INCOME TAX OFFICER WARD-1(2)(3), BANGALORE vs. SHRI.ERAPPA KRISHNAPPA , BNAGALORE

The appeal filed by the revenue is directed against the order dated 26.11.2018 passed by Ld. CIT((A)-2, Bengaluru and it relates to the assessment year 2011-12. The revenue is aggrieved by the decision of Ld. CIT(A) in granting relief in respect of the following issues:- a) Disallowance of development charges - Rs.4,33,15,193/- b) Disallowance of payment for purchase of land - Rs.1,27,50,000/-

The first issue relates to the disallowance of development charges - Rs.4,33,15,193/-. The A.O. noticed that the assessee is carrying on real estate activity under the name “E.K. Land Developments”. The AO noticed that the assessee has claimed deduction of Rs.4,33,15,193/- as development expenses during the year under consideration. The A.O. further noticed that the assessee had shown development charges of Rs.7,74,05,400/- in the year relevant to the assessment year 2010-11. In the absence of details relating to development expenses, the A.O. had disallowed the above said amount in assessment year 2010-11 and the assessee had challenged the same by filing appeal before Ld. CIT(A) and the same is pending. It is noticed that the assessee has paid a sum of Rs.3,16,05,400/- by way of cash out of the above said amount of Rs.7,44,05,400/-. Accordingly, the outstanding balance towards development charges payable was shown at Rs.4,58,00,000/- as on 31.3.2011.

The A.O. noticed that the amount of Rs.4,33,15,193/- claimed as deduction during the year under consideration formed part of the expenditure of Rs.7,74,05,400/- disallowed in A.Y. 2010-11. Since the assessee did not furnish any documentary evidence in support of the claim to prove the genuineness, the A.O. disallowed the same. The A.O. also held that the provisions of section 40A(3) of the Income-tax Act,1961 ['the Act' for short] is also applicable, since the assessee has made the payment exceeding Rs.20,000/- by way of cash. Accordingly, he disallowed the sum of Rs.4,33,15,193/- on both grounds.

The Ld. CIT(A) noticed that appeal relating to assessment year 2010-11 has since been disposed of by the Tribunal in favour of the assessee, i.e., it was submitted before the Tribunal that the assessee had not claimed land development expenses of Rs.7,74,05,400/- as expenditure in assessment year 2010-11. It was submitted before the Tribunal that the land development expenses will be claimed proportionately in the subsequent years in proportion to sale of sites. The Tribunal accepted the explanations of the assessee and accordingly deleted the disallowance of Rs.7.74 crores made in AY 2010-11.

The Ld. CIT(A) appreciated that the assessee’s claim of Rs.4,33,15,193/- as development expenses during the year under consideration is the proportionate expenditure claimed by the assessee in respect of sale of sites effected during the year. The Ld. CIT(A) also noticed from the “ledger extract” that the individual payments made towards land development expenses was less than Rs.20,000/-. Accordingly, he held that the provisions of section 40A(3) of the Act are not attracted and accordingly deleted the addition.

We heard the parties on this issue and perused the record. As noticed earlier, the A.O. had made the disallowance of Rs.4,33,15,193/- on two grounds, viz., (a) absence of documentary evidence in support of expenses and (b) contraventions of provisions of section 40A(3) of the Act. However, the Ld. CIT(A) has addressed the issue of contravention of provisions of section 40A(3) of the Act, that too on examining the ledger extracts. It is not clear as to whether the documentary

We also notice that the expenditure of Rs.4,33,15,193/- claimed by the assessee formed part of Rs.7,74,05,400/-, which was incurred by the assessee during the year relevant to the assessment year 2010-11. As noticed earlier, the assessee has claimed proportionate expenditure relating to the whole of sites affected by it. Since the assessee has claimed the expenditure during the year under consideration, it is the duty of the assessee to prove the expenditure before the A.O. by furnishing relevant documentary evidences. Since the Ld. CIT(A) has also not examined the documentary evidences, we are of the view that this issue requires fresh examination at the end of the A.O. with regard to both the issues, viz., the genuineness of the expenses and applicability of section 40A(3) of the Act.

Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore the same to the file of the A.O. for examining it afresh.

The next issue relates to disallowance of land purchase expenses of Rs.1,27,50,000/- u/s 40A(3) of the Act. The A.O. noticed that the assessee has debited a sum of Rs.6,40,46,399/- towards cost of land. The A.O. noticed from the details furnished

Before Ld. CIT(A), the assessee submitted that the lands were purchased from agriculturist from places, where no banking facility is available and hence the above said payments are covered by exceptions given under rule 6DD of the I.T. Rules. Accepting the above said explanation of the assessee, the Ld. CIT(A) deleted the addition.

We heard the parties on this issue and perused the record. We noticed earlier that the assessee did not offer any explanation before A.O. with regard to the payment made by way of cash towards purchase of land. However, before Ld. CIT(A), the assessee has taken support of provisions of rule 6DD and the Ld. CIT(A) has also granted relief without properly examining the claim of the assessee. Under these set of facts, we are of the view that this issue also requires fresh examination at the end of the A.O. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore the same to the file of the A.O. for examining the claim of the assessee afresh.