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Facts
The assessee, a real estate firm, purchased immovable properties for Rs. 27,34,800/- in cash. The Assessing Officer (AO) disallowed this amount under Section 40A(3) of the Income Tax Act, 1961, treating it as income. The CIT(A) upheld the disallowance.
Held
The Tribunal held that Section 40A(3) is not absolute and that considerations of business expediency are relevant. The assessee had proven the identity of sellers, explained the source of cash payments, and demonstrated that cash payment was due to the sellers' insistence and for business expediency.
Key Issues
Whether cash payments for purchase of immovable property are disallowable under Section 40A(3) when made due to business expediency and sellers' insistence, with proper documentation and source explanation.
Sections Cited
40A(3), 143(3), 143(2), 6DD
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, SMC BENCH, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA
Assessment Year: 2015-16 Yash Infratech v. The ACIT A-78, Indira Nagar Range 1 Lucknow (U.P) Lucknow TAN/PAN:AABFY1381R (Appellant) (Respondent) Appellant by: Shri P. K. Kapoor, C.A. Respondent by: Shri Sunil Kumar Rajwanshi, D.R. O R D E R
This appeal has been preferred by the Assessee against the order dated 20.06.2024, passed by the National Faceless appeal Centre, Delhi (NFAC) for Assessment Year 2015-16.
2.0 The brief facts of the case are that the assessee-firm was engaged in the business of sale and purchase of immovable properties. The return of income for the year under consideration was filed by the assessee on 27.09.2015, declaring a loss of Rs.27,78,683/-. The case of the assessee was selected for limited scrutiny under CASS. The Assessing Officer (AO) issued statutory notices to the assessee calling for details of transactions entered into by the assessee. The assessee filed details, vide letter dated 20.11.2017, from which it was noticed by the AO that during the year under consideration, the assessee’s stock-in-trade included three properties purchased during the year, amounting to Rs.27,34,800/- and the mode of payment was cash. The AO, therefore, disallowed the amount of Rs.27,34,800/- spent by the assessee for purchase of land in cash under section 40A(3) of the Income Tax Act, 1961 (hereinafter called “the Act’) and added the same to the income of the assessee. The AO completed the assessment under section 143(3) of the Act, assessing the total loss of the assessee at Rs.43,880/-.
2.1 Aggrieved, the Assessee preferred an appeal before the NFAC, which dismissed the appeal of the assessee by upholding the disallowance.
2.2 Now, the assessee has approached this Tribunal challenging the order of the NFAC, by raising the following grounds of appeal:
1. BECAUSE the Id. "CIT(A)" has grossly erred in not quashing the assessment order even though the Assessing Officer passing the assessment order had not issued the mandatory notice u/s 143(2) of the Act. 2.1 BECAUSE the addition of Rs.27,34,800/- made by the Assessing Officer u/s 40A(3) of the Income-tax Act, 1961 is beyond the scope of limited scrutiny for which the case of the assesse was selected for scrutiny assessment and on a due consideration of this fact alone the ld "CIT(A)" ought to have deleted the addition of the said amount. 2.2 BECAUSE the Id. "CIT(A)" has grossly erred in up-holding the addition of Rs.27,34,800/- u/s 40A(3) of the Income-tax Act, 1961, even though, the said addition was beyond the scope of limited scrutiny [for which the case was selected for scrutiny u/s 143(2)] and the Assessing Officer had not obtained necessary approval from the competent authority to expand the scope of scrutiny. WITHOUT PREJUDICE TO THE AFORESAID 3. BECAUSE the Id. "CIT(A)" has erred in law and on facts in confirming the addition of Rs.27,34,800/- u/s 40A(3) of the Income-tax Act, made by the Assessing Officer on the ground that the assesse had made cash payment for purchase of immovable properties in excess of limit specified under the said provisions of the Act. 4, BECAUSE while upholding the addition of Rs.27,34,800/- the Id. "CIT(A)" failed to appreciate that the provisions of section 40A(3) of the Act are not attracted in the present case as the immovable properties purchased by the assessee during the year by making cash payment of Rs. 27,34,800/- remained in the closing stock and no deduction of the said amount was claimed by the assesse while computing the total income for the assessment year under appeal.
