M/S SAMRUDHI DEVELOPERS,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-6(2)(1), BANGALORE

Brief facts of the case are as under: 2. The assessee is a firm having income from business. It filed its return of income on 28/09/2013 declaring total income of Rs.3,47,10,000/-. The return was processed under section 143(1) of the Act and the case was selected for scrutiny. Notice under section 143(2) of the Act was issued to assessee, in response to which representative of assessee appeared before the Ld.AO and called requisite details. 2.1 During the course of assessment proceedings, the Ld.AO observed that assessee debited sum of Rs.4,38,21,784/- to the P&L account by way of purchase of land. The Ld.AO treated the land purchased as stock in trade and the cash purchases incurred amounting to Rs.1,41,03,750/- as not allowable under section 40(A)(3) of the Act. The Ld.AO observed that, the payments were made in the name of Laughter Yoga Iternational Foundation, and not in the name of the vendors. 2.2 The Ld.AO called upon assessee to explain why the cash payment and checked payment made in the name of Laughter Yoga Foundation should not be disallowed. In response the assessee submitted that, it acted as agents of Society for acquisition of land and the amounts paid by the society were used to defray the expenses in connection with the purchase of land and ultimately the profit that is derived by assessee is nothing but commission for agency. The assessee submitted that instead of reflecting the income alone, they resorted to show the gross receipts and expenses relating to the project in the profit and loss account.

The Ld.CIT(A) was of the opinion that, assessee is in the business of real estate and has agreed to sell sites to the society. The Ld.CIT(A) was of the opinion that since assessee agreed to sell sites to the society, it had to acquire lands, develop it into sites, and sell the sites to the society. Thus the Ld.CIT(A) also concluded that assessee is not an agent of the society, and it is a contract between one principal and another principle. The Ld.CIT(A) upheld the addition made by the Ld.AO. 3.1 Aggrieved by the order of Ld.CIT(A), assessee is in appeal before us now. 3.2 Before us, the Ld.Counsel submitted that, assessee is a developer and agreed to sell residential sites to society for which it acquired lands. For purpose of acquisition it made payment of Rs.1,41,03,750/- by cash to the parties, which is disallowed by the Ld. AO under section 40(A)(3) of the Act. 3.3 The Ld.Counsel submitted that, assessee has also made payment in cheque to the said parties, which has been encapsulated in the assessment order at page 2. The agreements entered into with parties have been registered and stamp duty has been paid as per the market value.

On the contrary, Ld.Sr.DR relied on the orders passed by the Ld.CIT(A). He also placed reliance on the decision of Hon’ble Karnataka High Court in case of Nam Estates Pvt Ltd vs ITU reported in (2020) 428 ITR 186 that upheld the decision of coordinate bench of this Tribunal reported in (2013) 141 ITD 659. He submitted that assessee has not established that the vendors to whom cash payments were not made, do not have any bank accounts.

We have perused submissions advanced by both sides in light of records placed before us. 5.1 The only issue raised by assessee is in respect of the disallowance of cash payment made by assessee to various vendors for purchase of land, under section 40 (A) (3) of the Act. 5.2 We note that, the agreements are entered with the assessee through the power of attorney holders. Amongst the vendors there are few who are minors, who are represented by their natural guardians. Following are the reasons cited by assessee for which the cash payments have been made: