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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” : HYDERABAD
Before: SHRI S.S.GODARA & SHRI LAXMI PRASAD SAHU
BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER Assessment Year: 2014-15 Income Tax Officer, M/s.Padmasri Townships Ward-16(2), Vs Private Limited, HYDERABAD HYDERABAD [PAN: AADCP9596L] (Appellant) (Respondent) For Revenue : Shri Rohit Mujumdar, DR For Assessee : Shri P.Murali Mohana Rao, AR Date of Hearing : 11-05-2021 Date of Pronouncement : 25-08-2021 O R D E R PER S.S.GODARA, J.M. : This Revenue’s appeal for AY.2014-15 arises from the CIT(A)-4, Hyderabad’s order dated 06-08-2019 passed in case No.10456 / 16-17 / ITO,Wd.16(1) / CIT(A)-4 / Hyd / 19-20, in proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, ‘the Act’]. Heard both the parties. Case file perused.
The Revenue’s first substantive ground raised in the instant appeal seeks to reverse the CIT(A)’s action deleting Section 40A(3) disallowance of Rs.3,38,29,360/- made in the course of assessment framed on 30-12-2016 as under:
“11. After having gone through the assessment order, ground of appeal and submissions of the appellant, remand report of the AO and AR’s comments on the remand report, the issue involved in the appeal is decided as under: 11.1 The issue involved in this appeal is with regard to AO's addition by invoking the provisions of section 40A(3) of the Act. The appellant is found to have made payments in cash while purchasing the land from the sellers over and above Rs.20,000/-, aggregating of such amounts works out to Rs.3,65,29,360/- (Rs.3,38,29,360 + Rs.27,00,000) and disallowed the 100% of such amount for the year under consideration. 11.2 In this regard, the facts of the case are required to be analysed. Before that, the AO's observations during the course of assessment proceedings and during the course of remand proceedings are to be seen. On going through the assessment order and remand report, -it is made clear by the AO that the appellant was not prevented by sufficient reason in making payments by cash over and above Rs.20,000/- to the agriculturists, farmers and landlords as the case may be. The AO of the view that the appellant should have made cash payments when the bank was closed because of general holidays or the buyers did not have any bank account per se. The AO after seeing the facts of the case has concluded that the above addition is made as the appellant was found to have made cash payments during the workinq days of the Bank as well as the sellers have got their bank accounts. Under these circumstances, the AO had categorically stated that the no immunity is available under Rule 6DD(j) and, hence, the addition so made of Rs.3,38,29,360/- u/s 40A(3) is to be sustained. 11.3 I have perused the assessment record as well as AO's comments and the submissions of the AR furnished from 'time to time and also following relevant case laws relied upon the AR in this regard. (a) Sri K. Phanikumar Vs. ACIT, Central Circle, Vijayawada 100 taxmann.com 438 (VSKP. Trib) (2018) (b) ITO Vs. Madan Lal Mittar ITAT Delhi E Bench in dated 19.5.2006 (c) KGL Network P Ltd. Vs. ACIT Cir-14(2), New Delhi (97 taxmann.com 400 (Delhi Trib.) 2018)
(d) Surya Merchants Ltd. Vs. DCIT Central Circle, Gaziabad 101 taxmann.com 16 (Delhi-Trib.) (e) CIT Vs. Singamsetty Subba Rao in the High Court of AP 40 taxmann.com 107 (AP).
