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Income Tax Appellate Tribunal, CHENNAI ‘B‘ BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI DUVVURU R.L. REDDY
आदेश /O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
These appeals filed by the Department are directed against different orders of the Commissioner of Income-tax (Appeals)-6, Chennai for the assessment years 2009-10, 2010-11 and 2011-2012.
First we take up ITA No:-1828/Mds/2015 for adjudication:- The Revenue has raised the following grounds of appeal:-
‘’2.1. The Id. CIT(A) ought to have appreciated that the AO had made the disallowance on account of non-deduction of TDS on the architect fee and the assessee ought to have complied with the provisions of section 40(a)(ia) of the Act. 2.2. The Id. CIT(A) ought to have appreciated that the assessee having deducted TDS for a portion of rent, failed to deduct for another portion on the same claim. 2.3. The Id. CIT(A) ought to have appreciated that as per section 40(a)(ia) of the Act, the tax has to be deducted by the assessee on the payments made irrespective of whether paid or payable and that non-deduction of tax warrants action u/s 40(a)(ia) of the Act. 2.4. The Id. CIT(A) ought to have appreciated that in the case of Vector Shipping Services (P) Ltd., "Assessee a shipping company claimed deduction of salary paid to employees of Company M which performed ship management work on its behalf - Assessing Officer disallowed expenses under section 40(a)(ia) on ground that TDS was not deducted on such expenses - Commissioner (Appeals) and Tribunal deleted disallowance by recording finding that M had deducted TDS on salaries paid by it on behalf of assessee and no amount remained payable at year end." The SLP filed by the department in the above case was dismissed by the Hon'ble Supreme Court in limine. 2.5 In the case onhand, the payment was made to lorry hire charges before 31st March, without deduction of TDS. There are difference decisions of various High Courts tor and against the issue u/s 4U(a)(la). However, the Board's view as per Circular NO.10/DV/2013 in F.No.279/Misc/M- 61/2012-IT J(Vol-II), dated 16.12.2013 that the provision of section 40(a)(ia) of the Act would cover not only the amounts which are payable as on 31st March of the previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a)(ia) of the Act, the term "payable" would include "amounts which are paid during the previous year". 2.6. The issue involved in CIT Vs. Vector shipping Services (P) Ltd. is completely different. The TDS was deducted by the person, who received the amount from Vector Shipping Services before disbursement of salary.
2.7. The Id. CIT(A) ought to have appreciate the recent decision of the Hon'ble Punjab & Haryana High Court in the case of P.M.s. Diesels Vs. CIT (ITA Nos.716 of 2009 (O&M), 130 of 2012 and 171 & 188 of 2014, dt.29.04.2015), wherein it was held that requirement to deduct tax at source under section 194C is mandatory and in case of assessee's failure to do so in respect of contractual payments, disallowance has to be made u/s 40(a)(ia) irrespective of fact as to whether assessee is following cash or mercantile system of accounting. 3.1 The Id. CIT(A) ought to have appreciated that the assessee had not submitted sufficient proof before the AO regarding its claim of development expenses which is in the nature of over and above the guideline value of the lands. 3.2 The Id. CIT(A) ought to have called for remand report under Rule 46A while admitting fresh evidences that which were not produced before the Assessing Officer. 3.3 The Id. CIT(A) ought to have appreciated that the assessee although has claimed to have paid the difference of market value and the guideline value in cheque, this is only the on-money that has been paid to the landowners. 3.4 The Id. CIT(A) ought to have appreciated that the on- money paid even by way of cheque cannot be considered as a legal payment.
3.5 The Id. CIT(A) ought to have appreciated that the assessee ought to have proved the market value in the light of the jurisdictional Judgement in the case of J.V.K. Rao (131 Taxman 65)(Mad) wherein it was observed that Fixation of market value depends on several factors inclusive of the area of the property, location and proximity of the area, comparative genuine instances of sale, guideline value, annual rental value in case of urban properties, future potential for development, etc’’.
The brief facts of the case are that the assessee during the 3. assessment year 2009-10, claimed various expenses, like architect fee etc of �17,70,000/- - without deducting any TDS and also made short deduction of TDS on expenses to the extent of �13,74,438/--. Hence, the Assessing Officer invoked the provisions of section 40(a)(ia) of the Act and disallowed the same.
On appeal before the Ld. Commissioner of Income Tax (Appeals) ld. 4.
