ADARSH KUMAR GOEL, J. - (1.) THIS order will dispose of ITA Nos. 125, 127 and 128 of 2004, as it is stated that question of law involved in these appeals is common.
(2.) IT Appeal No. 125 of 2004 has been preferred by the Revenue under S. 260A of the IT Act, 1961 (hereinafter referred to as "the Act") against order dt. 23rd Sept., 2003 passed by the Tribunal, Amritsar Bench, Amritsar in IT(SS)A No. 3/Asr/2003, for the block period 1st April, 1990 to 6th April, 2000, claiming following substantial question of law : "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disallowance under S. 40A(3) cannot be made in block assessment ?" The assessee filed its return for the block period 1st April, 1990 to 6th April, 2000. The AO in the course of the assessment made addition on account of claimed expenses being found to be in violation of s. 40A(3) of the Act. It was observed that the seized material revealed that ledger containing the details of purchases made against cash payment exceeding Rs. 20,000 which could not be allowed and on that account addition towards undisclosed income had to be made. The assertion of the assessee was that on that account disallowance could not be made. The AO did not accept this plea with the following observations : "I do not agree with the argument put forth by the assessee because the examination of seized material shows that cash book and ledger etc. have been maintained by the assessee. Although these cash book and ledger have not been maintained in normal course but it has been noted that the assessee had developed his own accounting system. It is noted that the balance sheet as on 4th April, 2000 has been prepared after taking into account the expenses debited in cash book and ledger. Thus, the assessee has taken care of all expenses while preparing the balance sheet. As the assessee has claimed the expenses, the disallowance under S. 40A(3) has rightly been made in respect of those expenses which have been made in violation of provisions of S. 40A(3) of the IT Act, 1961. Further, the rationale of incorporating the provisions of S. 40A(3) were explained by the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC). It was explained by Hon'ble Supreme Court that while interpreting the taxing statutes, the Court cannot be oblivious of the proliferation of black money, which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business. It was held that the provisions of S. 40A(3) and r. 6DD intended to prevent use of unaccounted money or reduce the chances to use black money for business transactions. In the light of these observations, it would be going totally against the judgment of the Hon'ble Supreme Court to hold that the provisions of S. 40A(3) should not be applicable in respect of unaccounted business. This view also is supported by the decision of learned Andhra Pradesh High Court in the case of S. Venkata Subba Rao vs. CIT (1988) 73 CTR (AP) 93 : (1988) 173 ITR 340 (AP) in which it has been held that : 'There is no doubt about the proposition that profits and gains derived from an illegal business are liable to be taxed. Such profits and gains are to be determined in accordance with the provisions of the Act. It is not possible to hold that some of such provisions do not apply to the taxable income in the case of an illegal business while some others do. May be that in an illegal business it may not be practicable to comply with the requirements of S. 40A(3) but that only means that such illegal business ought not be carried on. By carrying on a business out of his regular books of account he cannot be placed at an advantage as compared to other carrying on their business as per books in implemented S. 40A(3).' Reliance is also placed on the decision of Hon'ble Tribunal, Chandigarh Bench as per their order dt. 6th March, 2000 in appeal No. ITA No. 1063/Chd/1996 for the block assessment in the case of Madan Lal Basi vs. Asstt. CIT, Central Circle, Ludhiana. With these observations, I, therefore, disallow an amount of Rs. 9,26,673 @ 20 per cent of Rs. 46,33,364 under S. 40A(3) of the IT Act, 1961 which is brought to tax in the hands of the present assessee."
(3.) THE CIT(A) set aside the addition which view has been upheld by the Tribunal. It was held that S. 40A (3) could not be invoked in the case of the assessee where block assessment was by estimate on the basis of GP rate. The finding recorded by the Tribunal is as under : "We have considered the rival submissions and carefully gone through the material available on the record. The undisputed fact of this case is that a search was conducted at the residential premises of the partners of the assessee and the assessee declared an undisclosed income of Rs. 14,54,500 which was accepted by the AO by stating that income so declared was in agreement with the information brought on record. However, the AO invoked the provisions of S. 40A(3) while passing block assessment order and made the impugned addition. Admittedly, the entries which were taken into consideration by the AO were recorded in the books of account found during the course of search, however, no trading and P&L a/c was prepared to determine the income, but the income disclosed by the assessee was accepted and since no trading and P&L a/c has been prepared, there was no question of invoking the provisions of S. 40A(3). In a similar case, the Tribunal, Cochin Bench while deciding the issue in the case of Eastern Retreads (P) Ltd. vs. Asstt. CIT (2000) 66 TTJ (Cochin) 839 held that : 'No doubt, if there was violation of the provisions of S. 40A(3) there could be disallowance of the expenses in computing the total income, but then the disallowance should be made in a regular assessment under s. 143(3). In view of the provisions of Explanation below S. 158BA(2), it is open to the AO to make a regular assessment even in respect of any assessment year included in the block period and make disallowance under any provisions of the IT Act. But such disallowance cannot be made in a block assessment, as in that case the assessee would be burdened with a higher rate of tax. As the procedure for assessment of the undisclosed income of the block period appears in a separate self-contained code, that assessment should be made strictly in accordance with the provisions in Chapter XIV-B. The addition on this account cannot be, therefore, sustained.' From the above, it would be clear that the disallowance under S. 40A(3) cannot be made in block assessment." ;