Allahabad H.C : There was no question of any disallowing in a case where the assessee’s income is computed by application of gross profit rate on sales as shown

Heard counsel for the parties. The Tribunal (Allahabad Bench) referred the following questions for opinion of this Court under s. 256(2) of the IT 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 disallowing 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 exceptions contemplated in r. 6DD of the IT Rules, 1962 ?

(iii) Whether, on the facts and in the circumstances of the case, Tribunal was legally correct in declaring (sic—deleting) disallowance of Rs. 91,926 made by the ITO under s. 40A(3) of the IT Act, 1961 ?”

2. The assessee—a registered firm—derives income from sale of Ayurvedic medicines. The proceedings relate to the asst. yr. 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 AO rejected the book version of the assessee and applied the gross profit rate of 15 per cent and this is how addition to the extent of Rs. 8,834 representing additional profit, was made.

The AO 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 s. 40A(3) of the Act. Alternative plea of the assessee that the payments in cash had been made to the genuine parties in exceptional circumstances was rejected.

The dispute was carried before the AAC and it was contended that s. 40A(3) was not applicable. It was pleaded that s. 40A(3) was applicable only to the expenditure and not to the price paid for purchases. In short, the plea was that price paid for purchases did not amount to ‘expenditure’. Alternatively, it was contended before the AAC that the case of the assessee was covered under exceptional circumstances, as stated under r. 6DD(j) of the Rules, framed under the Act. The AAC held that the payment for purchases was within the scope of s. 40A(3) and that the ingredients of s. 40A(3) having not been complied with, payments for purchases were rightly disallowed under s. 40A(3) r/w r. 6DD(j).

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

The Tribunal observed that the AO rejecting the assessee’s trading results under the proviso to s. 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 branch office. The Tribunal further observed as follows : “….. The question arises whether in such a case any deduction on account 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. In asmuchas 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 s. 40A(3).”

3. All the three questions, referred to this Court, revolve round the same controversy. The question for consideration is that when no deduction was sought and allowed under s. 40A(3), was there any need to go into s. 40A(3) and r. 6DD(j). We see force in the view taken by the Tribunal that when income of the assessee was computed applying the gross profit rate and that 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 provisions of s. 40A(3) r/w r. 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. 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. No law contrary to the view taken by the Tribunal, has been shown by the standing counsel.

4. In the alternative, the Tribunal recorded finding on the ingredients of s. 40A(3) and r. 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.

5. 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.

[Citation:229 ITR 229]