Authorised Representative submitted that all the payments considered for disallowance u/s. 40(a)(ia) of the Act were already paid as on 31.03.2009, and were not outstanding as ‘’payable’’ at the end of the financial year, hence the provision of Sec. 40(a)(ia ) of the Act has no application. Ld. Commissioner of Income Tax (Appeals) observed that as
per the provisions of Sec. 40(a)(ia) of the Act, the expenses mentioned u/s. 30 to 38 of the Act should not be allowed as deduction while computing the taxable income under the head ’’income from business/profession’’ unless necessary tax is deducted at source and remitted into Govt account within the due date to file the return of income u/s. 139(1) of the Act. Ld. Commissioner of Income Tax (Appeals) relying on the decision of Allahabad High Court in the case of Vector Shipping Services P. Ltd 357 ITR 642 held that the provisions of Sec. 40(a)(ia) of the Act are applicable only if the amounts are payable and outstanding as on 31st March of the relevant financial year. In the present case, since the assessee has already paid the above amount, the same cannot be disallowed. The ld. Commissioner of Income Tax (Appeals) deleted the disallowance. Aggrieved, the Revenue filed an appeal before us.
We have heard both the parties and perused the material on record. We are of the opinion that the issue stands settled against the assessee by the judgment of Hon’ble Supreme Court in the case of M/s.
Palam Gas Service vs. CIT in Civil Appeal No.5512 of 2017, dated 03.05.2017 wherein it was held as under:-
‘’15 Ms. Dhugga invited our attention to a judgment of the Division Bench of Madras High Court in Tube Investments of India Ltd. v. Assistant Commissioner of Income-Tax (TDS), [2010] 325 ITR 610 (Mad). The Division Bench referred to the statistics placed before it by the Department which disclosed that TDS collection had augmented the revenue. The gross collection of advance tax, surcharge, etc. was Rs. 2,75,857.70 crores in the financial year 2008-09 of which the TDS component alone constituted Rs.1,30,470.80 crores. The Division Bench observed that introduction of Section 40(a)(ia) had achieved the objective of augmenting the TDS to a substantial extent. The Division Bench also observed that when the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory’’.
Accordingly, this ground of the appeal of the Revenue is allowed.
6. Next ground raised by the Revenue is that ld. Commissioner of Income Tax (Appeals) ought to have appreciate that the assessee had not submitted sufficient proof before the ld. Assessing Officer regarding its claim of development expenses which is in the nature of over and above guideline value of the lands.
The facts of the case are that the assessee company in its 7. P&L account claimed an amount of �1,27,95,950/-- by way MRF project development expenses, in addition to the land purchase cost of �2,78,87,167/-. When assessee were asked for details of the project development expenses, the assessee before the Assessing Officer explained that the amount of �1,27,95,950/- represents the payments to the land owners over and above the guideline value of the lands. However the Assessing Officer did not accept the assessee's contentions. Observing that the assessee has not proved the genuineness of the payments, the Assessing Officer in his order disallowed the payments of �l,27,95,950/- which were shown as MRF project development expenses, for the want of proof, and added to the total income of the assessee. Aggrieved, assessee filed an appeal before ld. Commissioner of Income Tax (Appeals).
8. Ld. Commissioner of Income Tax (Appeals) observed that the assessee is in real estate business and has undertaken various projects. One of such project is MRF project. During the financial year 2008-09, the assessee started acquiring lands for the MRF project. The lands acquired for this project are basically agricultural lands and all the land owners are the local agriculturists. As could be seen from the ledger extract (of MRF - Project Purchases a/c), the total payments made by the assessee during the year are �s4,06,83,117/ -. However, in the final statements, Rs.2,78,87,167/-, being the guideline value of the agricultural lands purchased, was shown as "Project Purchase Account Towards Cost of Land" and the balance of Rs.1,27,95,950/-, being the amount paid over and above the guideline value, was accounted as "Development Expenses". This facts is further supported by the fact that all the payments i.e. "Project Purchase Account Towards Cost of Land" of Rs.2,78,87,167/-, as well as the "Development Expenses" of Rs.1,27,95,950/-, are paid by account payee cheques to the same land owners on the same dates. All these payments are also made from only one bank account of the assessee, i.e. Canara Bank Perambalur Branch. The details of the purchases of agricultural lands for MRF project, names and the address of the land owners and their payments towards the cost (guidelines value) and the additional payments being the difference between the market rate and guide line. These amounts are also paid by account payee cheques from the same bank account of the assessee, on the same dates. In fact, all the payments i.e. payment of guideline value (as cost) and also the additional amount (as development cost) are shown in the ledger account of the "MRF - Project Purchases" in the books of the assessee. This account also contains the details of cheque numbers and the amounts of the payments made to the land owners. Thus, the payments to the land owners, over and above the guideline value, are genuine. Since the payments are made to the land ownership relation to and for the purpose of purchasing the lands, these expenses form part and parcel of the land cost and allowable as deduction. Therefore, it was not probable to hold that the assessee has not furnished the evidences/proof for the payments. Considering all these facts, the ld. Commissioner of Income Tax (Appeals) directed the ld. Assessing Officer to allow the expenses. Against this, the Revenue is in appeal before us.
