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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’
Before: SHRI N.V VASUDEVAN & SHRI S RIFAUR RAHMANShri Pillamuniswamappa,
Date of Hearing : 31-08-2015 Date of Pronouncement : 04 -09-2015 O R D E R PER SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER :
This appeal by the assessee is against the order of the Commissioner of Income-tax (Appeals) – II at Bangalore dated 10- 01-2014 relating to the assessment year 2008-09.
The assessee, a real estate developer, filed his original return of income for the asst. year 2008-09 on 29.9.2008 declaring the total income at Rs.42,19,716/-. Initially return of income was processed u/s 143(1) and subsequently, the assessment completed u/s 143(3) by determining the total income at Rs.84,06,090/-. Two additions made by the AO in the order of assessment that is challenged in this appeal is the disallowance of Lay out formation expenses of Rs.21,86,375 and another sum of Rs.20,00,000 u/s.40A(3) of the Income Tax Act, 1961 (Act).
Aggrieved, by the aforesaid additions the assessee filed an appeal before CIT(A). The learned CIT(A) dismissed the appeal of the assessee. Hence this appeal by the Assessee before the Tribunal.
The main issue in this case is: a) Disallownace of layout formation expenses of Rs.21,86,375.
The AO had noticed that the assessee sold a property to Kammagondanahalli Sri Maruti Seva Samithi for a consideration of Rs.8,02,25,000/- from which the assessee reduced the cost of acquisition, layout formation expenses of Rs.1,04,81,985/- and labour charges of Rs.10,14,600/-.
Assessing Officer noted that the assessee made 37 payments amounting to Rs.21,86,375/- on various dates from 5/12/2007 to 27/2/2008 after the sale of the property in respect of layout formation charges. As per the terms of the agreement between the Assessee and Kammagondanahalli Sri Maruti Seva Samithi, the Assessee has to bear all expenses of formation of lay-out. The price agreed between the parties was inclusive of those expenses. The assessee made a representation that the above expenditure had to be made as part of contract and further pointed out that since the lay-out was not formed by laying road and providing other amenities as per the contract, the vendor had withheld the payment of Rs.1,04,25,000/-. The said payment withheld was realized only after incurring the aforesaid expenses and completing the lay-out formation as per the agreement.
The Assessee realized the sale proceeds of the lay-out only on 27/2/2008.
The AO rejected the contention of the assessee, as the expenditure incurred had been incurred on a property on which the assessee had transferred all his right and interest to the purchaser through the deed of indenture and thus, the assessee was not entitled to the deduction of expenditure. The CIT(A) confirmed the order of the AO. b) Disallowance u/s 40A(3): Rs.20,00,000/-
The AO noted that a payment was made to Shri Chandre Gowda for purchase of materials towards layout formation, through a bearer open cheque of Rs.20,00,000/-. The Assessing Officer disallowed the expenses as this contravenes the provisions of sec. 40A(3) of the Act and accordingly brought to tax. The same was confirmed by the CIT(A).
Aggrieved, by the order of the CIT(A) the assessee has filed the present appeal.
During the course of hearing, Learned AR submitted that the assessee had entered into agreement to sell on 15.2.2007 with the vendor. As per Clause 4 of the agreement to Sell which reads as under, the Assessee had to incur expenditure for formation of lay-out:
“4. The vendor and the Vendee hereby mutually agree that i. The vendor has to complete the work of layout formation i.e Earth filling of the layout to make it uniform surface, construction of 15 feet compound walls including foundation with size stones on the southern part of the property as the adjacent property is a rain water fed Big Lake and 10 feet wall on other sides, Digging of 2 borewells and construction of 2 borewells Sheds, Laying of water pipeline and construction of culverts, construction of entry gate with iron grills measuring 15 feet x 7 feet. ii. The sale deed has to be registered before 30th Nov, 2007. iii. The vendee has the right to hold payment of the sale consideration or part of the sale consideration till the vendor completes the work of layout formation as stipulated in sub-calsue i. of clause 4 herein above. Further, the vendee at any point of time can stop payments of cheque being issued by him to the vendor in consideration of this agreement if the layout work is delayed.”
