Opinion Of Eminent Legal Luminaries On Controversial Issues

Can AO Disallow Any Expenditure Separately Once Books Of Account Are Rejected?

QUERY: The assessment of builder cum contractor has been completed on estimated basis after rejecting his books of account. However, while completing the assessment, the Assessing Officer has made certain disallowances in respect of cash payments under section 40A(3) of the Act as well as under section 40(a)(ia) of the Act, whether disallowances are justified?
ANSWER: In Teja Construction vs. ACIT [39 SOT 13] the Hyderabad Tribunal has observed as under:

“Once the books of account are rejected, income is estimated, the Assessing Officer precluded from invoking any other provisions of the Income-tax Act to make further addition. The books of account of the assessee was not relied, it was rejected by the Assessing Officer and the same was confirmed by the CIT(A) as well as by us. Now, based on the reliance on the same books, for the purpose of invoking the provisions of section 40(a)(ia) is improper. The estimation of income take care of the irregularities committed by the assessee. Further addition by invoking section 40(a)(ia) amounts to punishing the assessee for a same offence on double occasions, which is not permitted by law. There is a connection between expenditure claimed by the assessee and making non-deduction of TDS. Since the books of account not verifiable, for which the assessee’s books were rejected and income was determined. It was held in the case of CIT v. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC) where a particular business income of the assessee has been estimated and determined and in such a case, the Assessing Officer precluded from adding any unexplained cash credit as undisclosed income of the business”.

Thus, on the basis of aforesaid decision one can very well argue that once an assessment is on estimated basis, then, no disallowance of expenses can be made either under section 40A(3) or under section 40(a)(ia) of the Act.
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