We have heard both the parties and perused the material on record. In this case before the ld. Commissioner of Income Tax (Appeals) assessee produced details regarding purchase of lands for M/s.
MRF (guideline) and additional payments and also details of the Canara Bank account. On this basis, ld. Commissioner of Income Tax (Appeals) came to the conclusion that payments was made to the land owners over and above guideline value which was made towards purchase of lands and hence he deleted the addition. These fresh evidence required to the confronted to the ld. Assessing Officer for his comments which was not done by the ld. Commissioner of Income Tax (Appeals). Hence, there is violation of Rule 46A. So the issue is remitted back to the file of the ld. Assessing Officer for fresh consideration. The ground of the appeal of the Revenue is partly allowed for statistical purpose.
In the result, appeal of the Revenue in ITA 1828/Mds/2015 is partly allowed for statistical purpose.
11. Now, we take up & 1796/Mds/2015 for assessment years 2010-11 and 2011-2012 for adjudication.
12. First common ground raised by the Revenue in these two appeals is with regard to disallowance u/s.40A(3) of the Act. We adjudicate the facts as narrated in ITA No.1785/Mds/2015.
Facts of the case are that the assessee is a private limited 13. company and engaged in the business of real estate and construction activities. The Assessing Officer during the course of assessment proceedings noticed that the assessee had incurred expenses in cash in excess of Rs.20,000/- amounting to �42,91,739/-. The Assessing Officer asked the assessee for the details and reasons for the payments in cash. The assessee, explained that these amounts were paid to various land owners who insisted of cash payments only and this was a common practice in the real estate business. Having not satisfied with explanations of the assessee, the Assessing Officer disallowed the said cash expenses amounting to �42,91,739/- and added to the total income of the assessee. Aggrieved, assessee filed an appeal before ld. Commissioner of Income Tax (Appeals).
Ld. Commissioner of Income Tax (Appeals) observed that these expenses are in relation to purchase of lands required for assessee's business and the related expenses like registration/ stamp duty expenses paid, developmental expenses. The major portion of the expenses (to the extent of Rs.33,60,000/-) included the purchase costs of the lands required for the assessee's projects. In most of the real estate businesses, especially in the rural areas/farmers etc, the sellers of the lands do insist for cash payments, which is an unavoidable situation in the real estate business. As held by the Co-ordinate Bench of the Tribunal in the case of Assistant Commissioner of Income Tax Vs. Jubliee Plot & Housing Private Limited -ITA No.1097(Mad.)/2011 dated 21.03.2103, purchase cost of the lands in a real estate business can be treated as exempted under the Rule 6DD and hence cannot be subjected to the provisions of section 40A(3) of the Act. In view of the decision of the Tribunal in the above case, ld. Commissioner of Income Tax (Appeals) was of the opinion that the payments towards the purchase cost of the land of Rs.33,60,OOO/- can be considered as exempt under Rule 6DD and hence the same cannot be subjected to the provisions of section 40A(3) of the Act. Similarly, the expenses like registration/ stamp duty expenses paid etc, amounting to Rs.5,OO,935/- are also covered by the exceptions under Rule 6DD of the Act and hence falls outside the purview of the provisions of section 40A(3) of the Act. The land developmental expenses of various projects. The total amount involved here is �4,30,804/- which is incurred for various projects. These expenses are basically in the nature of fencing expenses, labour charges etc. Most of the expenses are individual expenses incurred by the assessee under the category of statutory limits of Rs.20,OOO/- each. Only while accounting the expenses, the assessee, in its books, consolidated the expenses and accounted together. Hence in the books it appeared that the expenses are above Rs.20,OOO/-. Hence the above expenses do not fall under the purview of section 40A(3) of the Act. Hence, ld. Commissioner of Income Tax (Appeals) observed that the Assessing Officer is not justified in invoking the provisions of section 40A(3) of the Act and disallowing the above expenses. Accordingly, he deleted the additions made by the Assessing Officer, is deleted. Against this, the Revenue is in appeal before us.
We have heard both the parties and perused the material on 15. record. The ld. Authorised Representative relied on the decision of the Co-ordinate Bench of the Tribunal in the case of ACIT vs. K.M.
Vidhyasagar in 1340/Mds/2011, dated 21.03.2014, wherein it was held as under:-
5. Heard both sides. Perused orders of lower authorities and decisions relied on. The Assessing Officer disallowed cash payments made by the assessee under section 40A(3) of the Act. There is no dispute that all these transactions are made in the course of assessee’s business of purchase and sale of plots and the transactions are all genuine. The question now for consideration is whether assessee made these payments in the course of carrying on the business of purchase and sale of plots and considerations of business expediency and other relevant factors are relevant for the purpose of section 40A(3) or not?