5. BECAUSE while upholding the addition of Rs.27,34,800/- u/s 40A(3) of the Act, the ld. "CIT(A)" failed to appreciate the un-disputed fact that the cash payment of the said amount was actually made by the assesse to the sellers of the properties which transactions are duly evidenced by the registered sale deeds and thus the genuineness of the payments could not have been questioned. 6.1. BECAUSE while upholding the addition of Rs.27,34,800/- u/s 40A(3) of the Act, the ld. "CIT(A)" has completely mis-read/misinterpreted the recital in the sale deeds so as to erroneously observe that the assesse had already paid 50% of the sale consideration earlier as advance. 6.2. BECAUSE as per the material and information on record, it is clearly evident that the assesse had drawn the requisite amount of cash from his bank account on the date of execution/registration of sale deeds before making the payment of sale consideration to respective sellers.
7. BECAUSE the authorities below failed to appreciate that the cash payment of Rs.27,34,800/- made by the assesse for purchase of the immovable property was covered by the exceptions provided in Rule 6DD of IT Rules read with sub section (3) and (3A) of section 40A of the Act.
8. BECAUSE while upholding the addition of Rs.27,34,800/- u/s 40A(3) of the Act, the ld. "CIT(A)" has omitted to consider various case authorities relied upon by the assesse.
9. BECAUSE the order passed by the ld. "CIT(A)" is based on presumption, surmises and conjectures and without considering the facts and circumstances of the case and law applicable thereto.
BECAUSE the order appealed against is contrary to facts, law and principles of natural justice.
BECAUSE each ground taken in appeal is mutually exclusive and without prejudice to each other. 12 The appellant craves leave to add, delete or modify any of the grounds before or at the time of hearing of appeal. 3.0 The Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that the AO has disallowed payment made for the purchase of land in cash by invoking the provisions of section 40A(3) of the Act read with Rule 6DD of the Income Tax Rules, 1962, without appreciating that the identity of the sellers had been established, the source of payment was also explained and further the impugned payment was made in cash only on account of business expediency under unavoidable and exceptional circumstances. It was submitted that once the identity and the source of payment are established, there would be no occasion of loss to the Revenue even if the payment has been made in cash. The Ld. A.R. further submitted that the lower authorities have not appreciated the fact that the assessee was engaged in the business of real estate and that the impugned payment for purchase of land was made in cash owing to the business expediency, because the land was required to be purchased in furtherance of the business and the deal would have been cancelled by the sellers if the payment was not made in cash, and that it was only at the insistence of the sellers that the cash payment was made. It was also submitted that cash payment was made after withdrawals from the bank accounts of the assessee on the same day the cash payment was made and, therefore, even the source was very much explained. The Ld. A.R. further argued that even Rule 6DD of the Rules provides that Section 40A(3) was not absolute and was to be applied having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. It was submitted that the exceptions provided are, thus, not exhaustive but only illustrative. The Ld. A.R. placed reliance on numerous judicial precedents being orders of various Benches of the Tribunal as well as the Hon'ble Apex Cour, wherein relief had been allowed to the assessee vis-à-vis disallowance made under section 40A(3) of the Act. These judicial precedents have been included by the assessee in the paper book submitted by the assessee and are as under:
Vikrant Happy Homes (P.) Ltd. vs. DCIT reported in [2022] 138 taxmann.com 559 (ITAT, Pune).
Vijayeta Buildcon (P.) Ltd. vs. ACIT reported in [2021] 123 taxmann.com 133 (ITAT, Jaipur).
A. Daga Royal Arts vs. ITO reported in [2018] 94 taxmann.com 401 (ITAT, Jaipur). 4. ITO vs. Standard Leather (P.) Ltd reported in [2016] 76 taxmann.com 109 (ITAT, Kolkata)
Attar Singh Gurmukh Singh vs. ITO reported in [1991] 191 ITR 667 (SC).
