SHRI GAUTAM SHARMA,JODHPUR vs. DCIT, CENTRAL CIRCLE-2, JODHPUR

2 Rival contentions have been heard and records perused. The facts in brief are that the assessee is engaged in the business of purchase & sale of land and construction of buildings. During the year under consideration, the assessee had purchased land for Rs.42,59,960/- and had made payment of Rs.40,57,000/- in cash to the farmers for purchase of the said agriculture land. In the assessment order, the AO observed that the assessee showed purchase of agricultural land of Rs.42,59,960/- in the trading account for the year ended 31-03-2012. The purchase was made from Shri Bargat Khan. As per sale deed dated 04-04-2011 as well as the ledger copy of purchase account, the assessee made payment of Rs.40,57,000/- towards purchase of the said agricultural land in cash. In view of the fact that the assessee was engaged in real estate business, the AO required the assessee to explain as to why a disallowance of Rs.40,57,000/- may not be made u/s 40A(3).

3 It was submitted before the AO that as per assessee’s nature of business/trade, payment towards consideration for agricultural land are normally required to be made in cash only. The farmers have large families and most of them are not very literate and still have a complex in transacting through banking channels. Sometimes it is also very difficult to convince to all the members of the family to agree unanimously to sell their land. Most of the time, the family members are available either in the late night or early morning and at the time it is ITA 120/Jodh/2019 Shri Gautam Sharma vs DCIT, Central Circle-2, Jodhpur not possible to make payment through banking channel. The AO, however, observed that the assessee had not disputed that it was engaged in real estate business or that purchase of land had been made in cash. The AO noted that the case did not fall under any of the exception clauses provided in Rule 6DD. The AO also noted that provision of Section 40A(3) applicable to expenditure for stock in trade and raw materials and the word ‘expenditure’ included all outgoings including expenditure for purchasing stock in trade and raw material. With these observations, the AO made a disallowance of Rs.40,57,000/- u/s 40A(3) of the Income Tax Act, 1961. 2.4 By impugned order, the ld.CIT(A) confirmed the action of the AO against which the assessee is in further appeal before this Bench.

5 It was argued by the ld.AR of the assessee that the source of payment is also not in dispute and the genuineness of transaction has also not been disputed and provisions of Section 40A(3) cannot be invoked in such circumstances. Reliance was placed on the CBDT Circular No. 250[F.No 26/1/79-IT(A-II)] dated 11-01- 1979 in which it was clarified that under rule 6DD the provision of Section 40A(3) will not be applied by the Income Tax Officer where he is satisfied that the payment could not be made by the crossed bank cheque or draft due to ITA 120/Jodh/2019 Shri Gautam Sharma vs DCIT, Central Circle-2, Jodhpur ‘’exceptional or unavoidable circumstances’’ and the assessee furnishes evidence as to the genuineness of the payment and the identity of the payee. 2.6 [1991] 191 ITR 667 (SC) wherein the Hon’ble Supreme Court while upholding the validity of such provisions had held that the terms of Section 40A(3) are not absolute and considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the Section.

7 As per ld. AR of the assessee in terms of nature of business of the assessee's trade, the payments towards considerations of agricultural land is normally required to be made in cash only. The farmers have large families and most of them are not very literate and still they have a complex in having transaction through banking channels. The agricultural lands purchased are required to be converted into the residential plots and only thereafter, the same becomes tradable commodity. Until the agricultural land is converted into urban land after obtaining permission u/s 90B from the local authorities, the agricultural land cannot partake the character of stock in trade. The payment made towards purchase of agricultural land is an asset until the same is converted. The unconverted agricultural land

8 As per ld. AR, the said second proviso also recognizes "other relevant factors". The "other relevant factors" will surely include cases where it is impracticable or impossible to make cash payments relating to purchase / sale of land or other immovable properties. Therefore, all the judgments on Old Rule 6DD(j) prior to its omission where cash payment were made on account of impracticability or impossibility of payment by cheques and other compelling reasons still continue to be a valid justification in view of the exemption so carved out in, second proviso to section 40A(3). Reliance was placed on following decisions:

10 On the other hand, the ld. DR contended that since the assessee was engaged in purchase and sale of land, the land so purchased constitutes its stock in trade for which payment is required is to be made only by account payee cheque. Since the assessee has made cash payment, therefore, the AO was justified in making

11 I have considered the rival contentions and carefully gone through the orders of the authorities below. I have also deliberated on the judicial pronouncements as referred by the lower authorities in their respective orders in support of their conclusion for invoking the provisions of Section 40A(3) of the Act, as well as the case laws cited by the ld. AR and ld. DR during the course of hearing before me in the context of factual matrix of the case. From the record, I found that the assessee was engaged in purchase & sale of land and construction of buildings. During the assessment year under consideration, the assessee had purchased agricultural land for Rs.42,59,960/- and made cash payment of Rs.40,57,000/- to the farmers for purchase of said agricultural land. I found that source of payment is not in dispute and the genuineness of the transaction has also not been disputed by the revenue authority. In the nature of business of assessee’s trade, the payment towards consideration of agricultural land is normally required to be made in cash only. The Farmers insist for making cash payment as they are not very much literate. No doubt, the payment for purchase of agricultural land constitute business expenditure which attracts the provisions of Section 40A(3) of the Act, however, where exceptional and unavoidable circumstances exists and identity of seller of ITA 120/Jodh/2019 Shri Gautam Sharma vs DCIT, Central Circle-2, Jodhpur land and genuineness of the transaction is fully established and not disputed by the revenue, no disallowance is warranted. From the record, I found that on the date of entering into transaction of purchase of land, the assessee was having sufficient cash balance which proves the source of payment. It clearly establishes that the assessee was having sufficient cash balance and only at the insistence of sellers of agricultural land, the assessee had made cash payments to them. This makes out a case of assessee’s business expediency under which he has to make payment in cash and in the absence of which, the transaction could not be completed. In the instant case, it is not the case of Revenue either that unaccounted or undisclosed income of the assessee has been utilised in making cash payment. The intent and purpose for which Section 40A(3) has been brought on the statute book has been clearly satisfied in the instant case. Therefore, being a case of genuine business transaction, no disallowance is called for by invoking the provisions of Section 40A(3) of the Act. Even after amendment of Section 40A(3) and Rule 6DD, given that there has been no change in the provisions of Section 40A(3) insofar as consideration of business expediency and other relevant factors are concerned, the same continues to be relevant factors which needs to be considered and taken into account while determining the exceptions to the disallowance as contemplated u/s 40A(3) of the Act so long as the intention of the legislature is not violated. As per

12 In view of the above discussions and considering the totality of facts and circumstances of the case, I do not find any merit for the disallowance made by the AO u/s 40A(3) of the Act. Accordingly, the AO is directed to delete the same.

0 In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 04/09/2020. ¼jes’k lh 'kekZ½ (Ramesh C. Sharma) ys[kk lnL;@ Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 04/09/2020 *Mishra