11.4 It is seen from the facts that the appellant is in the real estate development i.e, buying land in acres and plotting them and converting the same into stock in trade, thereafter selling the plots to the customers. The main point is that the mode of payment made by the appellant for acquiring/purchasing the lands from the sellers is by way of cash in excess of Rs.20,000/-. It is seen from the purchases made by the appellant that during the year under appeal, the appellant has made investment/purchases to the tune of Rs.5,91,37,570/- and perusal of the books of account it is seen that almost all the purchases are made by cash only. For some of the purchases i.e. about 40% of total purchases, payments were made by cheques. It is to be noted that it is the general practice prevailing in this line of activity that the seller of the land insists always cash payments only, since the cash is immediately realized. 11.5 It is to be noted that AO also accepted the general practice of making payment by way of cash prevailing in this line of business in the remand report. The AO in his comments stated that many of the sellers are residing in urban areas and having knowledge of banking. Further, it was observed by the AO that many are having bank accounts. However, the AO has not made any comments on the appellant's submission that strike was going on in the banks on the day of making payment to sellers and the appellant was compelled to make payments for the exigency of the business. From the reports of the AO, it is undisputed fact that the payments were genuine and all the sellers are identified. Most of the sellers are agriculturists. 11.6 In this regard, reliance is placed on the Hon'ble Visakhapatnam Tribunal decision in the case of Sri Ch. Hanumantha Rao Vs. ITO Ward-2(2), Guntur in taxmann.com 421 (2017) wherein it was held that where there exist a business expediency and other relevant factors and also the payments are genuine, then the Acts provide for immunity from disallowance of expenditure, if the appellant proves to the satisfaction of the AO that there exists a business expediency in making the cash payments. In this case, the appellant has filed necessary evidences to prove that the impugned land has been acquired as an investment and subsequently converted into stock in trade of his business. Therefore, we are of the view that the AO was erred in disallowing cash payments by invoking provisions of section 40A(3) of the Act. 11.7 In the present case, the AO did not dispute the genuineness of payments. Further, each and every payment in cash are not automatically get disallowed u/s 40A(3) of the Act. In a particular case where there exist a business expediency and other relevant factors and also the payments are genuine, then the Acts provide for immunity from disallowance of expenditure, if the appellant proves to the satisfaction of the AO that there exists a business expediency in making the cash payments. The appellant's contention is that the vendors have insisted for cash payment. If cash payments are not made, it will not be possible to make them to come for registration and sign the sale deed. The appellant will be in hardship if the villagers did not turn up for registration on specified date. There was compulsion to the appellant to make the payment on account of business expediency and since the realization of cheques and DDs take longer time, the appellant was forced to make cash payments to the landowners to drive them to come for registration. These payments cannot be considered under the provisions of section 40A(3) of the Act. In this case, the appellant proved that since there was a strike in the banks there was a need to make the payments in cash which is business expediency only. Further, the exceptions contained in Rule 6DD are not exhaustive and that the said rule must be interpreted liberally.
To sum up - Since the purchases made by the appellant have been evidenced with the registered sale deeds wherein the identity of the seller and genuineness of the payment to the seller is established. Further, the appellant has made the payments through books of account and hence, the source for making payments to the sellers is also established. In the case of Toshika Real Estate P Ltd., Jaipur in the Hon'ble Jaipur Bench held that if the payments are genuine and if the business expediency so requires and the appellant makes the payments in cash, the technical requirement should not come in the way of claiming it as expenditure in view of the proviso to section 40A(3) of the Act. 12.1 As the intention of the legislature behind the introduction of the section 40A(3) of the Act was to arrest the circulation of the black money in respect of expenditure incurred. When the main purpose of enacting the provisions of section 40A(3) (i.e. curbing the involvement of black money) is not defeated, in so far as the appellant has filed the bank statement showing the withdrawal of money for the purpose of making cash payments; making disallowance mechanically would tantamount to violation of natural justice. 12.2 As the three ingredients which are required to i.e. identity, genuineness and sources of funds to the above transactions have been satisfied, applying the rule 6DD(j) in strict manner would not serve the desired purpose of the legislature. The Hon'ble Rajasthan High Court in the case of Harshita Chordia (298 ITR 349) has held that exceptions contained in rule 6DD(j) are not exhaustive and these rules should be construed liberally and should be taken as guide to appreciate the circumstances that compel an assessee to make certain payments in cash, and should not amount to violation of provisions of section 40A(3) of the Act. 12.3 It is also seen from the facts that the lands purchased by the appellant are basically agricultural lands and hence, the provisions of section 40A(3) are not applicable. 12.4 On verification of the books of account, it is seen that the appellant has made payments by cash in excess of the prescribed limits of Rs.20,000/- and above was done as the appellant is involved in real estate business and the appellant was forced to make payments in the above said manner. For making this payment the appellant had made a withdrawal of cash from his bank account. The appellant has amply proved the circumstances, which compelled it to make the cash payments and so this matter is also covered by the submissions given as regards the applicability of Rule 6DD. Further, this fact of receipt of cash is also mentioned in the sale deed of the land. Commercial/business expediency warranted the appellant to make payment in cash, as the sellers insist for the same. 12.5 In this regard reliance is placed on the decision in the case of M/s. Tirupati Constructions Vs. CIT in dated 30.09.2015 (ITAT, Indore) wherein it was held that 'in the appellant's case transaction was genuine, the conveyance deed was executed before the Registrar, the name and address of the seller was mentioned in the sale deed itself, the identity of the persons was not in doubt. In these circumstances, the AO must have come to the conclusion that the provisions of section 40A(3) of the Act were not applicable. Considering all these aspects, where genuineness of transaction is not in question, the identity of payees is also well established the payments have been made to the seller of the land in rural areas, in our view, the AO rightly accepted the claim of the appellant and found that the provisions of section 40A(3) are not applicable in the case of purchase of land by the appellant even if it was acquired as a stock in trade.