The Hon’ble Gujarat High Court in the case of Anupam Tele Services (supra) held that provisions of Rule 6DD(j) are not exhaustive and considerations of business expediency and other relevant factors are not excluded from the provisions of section 40A(3) of the Act. This is also clear on reading from the provisions of section 40A(3) of the Act. The Commissioner of Income Tax (Appeals) elaborately considered the submissions of the assessee as well as case laws and came to the conclusion that provisions of section 40A(3) are not attracted in the assessee’s case observing as under:-
“5. The main issue for rendering decision in this appeal is with reference to the applicability of the provisions of Section 40A(3) of the Act to the facts of the case and according to the Appellant the said provisions of the Act are wrongly applied inasmuch as the nature of the business of the Appellant necessitated him to make payments in cash for purchase of lands as land owners did not believe in receiving cheques and wait for its encashment. During the course of assessment proceedings, it was submitted that the Appellant on his part should also get the profit registered immediately as the competitors would snatch away the property meant for sale. Therefore, it was pleaded before the Assessing Officer that considering the business carried on by the Appellant being a marketing agent for plots and flats in deriving brokerage income the exceptional commercial expediency would justify his prayer for not applying the provisions of Section 40A(3) of the Act.
6. In so far as the payment being the sale consideration for the transaction of purchase of property in Harrington Nagar, the Assessing Officer has erroneously applied the provisions of Section 40A(3) of the Act to make the disallowance of ` 4O,OOO/- being 20% of Rs.2,OO,OOO/- paid to Mrs. Devi Mohan inasmuch as the transaction of cash payment towards sale consideration was effected on 12.9.2005 being the beginning of the week, Monday and consequent to the commercial expediency the payment of Rs.2,OO,OOO/- being the sale consideration was made to the seller of the property. According to the Appellant, the sale consideration paid for the purchase of property under consideration would be outside the purview of the provisions of Section 40A(3) of the Act and on the touchstone of purposive theory, it is submitted that having accepted the purchase of land in the identification of the seller of the property as well as the identification of the transaction of purchase of land in the hands of real estate operator/the Appellant herein, the provisions of Section 40A(3) of the Act are erroneously applied.
7. In the decision rendered by the Gahuwati High Court in the case reported in 240 ITR 902, it was held as follows: "From a perusal of the decisions of different High Courts referred to above, it clearly emerges that the purpose of Section 40A(3) of the Act is not to penalize the assessee for making cash payment of an amount of Rs2,5OO/- or above. The purpose is only to preventive and to check evasion of tax and flow of unaccounted money or to check transaction which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transactions"
The Appellate Tribunal in the case reported in 93 TT] 912 has held after considering the decision of the Apex Court reported in 191 ITR 667 as follows:- "The Hon'ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted that Section 40A(3) of the Act is intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce the chances of use of black money for business transactions. In the present case, it is seen that the assessee for purchase of rice, paid the amount directly to the bank account of the payee. The effect of issue of crossed cheque/DD is that the payee named therein receives the payment through banking channels. The purpose is dual. In the first instance, it is to see that payee and payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transaction. In the case before us, it is seen that instead of issuing cheque/DD, the assessee prepared a Challan and along with the cash the Challan was presented to the bank of the payee for the credit of the same in the account of payee. In the result, it is ensured that the payee and payee alone receives the payment and the origin and conclusion of transaction is traceable. Thus, payment of sum directly in the bank account of payee fulfils the criteria for ensuring the object of introduction of Section 40A(3). This is not a direct payment to the payee but only to the credit of its bank account without the payee actually receiving the cash. We accordingly hold that such payment is not in violation of provision of Section 40A(3) and hence no disallowance is called for."
9. In the case reported in 274 ITR 534 the Gujarat High Court as discussed the issue under consideration especially where the practicality of the payment, should be judged from the view of businessmen and not the Assessing Officer in following words:
Held that Section 40A(3) was intended to serve the objective of checking tax evasion and ensure that payments exceeding Rs.2,500/- are made by crossed cheque or bank draft so that it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was made out of income from disclosed sources. The Section is mandatory and there is no discretion left with the taxing authority under this sub-section to allow expenditure which does not comply with it. The rigour of the rule contained in this sub-section is, however, relaxed to some extent by the second proviso to the said sub-section shall be made where any such payment is made otherwise than by a crossed cheque or a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Those guidelines will have to be borne in mind while interpreting the provisions of the relevant rules enacted by the competent authority, so that by a constricted or artificial construction of those rules, the very object of the legislature is not frustrated."
