ITAT Quashes Revision Order: No Section 40A(3) Disallowance When Income Estimated via Gross Profit Rate [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has set aside a revision order issued under Section 263 of the Income Tax Act against the appellant, ruling that no separate disallowance under Section 40A(3) is warranted when income is already assessed by applying a gross profit rate on unaccounted cash purchases.

Mahesh Kumar Verma, a bullion trader operating under the name Somya Bullion and Jewellers in Chandni Chowk, Delhi, was subjected to a search under Section 132. Consequently, assessments for AY 2015–16 and AY 2016–17 were framed under Section 153C read with Section 143(3), where the Assessing Officer (AO) added a 2% profit margin on unaccounted cash purchases made from Jindal Bullion Ltd (JBL), totalling ₹5.83 crore for AY 2015–16. The AO, however, did not invoke Section 40A(3), which deals with disallowance of expenses where cash payments exceed permissible limits.

The Principal Commissioner of Income Tax (PCIT), Kanpur, initiated revision proceedings under Section 263, observing that the AO erred by not disallowing 100% of the cash purchases under Section 40A(3). The PCIT termed the AO’s omission as a lack of enquiry, rendering the original assessment order erroneous and prejudicial to the interest of the Revenue.

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The assessee countered that the seized ledger named “MT” and “01 Chintu Capital” was not exclusively linked to him and included entries of various parties. However, to avoid litigation, the AO had already estimated income by applying a 2% profit rate on total cash purchases. The assessee’s counsel argued that once profit has been estimated on unaccounted purchases, no separate disallowance can be made under Section 40A(3), relying on judicial precedents.

The bench comprising Mahavir Singh (Vice President) and Brajesh Kumar Singh (Accountant Member) agreed with the assessee’s contention. The Tribunal held that when profit is estimated based on turnover or purchases, any separate disallowance u/s 40A(3) is unnecessary, as the estimation subsumes all related expenditures. The bench cited CIT v. Santosh Jain (2008), CIT v. Banwari Lal Banshidhar (1998), and CIT v. Amman Steel & Allied Industries (Madras HC, 2015) in support.

Further, the Tribunal observed that the AO had duly examined the seized material and applied his mind before estimating income. Since the AO’s view was one of the plausible views supported by various High Courts, the PCIT’s interference under Section 263 was unwarranted. Referring to Malabar Industrial Co. Ltd. (2000) and Max India Ltd. (2007), the bench reiterated that revision under Section 263 cannot be invoked merely because another view is possible.

Accordingly, the Tribunal quashed the revision orders for both assessment years and allowed the appeals filed by Mahesh Kumar Verma.

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