Therefore, the action of the AO is not justified in making the disallowance of Rs.3,38,29,360/- u/s 40A(3) of the Act. Respectfully following the above judicial decisions, the addition made u/s 40A(3) of the Act amounting to Rs.3,38,29,260/- is directed to be deleted and hence, the ground raised in this regard is allowed”.
Learned departmental representative vehemently contended during the course of hearing that the Assessing Officer had rightly invoked the impugned cash payments disallowance u/s.40A(3) of the Act as the assessee had failed to prove the corresponding exigency(ies) in its made to various land owners in real estate business. He further quoted hon'ble apex court’s landmark decision in Attar Singh Gurmukh Singh Vs. ITO (1991) 191 ITR 667 (SC) that this statutory provision comes into play so as to prevent un-accounted cash from being ploughed in the system. We find no merit in the Revenue’s foregoing arguments. This is inter alia for the reason(s) that the Assessing Officer had himself made it clear in the corresponding remand report dt.10-06-2019 (supra) that the assessee could not prove its vendors as having no bank accounts. The learned Assessing Officer appears to have shifted a negative burden on the assessee wherein he simply could not find as to whether the vendors had bank accounts or not? Coupled with this, this tribunal’s co-ordinate bench decision in M/s. Tirupati Constructions (supra) has also dealt with identical issues of Section 40A(3) disallowance that the same does not apply in such cases of registered sale deeds proving genuineness of the transacting parties. And also that case law Harshita Chordia (298 ITR 349) and Anupam Telecom Services Vs. ITO (2014) 366 ITR 122 (Guj) hold that the exigencies taken into consideration in rule 6DD are not self- exhaustive wherein overwhelming genuine business transactions are always protected. We thus decline the Revenue’s instant first and foremost substantive grievance. The CIT(A)’s action under challenge stands affirmed.
Next comes Section 69 un-explained expenditure addition of Rs.27 lakhs. The CIT(A)’s detailed discussion deleting the same reads as follows:
“14. Next issue relates to AO's action in making an addition of Rs.27,00,000/- towards unaccounted expenditure u/s 69C of the Act. AO's observations in this regard are as under: It is seen from Note 17 to the Profit & Loss Account relating to Cost of Materials Consumed (Direct Expenses) that the assessee has debited an amount of Rs.5,91,37,5701- towards purchase of land. However, on verification of sale deeds (for purchase), it is noticed that the purchase consideration as per the sale deed registered vide document No.5814/ 13 is Rs.3-0, 00, 0001 _ but the same has been accounted as Rs.3, 00, 0001 - in the books of account. The total consideration for purchase of this land was paid in cash. Thus, there is a difference of Rs.27,00,0001- in purchase of this land was paid in cash. Thus, there is a difference of Rs.27, 00, 0001 _ in purchases which was not accounted for in the books of account and accordingly, sources for the same are unexplained. Accordingly, the said amount of Rs.27,00,000/- is treated as unexplained expenditure and brought to tax. 14.1 On the other hand, AR during appellate proceedings submitted as under: The source of the unaccounted purchases of Rs.27,00,000/- has been explained to the AO during the assessment proceedings. The assessee has enough reserves and cash flow to make the purchase. The Jaipur Bench of ITAT ruling in 31 DTR 456 - Nisraj Real Estate held that unaccounted purchases made by assessee could not be treated as unexplained expense u/s 69C and no addition can be made thereof u/s 69C proviso there under - as once sales were made by assessee, purchases were obviously made. 14.2 Further, during remand proceedings on this issue, AO further commented as under: The last point for consideration for remand report is the addition made of Rs.27,00,000/- on account of the purchase made without any sources. For this ground also the assessee neither furnished any information nor any evidence in its support. Hence, this ground may please be dismissed. 14.3 In response to the comments of the AO, AR furnished rejoinder on this issue as under:
