Law:

Section:

Section 40A(3) of the Income-tax Act, 1961 read with rule 6DD(j) of the Income-tax Rules, 1962 - Business disallowance - Payments in cash exceeding Rs. 2,500 - Whether it can be said that section 40A(3) cannot be applied to a business carried on illegally - Held, no - Whether an assessee who is seeking to claim benefit of clause (j) in rule 6DD, has not only to satisfy that having regard to nature of business there was a genuine difficulty in complying with requirements of section 40A(3) he must also establish genuineness of payment and identity of payee - Held, yes Facts On 26-10-1973 the central excise and customs authorities searched the assessee's business premises and confiscated certain contraband commodities. The assessee filed returns of income subsequently for the assessment year 1974-75. In the said assessment year the ITO made an addition of Rs. 39,246 to the returned income by invoking provisions of section 40A(3). The Tribunal also upheld the ITO's orders. On reference, the assessee, inter alia, contended (i) that as he was engaged in illegal business of smuggling, he could not be expected to comply with the requirements of section 40A(3), and (ii) so long as he was able to establish the cost of acquisition of the goods in question, he could not, in the very nature of things, be called upon to establish either the genuineness of the payment or the identity of the payee. Calling upon him to do so was to ask for the impossible in the circumstances. As the ITO had not disputed the assessee's claim that the cost of acquisition was Rs. 39,246, that by itself should be sufficient to allow the deduction having regard to the nature of the transaction, say, the very nature of business. On reference : Held There is no doubt about the proposition that profits and gains derived from an illegal business can also be taxed. If so, the income can be taxed only under, and in accordance with, the provisions of the Act. Once the Act applies the taxable income has to be determined in accordance with the provisions thereof. It is not possible to draw a distinction between the several provisions of the Act, one set applying to the assessment of income arising from…

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