The provisions of Section 40A(3) of the Act are not absolute in its term and accordingly where there is a finding that the seller has insisted on cash payment and the payment is genuine, then the amount could not be disallowed on technical grounds. The above view is fortified and taken by the Allahabad High Court in the case reported in 217 ITR 431.
10. The Calcutta High Court has held in the case reported in 247 ITR page 13 that a payments in cash reflected in books of accounts cannot be disallowed invoking Section 40A(3) of the Act.
Similarly, the decision reported in 251 ITR 640 and another decision reported in 250 ITR 738 have reiterated that liberal view should be taken in the consideration of Rule 6DD(j) where there are compelling or mitigating circumstances.
The meaning of the word ‘practicable’ in the ordinary parlance must prevail in the context of Rule 6DD(j) and in the object of the enactment namely, to relax the rigour of Section 40A(3) of the Act in genuine and bonafide cases to avoid hardship and harassment is borne in mind and according to the word 'practicable' under the present scenario must signify wider scope so as to capable of being put into practice, done or accomplished in the available means and resources. 13. If we analysis the crux of the second proviso to section 40A(3), there are three factors (shown in brackets as (1), (2) and (3) hereunder) to be considered before making any disallowance under this sub-section. 14. The second proviso to section 40A(3) clearly states as follows:
Provided further that no disallowances under this sub- section shall be made where any payment in a sum exceeding [twenty]thousand rupees is made otherwise than by [an account payee cheque drawn on a bank or account payee draft], in such cases and under such circumstances as may be prescribed (1), having regard to the nature and extent of banking facilities available (2), considerations of business expediency and other relevant factors(3).
Hence before making any disallowance u/s 40A(3) the AO has to take in to consideration of the above three factors being 1. circumstances specified under Rule 6DD, 2. extent of banking facilities available and 3. the consideration of business expediency and other relevant factors.
The AO having accepted the payments for purchase of lands which are supported by the deeds and books of accounts ought to have considered the business expediency and other relevant factors before making such disallowances.
A view has been taken that the circumstances set out in Rule 6DD(j) are illustrative and not exhaustive and the Assessing Officer has to take into account the surrounding circumstances and considerations of business expediency.
18. Another activity of the Appellant in the real estate is to act as a POA holder for the sellers (land owners) to sell their properties to their customers for earning profit there from. The Appellant had also acted as a mediator/facilitator/agent between the purchasers and sellers of the lands for getting brokerage/commission without incorporating his name in the Deed of Sale.
19. For the present Assessment Year, the Appellant had returned an income from these activities to the extent of Rs.54,54,944/- and after recomputation the Appellant had shown the brokerage income at a revised figure of Rs.87,89,865/-, for which a tabulation is given in page 8 of the impugned order. Considering the applicability Section 40A(3) of the Act the Assessing Officer at page 9 of the impugned order had accepted the stand of the Appellant on the non- applicability of the said provision in the Act. However, for the transactions tabulated in pages 9 & 10 of the impugned order, the Assessing Officer invoked Section 40A(3) of the Act and made disallowance of Rs.79,663/-. In the light of the decision of the Madras High Court reported in 282 ITR 117, it is submitted that the payments on a single day which were below Rs.20,OOO/- would not attract the provisions of Section 40A(3) of the Act.
20. The Assessing Officer further disallowed Rs.12,390/- invoking Section 40A(3) of the Act on the brokerage paid to the extent of Rs.61,954/- to Basheer Ahmed and R. Muthu on Rs.79,663/- made u/s 40A(3) of the Act in the acceptance of grounds raised in the present proceedings. The above decision is rendered
in tune with order given on the similar issues reflected in the other part of this order. On the consideration of facts and arguments, the payment made to Mrs.Devi Mohan for purchase of property on 12.9.2005 would not attract the provisions of Section 40A(3) of the Act inasmuch as the identity of the recipient and source for the sale consideration having been not disputed, the disallowance under consideration is not warranted on the facts and in the circumstances of the case.
With regard to the addition of Rs. 40,000/- being 20% of Rs. 2,00,000/-, paid to Mrs. Devi Mohan for puchase of property on 12.9.2005 would not attract the provisions of section 40A(3) of the Act inasmuch as the identity of the recipient and source for the sale consideration having been not disputed.
Similarly the addition of Rs.2,20,OOO/- invoking Section 40A(3) of the Act, the purchase of lands through the employees of the Appellant having been not disputed the transaction under consideration and further not disputed the source for the payments, the provisions of Section 40A(3) of the Act are erroneously invoked and applied to the facts of the case.