Out of the total purchases disclosed, there is one particular transaction of Rs.30,00,000/- which was wrongly recorded as Rs.3,00,000/- due to an error of commission and which got adjusted in books of accounts at the time of finalization, which were produced along with the proof in the form of sale deeds for purchases to the AO during assessment proceedings. In this regard, the AR also placed on reliance on the Jaipur Bench of ITAT ruling in 31 DTR 456 - Nisraj Real Estate held that unaccounted purchased made by assessee could not be treated as unexplained expense u/s 69C and no addition can be made thereof u/s 69C of the Act proviso there under - as once sales were made by assessee, purchases were obviously made. 14.4 I have carefully considered the assessment order and AR's submissions in this regard. It is seen from the assessment order that the AO during scrutiny proceedings, on verification of sale deeds (for purchases) noticed that the purchase consideration as per the sa~ registered vide document no. 5814/13 is Rs.30,00,000/- but the same has been accounted as Rs.3,00,000/- in the books of account. The total consideration for purchase of this land was paid in cash. Thus, there is a difference of Rs.27,00,000/- in purchases which was not accounted for in the books of account. Therefore, the said amount of Rs.27,00,000/- is treated as unexplained expenditure and brought to tax as the appellant failed to explain the sources for the same during scrutiny. 14.5 However, during the appellate proceedings, the AR of the appellant has furnished the ‘Agreement of sale-cum-general power of attorney (with possession)' for a consideration of Rs.30,00,000/- for verification and the same is verified and found correct. Out of the total purchases disclosed, which was wrongly recorded as Rs.3,00,000/- due to an error of commission and which got adjusted in books of account at the time of finalization, which were produced along with the proof in the form of sale deeds for purchases to the AO during assessment proceedings. Therefore, the action of the AO is not correct to treat the purchase which was not unaccounted for in the books of account. Hence, the AO is directed to delete the addition of Rs.27,00,000/- as the AR substantiates with cogent evidence during appeal proceedings as well. As the result, the ground raised in this regard is allowed”.
4.1. Suffice to say, it has come on record that the actual amount as per sale agreement was Rs.30 lakhs which had been wrongly taken as Rs.3 lakhs only in books owing to a clerical error. Needless to say, the assessee has duly proved the former sum as recorded in the corresponding sale deed(s) as well. We conclude in this aspect that CIT(A) has rightly deleted the impugned addition made u/s.69 of the Act.
Lastly comes the issue of disallowance of commission and site maintenance charges of 45,24,605/- made in the course of assessment and deleted in the lower appellate discussion as follows: “15. Ground nos. 5, 6 & 7 are with regard to addition of Rs.45,24,605/- (Rs.33,58,955 + Rs.11,65,650) towards expenses u/s 37(1) of the Act. The AO's observations in making the said addition are as under: The assessee claimed an amount of Rs. 7,62,01,166/- towards Direct Expenses in the Profit and Loss Account which includes Site Development Expenses of Rs.1,70,63,596/-. During the course of assessment proceedings, the assessee was asked to furnish the relevant details. Accordingly, the assessee furnished the same. In this regard, the assessee has stated that tax has been deducted at source on all the payments wherever applicable and the same covers substantial portion of the said expenditure. The assessee was asked to produce bills/ vouchers in support of the expenditure claimed, as specified. Accordingly, the assessee produced the same. It is noticed that the bills/ vouchers for a portion of the expenditure is not maintained properly. In this regard, the AR informed the due to the nature of the business of the assessee, the expenses are incurred in sites and there may be some deficiencies in the vouchers maintained. The amount for which no proper bills/ vouchers were maintained and incurred in cash is arrived at Rs.11,65, 650/ -. Thus the amount of Rs.11,65,650/ - is disallowed in the assessment and added to the returned income. Further, it is seen from Note 21 to the Profit and Loss account relating to 'Other Expenses' that the assessee claimed an amount of Rs.3,35, 89, 552/ towards commission. The assessee was asked to furnish complete details of payment of the same along with basis for payment and to produce necessary evidence in support of the expenditure claimed. Accordingly, the assessee furnished the details of commission paid agent-wise. As per the details submitted, the assessee has deducted TDS in respect of 161 agents to whom a total amount of Rs.2,94,41,361/- has been paid. The assessee has furnished the quarter wise commission paid along with their PANs. The balance commission of Rs.41,47,921/- constitute commission payments below Rs.5000/ -. On test check of the vouchers relate to these payments, it was noticed that some of the cash vouchers are not maintained properly. In this regard, the AR informed that due to the nature of the business of the assessee, and due to large volume of payments, there may be some deficiencies in the vouchers maintained. Considering the nature of business of the assessee and the facts of the case, and after discussion with the AR in this regard, 10% of the commission of Rs.3,35,89,552/- is disallowed on an estimate basis. Accordingly, the disallowance of Rs.33,58,955/ - is added to the returned income. 