ORDER
R.P. Tolani, J.M.
1. This is assessee’s appeal. Descriptive grounds are raised. The learned counsel for the assessee pressed only following ground of appeal :
“The learned CIT(A) has erred in confirming the addition under Section 40A(3) of the IT Act of Rs. 3,48,705. It is submitted that on the facts and circumstances of the case, no disallowance is called for under Section 40A(3) and the addition made by way of disallowance of Rs. 17,43,519 be deleted.”
2. The brief facts are that the assessee is in the retail business of threads and covered by Section 44AF. However, the assessee had disclosed net profit less than prescribed under Section 44AF, got his accounts audited and the return of income was filed accordingly at the lower net profit. The AO though accepted the net profit of Rs. 95,200 as per P&L a/c, however, observed that the assessee had made cash payments of expenses, i.e., purchases from Coats Viyella India Ltd., provisions of Section 40A(3) were applied thereto resulting in 20 per cent addition out of such cash purchases at Rs. 3,48,705. Aggrieved the assessee preferred first appeal where the confirmation letters from Coats Viyella India Ltd. was submitted. The cash payments were made as on some occasions, the advance payment cheques issued by assessee were dishonoured which could have lead to criminal proceedings. Under these circumstances, the cash payments were made on the insistence of the party. Reliance was placed on CBDT Circular No. 250, dt. 11th Jan., 1979. It was contended that a too technical approach should not be applied to the assessee’s case. The CIT(A), however, held that Section 40A(3) was amended w.e.f. 1st April, 1997 dispensing Clause (j) of Rule 6DD and in case of such cash payments disallowance of 20 per cent was applicable, the circulars were not applicable to assessee’s case, the addition was upheld.
3. The learned counsel for the assessee reiterated the stand taken before lower authorities. It was contended that the payments were made in a very peculiar circumstance as some of the cheques were dishonoured and the seller was unwilling to sell the goods without advance cash payment. Besides, in case of dishonour of cheques there was strong possibility of consequences of criminal proceedings. Alternatively, it was contended that had the assessee returned 5 per cent net profit on its total turnover under Section 44AF(1), provisions of Section 40A(3) are not applicable, in any case the assessee is covered under Section 44AF(5) and still the provisions of Sections 28 to 43C are not applicable. It was further contended that even if this plea is not acceptable, what legislature intended was to tax retail traders in a summary manner at the net profit of 5 per cent of the turnover. An additional plea was made that the assessee may be subjected to Section 44AF(1), i.e., the income may be assessed at the rate of 5 per cent net profit on total turnover under Section 44AF(1) and provisions of Section 40A(3) may not be applied. Reliance was placed on judgment of Tribunal, Pune Bench, in the case of Balaji Construction v. Asstt. CIT (2000) 66 TTJ (Pune) 718 and Tribunal, Hyerabad Bench, in the case of Bangaru Manikyam v. ITO (1987) 21 ITD 320 (Hyd).
4. The learned Departmental Representative supported the orders of lower authorities. However, agreed to the last proposition of the assessee that the income of the assessee may be taxed at 5 per cent net profit on the total turnover, i.e., Rs. 30,76,348 and may be assessed accordingly. Therefore, provisions of Sections 28 to 43C may not be applied.
5. I have heard the rival contentions and perused the materials available on record. I find merit in the arguments of both the parties, the legislature has intended to tax the retail traders in a presumptive manner at the rate of 5 per cent net profit on total turnover thereby the provisions of Sections 28 to 43C [including Section 40A(3)] will not be applicable. Since both the parties have agreed to make the assessment under Section 44AF(1), the AO is directed to apply 5 per cent of net profit on total turnover and thereby delete the addition made under Section 40A(3). The AO is directed accordingly, assessee’s appeal is partly allowed.