The Assessing Officer disallowed Rs4,00,000/- invoking Section 40A(3) of the Act relating to the property purchase transaction from a company called S.A.K.Developers. The transaction took place on 1.1.2006 and the Appellant paid cash of Rs.20 Lakhs.
The Assessing Officer disallowed Rs.10,OOO/- invoking Section 40A(3) of the Act relating to the property purchase transaction with Mr.Dwarakanath Reddy. The transaction took place on 25.1.2006 and the Appellant paid cash of Rs.50,OOO/-.
The Assessing Officer disallowed Rs.57,600/- invoking Section 40A(3) of the Act relating to the property purchase transaction with R.Saravanan. The transaction took place on 8.3.2006 and the Appellant paid cash of Rs.2,88,OOO/-.
The Assessing Officer disallowed Rs.57,600/- invoking Section 40A(3) of the Act relating to the property purchase transaction with Mrs.Babitha Bhandari. The transaction took place on 25.3.2006 and the Appellant paid cash of Rs.2,88,OOO/-.
The Assessing Officer disallowed Rs.5,39,OOO/- invoking Section 40A(3) of the Act relating to the property purchase transaction with R.Paranthaman. The transaction took place on 10.2.2006 and the Appellant paid cash of Rs.26,95,OOO/-.
I have gone through the assessment order as well as the submissions given by the AR of the appellant and also the case laws relied by the appellant. The AO is of the opinion that since the cash payments were made and accordingly he disallowed 20% of the expenses u/s.40A(3). However, the AR of the appellant pleaded that for the nature of the business the appellant involved i.e. real estate on the second proviso to section 40A(3) section 40A(3) is clearly applicable to this case and further he has filed the additional submissions as under :- "January 1st was a holiday and hence the payment of 20 lakhs to SAK developers in any event would not be hit by the provisions of section 40A(3) of the Act. The real estate sector was doing really well during 2005 to 2007 and the owners were willing to sell only on immediate cash payments. Most of the properties dealt by the Appellant were situated at villages which did not have any banking facilities. Even if the owners were in some cases at Chennai, the Appellant had paid cash basically on the trade practice and consideration of the business expediency as explained below in this sector: In practical situation, the agent/middle man brings the property documents along with POA copy etc and represents the owner. The real owner in most of the cases will not come and deal the property.
The agent takes the purchaser / Appellant to the site verification, coordinates with the legal team etc and accepts the cash or cheque on owner's behalf and in many cases signs the sale deed as a POA holder.
The above practice was followed consistently in this trade as the agent/middle man fixes an "X" rate with the purchase/Appellant and may give in many cases to the land owners "X minus Y", the "Y" being his margin. By this way the middle man makes more money as a project income rather than a traditional type of charging a regular 2% commission. This practice was also followed by the Appellant himself and had offered the margin by him as 'project income'. In this method the Appellant fixes a price with the proposed seller and a different price with the proposed buyer and retain the difference with him, showing the same as 'project income'."
Further I have also gone through the decision in the case of Commissioner of Income Tax vs. P.Pravin And Co. 274 ITR 534 wherein it is held that the rigour of the rule may be relaxed in consideration with the business expediency and other relevant factors. The appellant deals in real estate business where the competition is very high and the element of cash payment is very much in vogue.
Respectfully following the ratio followed in CIT vs. P.Pravin And Co. 274 ITR 534 the provision u/s 40A(3) may not attract in the appellant case and accordingly the AO is directed to delete the addition of Rs. 14,16,253/- ( Rs. 13,24,000 + 79,663 + 12,390).
In the result, the appeal is allowed.”
On going through the above order of the Commissioner of Income Tax (Appeals), we find that assessee has made payments to various parties for purchase of plots / paid brokerage in the course of carrying on its business of purchase & sale of plots/flats. All these payments were made in view of business expediency and transactions are genuine.
8. The Hon’ble Gujarat High Court in the case of Anupam Tele Services Vs. ITO (supra) held as under:- It could be appreciated that Section 40A and in particular sub-clause (3) thereof aims at curbing the possibility of on money transactions by insisting that all payments where expenditure in excess of a certain sum
[in the present case twenty thousand rupees] must be made by way of account payee cheque drawn on a bank or account payee bank draft. As held by the Apex Court in case of Attar Singh Gurmukh Singh [Supra], ". In our opinion, there is little merit in this contention. Section 40A(3) must not be read in isolation or to the exclusion of rule 600. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A (3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions.” The Hon’ble High Court observed that the Hon’be Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO (191 ITR 667) held that the provisions of section 40A(3) are not intended to restrict the business activities. There is no restriction on the assessee on his trading activities. The terms of section 40A(3) are not absolute. The genuine and bonafide transactions are not taken out of the sweep of the section and considerations of business expediency and other relevant factors are not excluded. The provisions of section 40A(3) and Rule 6DD are intended to regulate business transactions and the prevent the use of unaccounted money or reduce the chances to use black money for business transactions.