15.1 During the course of appellate proceedings, the AR submitted as under: The genuineness of the transactions and identities of the receivers of the sale consideration can be easily established from the sale deeds (purchase documents) entered by the assessee with the vendors of the lands which are registered with the concerned offices of the sub- registrars by paying stamp duties. The AO has erred in disallowing Site Development Expenditure of Rs.11,65,650/- with a reason that the produced bills/ vouchers for a portion of the expenditure is not maintained properly and incurred in cash. All the bills/vouchers are submitted during scrutiny proceedings and with regard to payments incurred in cash, it was evident from the bills/ vouchers they are of less than Rs.20,000/- each and does not require any tax to be deducted. The assessee has claimed Rs.3,35,89,552/- towards commission, out of which the TDS was deducted on Rs.2,94,41,361/-, for which the AO was satisfied. The AO must have disallowed the 10% of the balance commission i.e. 10% of Rs.41,48,191/- but the AO has erred in making the disallowance on the entire amount of Rs.3,35,89,552/-. 15.2 I have carefully considered the assessment order, grounds of appeal and AR's submissions in this regard. It is seen form the assessment order that the AO has made addition of Rs.45,24,605/- (Rs.11,65,650 + Rs.33,58,955) towards direct expenses u/s 37(1) of the Act. However, the AR contended that the appellant has claimed Rs.3,35,89,552/- towards commission, out of which the TDS was deducted on Rs.2,94,41,361/- for which the AO has been satisfied. The AO must have disallowed the 10% of the balance commission i.e. 10% on Rs.41,48,191/-. Since the appellant has deducted TDS on Rs.2,94,41,361/- and the same is also confirmed by the AD in the assessment order, the action of the AO in making the 10% commission on entire amount of Rs.3,35,89,552/- towards direct expenses u/s 37(1) of the Act is not correct and, hence, directed to be restricted to 10% on the balance amount of Rs.41,48,191/- only. As the result, the ground raised in this regard is allowed.
15.3 Regarding the addition of Rs.11,65,650/- the AO stated that out of the appellant's claim of site development expenses of Rs.1,70,63,596/-, the expenditure to the tune of Rs.11,65,650/- was not properly supported by bills/vouchers. During the appellate proceedings also, the AR has not furnished the same, hence, the action of the AO is justified and the addition of Rs.11,65,650/- made by the AO is hereby confirmed. As the result, the ground raised in this regard is dismissed”.
5.1. It is clear from a perusal of the CIT(A)’s order that he has himself confirmed the latter component of site development expenses of Rs.11,65,650/-. The Revenue cannot be held to be an aggrieved party therefore. Coming to the former component of commission disallowance, it fails to dispute that the Assessing Officer had himself accepted the assessee’s claim to the tune of Rs.2,94,41,361/- which had also been subjected to TDS deduction. It is in this factual backdrop only that the CIT(A)’s detailed discussion has restricted the impugned disallowance to 10% of the remaining component of Rs.41,48,191/- only. We therefore find no merit in the Revenue’s instant substantive grievance.
5.2. Learned departmental representative lastly argued that it was an agreed disallowance as per assessment findings in para 6.2 of the assessment order. We do not see any such sacrosanct concession coming from the assessee’s side in the case file. This instant last argument is also declined therefore. No other argument has been raised before us.
We lastly acknowledge that although the instant lis is being decided after a period of 90 days from the date of hearing as per Rule 34(5) of the IT(AT) Rules 1963, the same however, does not apply in the covid lockdown situation as per hon'ble apex court’s recent directions dated 27-04-2021 in M.A.No.665/2021 in SM(W)C No.3/2020 ‘In Re Cognizance for extension of limitation’ making it clear that in such cases where the limitation period (including that prescribed for institution as well as termination) shall stand excluded from 14th of March, 2021 till further orders.
This Revenue’s appeal is dismissed in above terms.