PARK DEVELOPERS ,MUMBAI vs. INCOME TAX OFFICER 41(3)(3), MUMBAI
Income Tax Appellate Tribunal, MUMBAI “C” BENCH : MUMBAI
Before: SHRI VIKRAM SINGH YADAV & SHRI RAHUL CHAUDHARYAssessment Year : 2013-14
PER VIKRAM SINGH YADAV, A.M :
This is an appeal filed by the assessee against the order of the Learned
Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre
(NFAC), Delhi [„Ld.CIT(A)‟], dated 23-06-2025, pertaining to Assessment
Year (AY) 2013-14, wherein the assessee has challenged the sustenance of disallowance u/s. 40A(3) of the Income Tax Act, 1961 („the Act‟).
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2. 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
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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 4
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/-.
Against the said findings, the assessee carried the matter in appeal before the Ld. CIT(A), who has since sustained the said findings of the AO and against the said order, the assessee is in appeal before us.
During the course of hearing, the Ld. AR submitted that the AO while invoking the provisions of section 40A(3) of the Act has not just reduced the cost of land by an amount of Rs. 96,32,881/-, however, at the same time, he has brought the said amount to tax separately in the hands of the assessee. It was submitted that where the land cost has already been reduced, there is no question of bringing the said amount to tax separately in the hands of the assessee. It was accordingly submitted that the limited prayer of the assessee is that where the land cost stands reduced by virtue of disallowance u/s. 40A(3) of the Act, there cannot be a separate addition by bringing the said amount again to tax in the hands of the assessee.
Per contra, the Ld. DR has been heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A) and our reference was drawn to the findings of the Ld.CIT(A), which read as under:
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“2.5 Section 40A(3) of the Act provides that where an assessee incurs any expenditure in respect of which a payment (or aggregate payments) exceeding Rs. 20,000/- (applicable for AY 2013-14) is made to a person in a day, otherwise than by account payee cheque or bank draft, no deduction shall be allowed for such expenditure. The AO disallowed Rs. 96,32,881/- paid in cash for land purchases, as these payments exceeded the threshold and were not justified under Rule 6DD.
6 The appellant's argument that Section 40A(3) does not apply because no expenditure was claimed in the P&L account is misconceived in the context of its business. The AO correctly noted that the land is stock-in- trade, and its cost (including cash payments) forms part of WIP, which will be set off against future sales. As held in CIT v. Anil Bulk Carriers (P) Ltd. (2005) 275 ITR 454 (All), payments for stock-in-trade are business expenditures subject to Section 40A(3), even if capitalized in the Balance Sheet, as they contribute to the cost base deductible against revenue.
7 The appellant's contention that land purchases are capital expenditures outside Section 40A(3) is unsupported, as no evidence establishes the land as a capital asset. Even if considered capital, judicial precedents like Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC) are distinguishable, as they involved non-business assets, whereas here, the land aligns with the appellant's real estate business. The AO's finding that the land is stock- in-trade is consistent with the partnership deed and the WIP treatment.
8 The reduction of the land account by Rs. 96,32,881/- (from Rs. 106,25,51,940/- to Rs. 105,29,19,055/-) is a logical consequence of the disallowance, as the disallowed cash payments cannot form part of the asset's cost for tax purposes. This is supported by CIT v. Eicher Ltd. (2007) 294 ITR 310 (Del), where disallowed expenditures were excluded from asset costs.
9 The appellant's claim that the AO assessed income without receipts or accruals is incorrect. The disallowance under Section 40A(3) does not create income but adjusts the deductible cost base, increasing taxable income when the WIP is set off against sales. This is a standard application of the provision, as upheld in CIT v. A.K. Subbaraya Chetty & Sons (2003) 263 ITR 187 (Mad).
Section 40A(3) applies to the cash payments for land, as they are business expenditures related to stock-in-trade. The appellant's argument that no expenditure was claimed is untenable, and the reduction of the land cost is legally sound. This ground is dismissed.”
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7. Further, reliance was placed on the Co-ordinate Benches decision in the cases of Sunrise Integrated Textiles P. Ltd., vs. DCIT (in IT(SS)A No.16/Ahd/2018, dt. 22-03-2023) and in the case of Skill Promoters vs.
ACIT (in ITA No. 628/Hyd/2022 and others, dt. 31-10-2023).
We have heard the rival contentions and perused the material available on record. In the context of the limited prayer raised on behalf of the assessee, we find that the AO while invoking the provisions of section 40A(3) had disallowed the sum of Rs. 96,32,881/-, added to the assessee‟s returned income and the assessed income was determined accordingly. Secondly, the AO held that the land account of the assessee, appearing as fixed asset in the Balance Sheet will be reduced by the said amount and the land cost was revised to Rs. 1,05,29,19,059/- from 1,06,25,51,940/- after disallowance of Rs 96,32,881/- u/s. 40A(3) of the Act. The Ld.CIT(A) has upheld the findings of the AO stating that the reduction of the land account by Rs. 96,32,881/- (from Rs. 106,25,51,940/- to Rs. 105,29,19,055/-) is a logical consequence of the disallowance, as the disallowed cash payments cannot form part of the asset's cost for tax purposes. The Ld.CIT(A) has further held that the disallowance u/s 40A(3) does not create income but adjusts the deductible cost base, increasing taxable income when the WIP is set off against sales. Where the Ld.CIT(A) has held that disallowance u/s 40A(3) doesn‟t create income but adjusts the deductible cost base, we find that the same answers the limited prayer so raised on behalf of the assessee that where the land cost stood reduced by virtue of disallowance u/s. 40A(3) of the Act, there cannot be a separate addition by bringing the said amount again to tax in the hands of the assessee. In light of the same, we direct the AO to restrict his action by reducing the land cost by virtue of disallowance u/s 40A(3) of the Act and 7 not to make any separate adjustment/disallowance to the returned income.
In view of the aforesaid, other grounds of appeal so taken by the assessee have become infructious and thus, don‟t call for any separate adjudication.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 04-09-2025. [RAHUL CHAUDHARY] [VIKRAM SINGH YADAV]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai,
Dated: 04-09-2025
TNMM
Copy to :
1)
The Appellant
2)
The Respondent
3)
The CIT concerned
4)
The D.R, ITAT, Mumbai
5)
Guard file
By Order
Dy./Asst.