9. Here in the present case, it is not the contention of the Revenue that transactions are not genuine and payments
were all undisclosed money. It is not the case of Revenue that payee was not identified or payee denied the receipt of money. Therefore, taking totality of the facts and circumstances of the case into consideration and the case laws, we are of the view that Commissioner of Income Tax (Appeals) has rightly deleted the disallowance following various decisions. We sustain the order of the Commissioner of Income Tax (Appeals) and dismiss the grounds raised in both the appeals of the Revenue.
15.1 In the present case, an amount of �33,60,000/- was said to be paid for the purchase of lands. Ld. Commissioner of Income Tax
(Appeals) deleted the addition on the reason that assessee was in real estate business and payments were made to the farmers in the rural area namely Pudhupattinam. However, it is not clear to whom the amounts were paid and whether they have bank account or not. If the payments were made to the farmers and they have no bank account, the provisions of Sec. 40A(3) of the Act cannot be applied. Another payment of �5,00,935/- was made towards registration expenses. Ld.
Commissioner of Income Tax (Appeals) observed that it fell under exemption under Rule 6DD of the Act, however, here also names of the persons to whom it was paid was not mentioned. Another payment of �4,30,804/- which were incurred towards various projects like fencing, labour charges, metal purchase etc. The ld. Commissioner of Income
Tax (Appeals) deleted the same since the payments were less than
�20,000/- and consolidated payments was �4,30,804/-. However, the findings of the ld. Assessing Officer is contrary to his facts. Hence, in the interest of justice, we remit the entire issue to the file of the ld.
Assessing Officer to see to whom it was paid and any reasonable cause for making payments in violation of the Act. Similarly is the position in on this issue. Accordingly, the issue relating to disallowance u/s. 40A(3) of the Act in both the years is remitted back to the file of the ld. Assessing Officer for fresh consideration.
Next ground raised by the Revenue in is 16. with regard to disallowance of bad debts claimed by the assessee at �50,00,000/-.
Facts of the case are that during the relevant assessment year 17.
2011-2012, the assessee debited in its Profit and Loss account a sum of �50,00,000/- by way of bad debts written off. The ld. Assessing Officer disallowed the bad debts claimed by the assessee on the ground that the amount was only an advance given for the purpose of purchase of land and hence did not satisfy the conditions laid down u/s. 36(2) of the Act.
He added a sum of �50,00,000/- to the total income of the assessee
Ld. Commissioner of Income Tax (Appeals) observed that the amount, which is claimed as a bad debt, was an advance given for purchase of property at Anna Nagar, Chennai. The property was for the assessee's business purposes, and as mentioned above, the assessee is engaged in the business of real estate and construction activities. The assessee has been acquiring properties regularly from several persons, for the purpose of its real estate business. In most of the cases, the purchase transactions are materializing. However, in some cases, the transactions are not materializing and in few cases the advances are not received back by the assessee. Therefore the advance of �50,00,000/- was given for the purpose of business and during the ordinary course of business. Normally when a debtor becomes bad, it can be written off in the books as a bad debt and can be claimed as an allowable deduction while computing the taxable income under the head ‘’business income’’. Normally, the debts could be either trade debts or loan/advance debts. The former debts are on account of the trading transactions like sale of material/ goods, rendering of services, etc. When these amounts become bad, they can be written off as bad debts and the same are allowable u/s.36(1)(vii) of the Act. In these cases, the condition is that these amounts should have been offered to tax in the earlier years. The other types of debts are on account of loans and advances made by the assessee. These loans/advances could be of two types, i.e. (i) those advanced during the ordinary course of business and for the purpose of business, and (ii) other loans and advances. The loans and advances given in the ordinary course of business and for the purpose of business, when becomes bad, can be claimed as bad debts written off. Such bad debts written off in the books are allowable u/s..28 itself and not u/s.36(1) (vii) of the Act. For example, advance given to a supplier of raw material, if becomes bad, can be claimed as bad debt u/s.28 of the Act. Whereas the other types of loans, which are not connected to the business, cannot be written off as bad debts when becomes non-recoverable. it can clearly be seen that the advance under consideration of write off as 'bad debt' is the advance given to the landlord for the purpose of purchasing the property. There are no disputes in this regard. The land advances are for the purpose of acquiring properties for the assessee's real estate business and hence clearly forms an 'advance for the purpose of business'. Thus, these property advances to the land owners are for the purpose of business and during the ordinary course of carrying on the business. Subsequently, the land owner, whom the advance was given, has neither given (sold) the property to the assessee, where the advance could be adjusted against the sale consideration to be paid, nor returned