit rate of 15 per cent, was fixed keeping in view all relevant facts including the purchases made by the assessee. Inasmuch as we are of the view that no deduction as such having been allowed to the assessee on account of purchases, we hold that no question of any disallowance on account of purchase can be made in this case under section 40A(3).”

8. All the three questions, referred to this court, revolve round the same controversy. The question for consideration is when no deduction was sought and allowed under section 40A(3), was there any need to go into section 40A(3) and rule 6DD(j). We see force in the view taken by the Appellate Tribunal that when the 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 section 40A(3) and rule 6DD(j). 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.

9. No law contrary to the view taken by the Tribunal has been shown by standing counsel. In the alternative, the Tribunal recorded a finding on the ingredients of section 40A(3) and rule 6DD(j). Since we have agreed with the primary finding recorded by the Tribunal, we think it is not necessary for us to go into the alternative finding recorded by the Tribunal.

10. With these observations, questions Nos. 1 and 3 are answered in the affirmative, that is, in favour of the assessee and against the Revenue. Question No. 2, on which finding was recorded in the alternative, is returned unanswered.