IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA I.T.A No. 31 of 2003 Date of decision: 17.12.2010 M/s.Amrit Sugar Company, Mandi …. Appellant Versus Income Tax Officer, Mandi ….. Respondent Coram: The Hon’ble Mr. Justice Deepak Gupta, J. The Hon’ble Mr.Justice Sanjay Karol, J. Whether approved for reporting? No For the appellant: Mr.Vishal Mohan, Advocate For the respondent: Mr.Vinay Kuthiala, Advocate Deepak Gupta, J.(Oral) This appeal was admitted on the following substantial question of law:- 1. Whether the Tribunal was correct in upholding the disallowance made under Section 40-A (3) even when the appellant had produced receipt on record to prove that each payment constituted a different transaction. That further the Tribunal has been right in holding that the receipts issued by the persons to whom the payment has 2 been made does not constitute evidence in support of the contention that each payment constituted a separate and distinct transaction? Sh.Vishal Mohan, learned counsel for the appellant candidly submits that as far as this question is concerned, the answer has to go against the appellant in view of the judgment of this Court delivered in Commissioner of Income Tax Vs. M/s.Dalip Chand and sons, I.T.R No.7 of 1996 decided on 2.1.2008. He further submits that another question arises out of the aforesaid question. According to him, once the books of accounts furnished by the assessee are rejected on any ground and the assessment of profit is made on the basis of percentage, then the same books which have been rejected cannot be relied upon and the amount paid in cash in violation of Section 40-A (3) cannot be added back to ascertain the gross profits. Sh.Vinay Kuthiala, learned counsel for the respondent raised a preliminary submission that such an objection cannot be permitted to be raised since this objection was not raised before any of the authorities below. He relied upon the judgment in Chanana 3 Associates Vs. Commissioner of Income Tax, ITR 1997 (225) 72 in this regard. The answer to this objection is that once the appellant was challenging the very basic action of rejecting the books of accounts of the assessee and once the books of accounts are rejected, the assessee has a right to claim that his income should not be computed twice and added over twice. Therefore, the second question which arises out of this objection is “Whether the Assessing Officer after rejecting the books of accounts of the assessee and having computed the income of the assessee on best judgment assessment basis, by applying the principle of percentage of profits, is entitled to add back the amounts allegedly paid in violation of Section 40A(3) by relying upon the same rejected books of accounts.” We find from the order of the Assessing Authority that after rejecting the books of accounts, he dealt with each item in which the assessee deals in and came to a conclusion that the rate of profit for each item should be a particular percentage and thereby computed the profit. Once he computed the profit on the basis of percentage then he could not have added 4 back the amounts paid in cash because this would result in adding to the profit which he had already computed on percentage basis. The Assessing Officer cannot use two methods and combine them because this will mean that the income of the assessee is quantified twice. In this behalf, we are fully supported by the judgment of the Allahabad High Court delivered in Commissioner of Income Tax Vs. Banwari Lal Banshidhar, 1998 (229) 229 wherein the Allahabad High Court held as follows:- “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.” 5 In view of the above discussion, we are of the considered view that though the books of accounts of the assessee have been rejected, the Assessing Officer was not justified in adding back the amounts which were found to be paid in violation of Section 40A(3). The second question is answered in favour of the assesee. The appeal is allowed to this extent. No costs. ( Deepak Gupta ) Judge December 17, 2010 (Sanjay Karol) (m) Judge