the money (advance). Further, the assessee has also undertaken various steps but failed in recovering the amount. Only when the chances of recovering the amounts have become difficult, the assessee had written off these property advance, that too after waiting for periods of several years. It is also important to mention here that the said landlord has also written back the said amount and offered to tax in his hands in his return of income filed for A.Y.2012-13.Further, ld. Commissioner of Income Tax (Appeals) observed that as held by the Apex court in the case of CIT v. Abdullabhai Abdulkadar (1961) 41 ITR 545 (SC), in every case the test is, was the debt due as an incident to the business; if it is not of that character it will be a capital loss. The High Court of Madras in the case of CIT v. Dhanalakshmi Corporation [1962] (46 ITR 1031)(Mad.) also held that the advances made in the course of the normal trading activity, are eligible for write off as bad debts. Further, as held by the Supreme Court in the case of CIT v. Mysore Sugar Co. Ltd. [1962] (46 ITR 649)(SC), to find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is opt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are for what purpose was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstances, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses. Similar views were also expressed by the High Court of J&K in the case of Chenab Forest Co v. CIT [1974](96 ITR 568)(J&K). In the instant case the assessee's property advance to the landlords is a common practice in the case of real estate business. The advances to land owners is a routine and common phenomenon in the cases of real estate business and accordingly becomes incidental to the carrying of the business. Such business advances, when becomes bad and irrecoverable, becomes eligible for deduction, as 'bad debts written off. In fact, these advances, which are written off in the books, can be claimed as revenue expenses u/s.37(1) of the Act itself, as held by the Apex court in the case of CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC). Further, according to ld. Commissioner of Income Tax (Appeals) the writing off the bad debts, either u/s.28 or u/s.37(1), is akin to the provisions of section 36(1)(vii) of the Act, except that there is no requirement of including the amounts in computing the income of the assessee in the earlier years (for write off u/s.28). The provisions of sec.36(1)(vii) of the Act deals with the writing off the bad debts, subject to the conditions stipulated in the sub-section (2) of sec.36. As per the provisions of sec.36(2), only the debts which have been taken into account while reckoning the income in any of the earlier years, are eligible for allowance u/s.36(1)(vii) of the Act. Thus, it is clear that only the amounts which are included in the computation of income in the earlier years is eligible for deduction as bad debts. Further, with the change in the provisions of 36(1)(vii) of the Act, the only requirement was to write off the bad debts in the books of accounts. It makes no difference whether the assessee has taken sufficient steps to recover the debts or not. Even pendency of the cases before the courts is not a bar to write off the bad debts. Further, as held by the Hon'ble Supreme Court in the case of TRF Vs CIT (323 ITR 397) (SC), once an amount is written off as bad debt in the books of accounts the same has to be allowed u/s.36(1)(vii). Accordingly, ld. Commissioner of Income Tax (Appeals) allowed the assessee’s claim of bad debts written off and directed the ld. Assessing Officer to allow the assessee ‘s calim of bad debts of �50,00,000/-. Aggrieved, the Revenue is in appeal before us.
We have heard both the parties and perused the material on record. The claim of the assessee was that assessee is in the business of real estate. An amount of �50,00,000/- was advanced for purchase of land at Anna Nagar, Chennai. Since the deal was not materialized the said sum was claimed as bad debts. For claiming bad debts, the following conditions has to be fulfilled u/s. 36(1) (vii) of the Act.
‘’vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year : Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause :
Explanation For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee’’ ;
The assessee shall written off the debts as it is irrecoverable and such debts has been taken into account which computing income of the assessee for the previous year in which the amount of such debts or part thereof is written off or of an earlier previous year, or represent money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee, if was lent in the ordinary course of business, the assessee has to prove the above facts. First of all, nothing has been proved by the assessee before the ld. Assessing
Officer. However, the ld. Commissioner of Income Tax (Appeals) observed that assessee has fulfilled the conditions laid down u/s. 36(1)
(vii ) of the Act r.w.s 36(2) of the Act. He has not mentioned on what basis he came to that conclusion. In our opinion, the matter requires a re-examination from the end of the ld. Assessing Officer, whether assessee actually lent money towards purchase of the land. If it is advanced towards purchase of land in the assessee’s real estate business then only writing off the same is allowed as bad debts. With these findings, we remit the issue back to the file of the ld. Assessing
Officer for fresh consideration.
In the result, the appeals of the Revenue in 1796 and 1828/Mds/2015 are partly allowed for statistical purpose.
Order pronounced on Wednesday, the 21st day of June, 2017.