CIT vs. Suresh Kumar Agarwal reported in 249 ITR 113 (Alld.). 3.1 The Ld. A.R. also drew my attention to Circular No.220 dated 31.05.1977 issued by the C.B.D.T. regarding exceptions provided to section 40A(3) of the Act.
3.2 The Ld. A.R. submitted that in the light of the above cited judicial precedents, Circular and the facts of the case, the impugned addition be deleted.
4.0 Per contra, the Ld. Sr. D.R. supported the orders of the AO as well as the Ld. First Appellate Authority and submitted that the fact remained that there was violation of the provisions of section 40A(3) of the Act read with Rule 6DD of the Rules and, therefore, the lower authorities had rightly made and sustained the disallowance. It was prayed that the appeal of the assessee be dismissed.
5.0 I have heard the rival submissions and have also perused the material on record. It is seen that the assessee is a partnership firm and is engaged in the business of real estate development and sale and purchase of plots. During the year under consideration, the assessee had purchased three properties from three different sellers, to the tune of Rs.27,34,800/- in cash and the AO proceeded to disallow the entire purchase amount in terms of the provisions of section 40A(3) of the Act. It was the assessee’s submission before the Ld. First Appellate Authority that the purchase of these lands were vital for the purpose of business of the assessee but since the sellers had insisted for payments in cash only, on account of business expediency, the assessee had no other option but to make payment for purchases in cash after withdrawing the amount from the bank accounts. It was submitted that the sellers’ names and addresses were fully disclosed in the Sale Deeds and the sellers were also identified by their Voter IDs. It was further explained that the cash was handed over in front of the concerned Sub-Registrars and the same was also evident from the Sale Deed itself, wherein it had been specifically mentioned that the sellers had obtained consideration in cash at the time of execution of the Sale Deeds. The assessee had also demonstrated before the Ld. First Appellate Authority that the payments made in cash could be linked to the cash withdrawals from the bank accounts of the assessee on the same day. Thus, it emerges that the assessee had established the identity of the sellers, had duly explained the source of payments and had also established that the payments were made in cash because of business expediency, that being insistence of the sellers to receive payments only in cash.
5.1 It is seen that by now it has been consistently held by the various Hon'ble Courts that the terms of section 40A(3) of the Act are not absolute and the considerations of business expediency and other relevant factors cannot be excluded and that genuine and bona fide transactions cannot be visited with the rigors of section 40A(3) of the Act. The Hon'ble Jurisdictional Allahabad High Court in the case of CIT v. Suresh Kumar Agarwal reported in 249 ITR 113, following the judgment of the Hon'ble Apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra), had held that it was always open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in section 40A(3) of the Act was not practicable or would have caused genuine difficulty to the payee.
5.2 In the present case, it is seen that the assessee did prove the identity of the sellers, established the source of payments made in cash and also gave reasons why the impugned payments were made in cash. The Hon'ble Apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (supra) has observed that Rules must be interpreted in a manner so as to advance and not to frustrate the object of the Legislature. The Hon'ble Apex Court further observed that given that there has been no change in the provisions of section 40A(3) of the Act, insofar as the 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 in section 40A(3) of the Act so long as the intention of the Legislature is not violated. It was further observed by the Hon'ble Apex Court that section 40A(3) of the Act must not be read in isolation or to the exclusion of Rule 6DD of the Rules and if these two are read together, it will be clear that the provisions are not intended to restrict the business activities.
5.3 In my considered opinion, the present case will fall under the exception provided and, therefore, I have no hesitation in holding that once the assessee has given an explanation regarding the necessity to make the impugned payments in cash, the AO could not have legally made the impugned disallowance without establishing that the assessee’s explanation was false. Accordingly, I allow the grounds raised by the assessee, in this regard, and set aside the order of the ld. CIT(A) with a direction to the AO to delete the impugned addition.
5.4 Since no arguments were made by either of the sides on ground Nos.1, 2 and 2.2 and rlief has already been allowed to the assessee on other grounds, these grounds have become academic and are not being adjudicated upon.
6.0 In the final result, the appeal of the assessee stands partly allowed.
Order pronounced in the open Court on 19/09/2025.