PARK DEVELOPERS ,MUMBAI vs. INCOME TAX OFFICER 41(3)(3), MUMBAI

Briefly the facts of the case are that the assessee filed its return of income declaring total income of Rs. 5,63,780/-. It was selected for scrutiny and notices were issued calling for the necessary information/ documentation. During the course of assessment proceedings, from the perusal of the bank statement of the assessee, the AO observed that there were several cash withdrawals which have been made by the assessee amounting to Rs. 96,32,881/- which were utilized by the assessee towards purchase of land and a show cause was issued as to why the provisions of section 40A(3) of the Act should not be invoked and the amount of Rs. 96,32,881/- should not be disallowed. In response, the assessee submitted that the payments are made towards purchase of property and towards land development, the land will be part of investment and is not debited to the Profit & Loss Account and will be part of capital work-in- progress which will be capitalized as investment. It was submitted that none of the provisions of the Income Tax Act prohibit the payment of cash for purchase of land or right in land of the assessee. It was submitted that since the assessee did not debit any expenses to the Profit & Loss Account and has not claimed any expenditure during the year under consideration, question of disallowance of expenditure u/s. 40A(3) of the Act does not arise for consideration.

The submission so filed by the assessee were considered, but not found acceptable to the AO. The AO referred to the partnership deed of the assessee-firm, wherein the parties have agreed to carry on the partnership activity of buying, developing and selling of immoveable property on ownership, lease or any other basis, construction of building on the properties acquired and/or arranged by the firm consisting of flats, shops, offices, units and other premises and to sell such flats, shops, offices, units and other premises on ownership or lease or any other basis and referring to the same, the AO held that though the assessee is showing land in the fixed assets, but the land is not purchased for the purposes of investment, but to further develop or treat them and, therefore, the purchase of land by the assessee and further development would partake the character of business. Therefore, the provisions of section 40A(3) of the Act clearly applies in the case of the assessee. Thereafter referring to various payments made by the assessee, during the year to various persons in excess of Rs.20,000/-, the AO has held that the provisions of section 40A(3) of the Act are clearly applicable as the assessee has failed to explain as to how its case falls under any of the exceptions carried out in terms of proviso to section 40A(3) r.w. Rule 6DD of the Income Tax Rules. Referring to the plea of the assessee that it has purchased fixed assets and the said cash payments are made in relation to purchase of fixed assets, the AO held that the assessee has purchased the land which is to be treated as stock in trade and all the construction expenses are added to its cost in the form of work-in-progress which will be set-off against the said sale consideration on regular basis. Thus, the cost of land as well as all other expenses including the cash payments are essentially assessee‟s cash expenditure against the assessee‟s sale consideration arising out of construction of project and, therefore, the plea of the assessee that the above cash payments fall outside the purview of section 40A(3) of the Act cannot be accepted. The AO further held that the assessee had made payments in cash to the persons, who does not hold PAN or whose PAN are not available. Therefore, these payments clearly defeats the very basics of the section 40A(3) of the Act and such an expenditure cannot be allowed. Further it was held that the land so purchased is in the locality which is very well served with the banking facilities, therefore, there is no reason as to why the payments is made by the assessee in cash to the same persons. The AO accordingly held that the payment made by the assessee-firm in cash for purchase of land are squarely covered under the provisions of section 40A(3) of the Act and, therefore, an amount of Rs. 96,32,881/- was disallowed and added back to the assessee‟s total income. The AO further held that this will also have the effect on the land account of the assessee, appearing as fixed asset in the Balance Sheet which will be reduced by the said amount which after disallowance u/s. 40A(3) of the Act stand revised to Rs. 1,05,29,19,059/- from 1,06,25,51,940/-.