9. It was submitted by the learned counsel for the Assessee that the conditions specified in the agreement to sell are mandatory and is a subsisting contract between the seller and buyer. The seller is bound to comply with the terms of the agreement. The conditions specified in the agreement to sale are mandatory and is a subsisting contract between the seller and the buyer and the seller is bound to comply with the terms of the agreement. The seller could not complete the work as specified in clause 4 of the agreement to sale before the sale is complete as he was not enough funds to complete the work and the buyer has not paid the consideration of sale to the seller since the seller has not completed the work as specified in clause 4 of the agreement to sell. The seller could not raise so much money and hence could not complete the work as specified in clause- 4 of the Agreement. The buyer was insisting for immediate registration of the property as specified in clause 4 of the agreement to sell and has requested the seller to complete the pending work as in clause 4 and register the property. Since the work was pending and the buyer was persisting to register the property as specified in clause 4 of the agreement to sale, both the buyer and the seller have mutually came to an understanding and agreed that the sale deed be registered to comply the terms in clause 4 of the agreement to sale so that the seller will get the full consideration and could complete the pending work after the sale deed is executed. Accordingly the sale deed was executed and the buyer has paid the consideration and the seller has completed the work as specified in clause 4 of the agreement after the sale deed is completed as the seller got the consideration on execution of the sale deed. It was therefore submitted that the disallowance made by the Revenue authorities should be deleted.
10 Learned DR argued that the stand taken by the AO and CIT(A) was justified and in accordance with law.
Heard both sides of the arguments and material facts on the record. The revenue does not dispute that the expenditure in question was to be incurred by the Assessee as per the terms of the agreement for sale with Kammagondanahalli Sri Maruti Seva Samithi. Though there is a reference to absence of evidence to substantiate the incurring of expenditure by the Assessee, it is clear from the order of the AO that the required bills and evidence was filed by the Assessee before the AO. The only reason given by the AO and CIT(A) was that the sale deed was registered even before the expenditure was incurred and the Assessee as on the date of incurring the expenditure was not owner of the property. In our view the approach adopted by the Revenue authorities are unsustainable in law. But for incurring of the aforesaid expenditure the Assessee would not have been able to realize the sale consideration. It was part and parcel of the agreement that the Assessee has to incur these expenses. We are of the view that even though the expenditure incurred after the execution of the deed by the assessee, there existed a commitment in relation to such sale by plain reading of clause ‘4’ of the agreement to sale deed. It is binding on the assessee. Moreover, the payment of Rs.1,04,25,000/- was withheld by the purchaser for completion of the layout formation.
Only on completion of the layout formation expenditure, the assessee was able to recover the above said amount on 28/2/2008. The Assessing Officer was not right in holding that the right and interest on the property had been already transferred before such expenditure.
There is no dispute that such expenses were incurred by the assessee.
In our view, the assessee is eligible to claim the expenditure for the obligation existed even after sealing of the agreement. The relevant ground of appeal of the Assessee is accordingly allowed.
12. Disallowance u/s 40A(3) : The learned counsel for the Assessee submitted on the aforesaid disallowance, that the assessee had issued an account payee cheque for a sum of Rs.20,00,000/- to Mr. Chandre Gowda. In view of difficulties expressed by Mr. Chandre Gowda in realizing the account payee cheque he requested the Assessee to make a material alteration making the account payee cheque as bearer cheque. It was therefore owing to some urgency in meeting some office commitments that such a request was made and the day on which it was encashed happened to be Friday i.e., 29/2/2008. It was in such circumstances that the Assessee had cancelled the crossing of the cheque and allowed Mr. Chandra Gowda to draw the funds from the bank.
13. Learned DR submitted that the stand of the AO & CIT(A) is justified and in accordance with law.
14. Heard both sides and material on record, there is no dispute that the assessee had issued an open bearer cheque to Shri Chandre Gowda for Rs.20,00,000/-. This was a clear violation of the provisions of Sec.40A(3) of the Act and therefore the disallowance had to be made.
Even though the assessee contested that the cheque was issued under special circumstances and business exigencies, in fact, the assessee had contravened the provisions of sec. 40A(3) of the Act. Hence, we dismiss the relevant ground of appeal of the assessee.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on the 4th Sept, 2015.