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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI JASON P BOAZ
this composite order.
2. The brief facts emerging from the records of these cases are that a search & seizure operation was carried out on 13-02-2009 in the group of Mohtisham Complexes (P) Ltd. The case of the assessee was taken up for scrutiny. The AO on receipt of the seized documents observed that these Documents shows the details of expenses incurred in cash by the assessee. The AO asked the assessee as to why the payment of Rs.1,09,09,277/- made in cash in violation of provisions of Sec.40A(3) of the Act should not be disallowed. In response to the query, the assessee filed written submission and contended that it has not incurred any expenditure, therefore, sec.40A(3)is not applicable. The AO rejected the contention of the assessee and placed reliance on the judgment of in the case of Attar Singh Gurmukh Singh Vs ITO (191 ITR 667)and held that the expenses incurred by the assessee was for acquisition of the land which is nothing but closing stock or work in progress for the purpose of sale in future after making improvement/development to the same in to residential/commercial units. Accordingly, the AO invoked the provisions of sec.40A(3) of the Act and disallowed a sum of Rs.1,09,09,277/-. The AO also made similar addition in the hand of M/s Mohitsham Estates Pvt.Ltd under the protective assessment. The assessee challenged the action of the AO before the CIT(A). The CIT(A) has deleted the addition made by the AO by observing that the assessee has not claimed these expenses and it has not been claimed even by M/s Mohitsham Complexes Pvt.Ltd. as they capitalised these expenses. The CIT(A) has also deleted the addition made by the AO in the hand of Mohitsham Complexes Pvt.Ltd under the protective assessment.
The revenue has raised the following grounds;
“ 1. The learned CIT(A) erred in fact and in law in holding that the cash expenses of Rs.1,09,09,277/- does not fall under the ambit of sec.40A(3) of the IT Act, 1961.
The learned CIT(A) erred in fact and in law in adjudicating the issue by admitting the additional evidence inform of development and memorandum of understanding without allowing the opportunity to the AO as required under rule 46A(3) and admitting such evidence without regarding any reason as required as per Rule 46A(2) of the Income Tax Rules”.
Before us the learned DR has heavily relied upon the finding of the AO and submitted that even if the expenditure was not claimed by the assessee for the year under consideration, it is nothing but closing stock /work in progress as this expenditure was incurred by the assessee for acquisition of land for the purpose of developing the residential/commercial projects.
4. On the other hand, learned AR has submitted that the assessee has not claimed these expenses in the P&L account rather, no P&L account was drawn, as being the first year of the assessee after incorporation. He has further submitted that this payment were made by the parent company of the assesee as an advance payment and therefore until and unless the transaction of acquisition was completed these payments cannot even been considered as capital expenditure. Thus, the learned AR has supported the order of the CIT(A) and submitted that when neither the assessee nor the parent company Mohitsham Complexes Pvt.Ltd claimed these payments as expenditure than no disallowance can be made u/s 40A(3) of the Act. In support of his contention he has relied upon the decision of the Delhi Bench dated 15-06-2015 in case of M/s Madhusdan Buildcon Pvt.Ltd Vs ACIT in ITA No.508(Del.)/2014.
We have considered the rival submissions and the material on record. The AO has noted from the seized material containing the details of payments made in cash that a total amount of Rs.1,09,09,277/- has been made in cash which is required to be disallowed in assessee’s hand for the year under consideration under the provisions of sec.40A(3) of the Act. The AO has not disputed that these payments were not made by the assessee but were made by its group concern M/s Mohitsham Complexes Pvt.Ltd on behalf of the assessee. The assessee claimed that these payments are only advance payment for acquisition of land for the purpose of development of the projects called ‘Celebration Project’. The same amount was also added in the hand of the M/s Mohitsham Complexes Pvt.Ltd. under protective assessment. The CIT(A) has deleted the addition made by the AO by recording the fact in para-5 & 6 as under;
“ The main issue that emerges out of the section is that sec.40A(3) contemplates that it is applicable only in case where the appellant incurs any expenditure;
1) It is a case where the appellant has not incurred any expenditure the assessee has no P&L account for the year as there was no business and there was no claim of expenditure that has been made by the appellant for AY: 2009-10.
2) The project has not materialized and therefore no expenditure has been charged to the P&L account.
3) There has been no expenditure by the appellant and no claims of expenditure has been made in the tax return.
4) The expenses has not been incurred by the appellant but M/s Mohitsham Complexes Pvt.Ltd in its capacity as the promoter.
M/s Mohitsham Estate does investments with M/s Mohitsham Complexes. Even the expenses incurred by M/s Mohitsham Complexes are only an advance towards a proposed project. These projects have not been registered and has not been registered and has not taken off. Therefore, I am of the opinion that the AO has not appreciated section 40A(3) and has made these additions on the basis of sec.40A(3) which is not correct. The AO has observed that the explanations filed by the assessee are not acceptable for the simple reason that the assessee has incurred the above expenses in violation of provisions of sec.40A(3) of the IT Act irrespective of whether this expenditure is claimed in P&L account or not.
It is relevant to note here that the assessee ha not claimed these expenses and it has not been claimed by Ms/s Mohitsham Complexes Pvt.Ltd as they have capitalized these expenses as they are capital in nature and they have been capitalized in their books of accounts. It is very simple proposition that these expenses have not been made by the assessee but have been made by Mohitsham Complexes who have also not claimed it and have capitalized in their books of accounts so, they would not fall under the ambit of sec.40A(3). In this context, the agreement was also produced before me which has also made it very clear that it is the M/s Mohitsham Complexes Pvt.Ltd who will make the payments. The development and memorandum of understanding is presented and is analysed. The development agreement has made it very clear that the Mohitsham Estate Pvt.Ltd has agreed to invest a particular amount. In consideration for their investment by M/s Mohitsham Estate Pvt.Ltd , M/s Mohitsham Complexes Pvt.Ltd (MCPL) shall take up the entire project develop it and promote it. They shall be responsible for the contacts, construction and shall bear the investment cost of the project and they shall make all miscellaneous expenses of the project.
Therefore, it is very clear that M/s Mohitsham Estate is a company which has just made investments and all the expenses regarding projects undertaken in regard to the Memorandum of Understanding has been done by M/s Mohitsham Complexes. Therefore, as far as M/s Mohitsham Estates are concerned, there are no investments, no P&L account has been drawn, no expenditure have been claimed and therefore, disallowance of expenses u/s 40A(3) in the hands of M/s Mohitsham Estate to the tune of Rs.1,09,09,277/- is not correct and is accordingly deleted”.
Nothing has been brought before us by the revenue to controvert the fact recorded by the CIT(A) that the payment was to be made by M/s Mohitsham Complexes Pvt.Ltd and the assessee in the development agreement agreed to invest a particular amount. Therefore, when the assessee has not claimed the payment in question as an expenditure than, the question of disallowance of the said amount u/s 40A(3) of the Act does not arise for the year under consideration. In the case of Madhusudan Buildcon Pvt.Ltd (Supra) the Tribunal held in para-2 to as under;
“ A careful perusal of this provision transpires that where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by account payee cheque etc. then, twenty percent of the amount paid in cash is disallowable. Thus, it becomes apparent that in order to invoke the provisions of sec.40A(3), it is sine qua non that the assessee must have incurred expenditure in respect of which such payment is made in cash. Sec.40A has the marginal note. Expenses or payment not deductible in certain circumstances. This section 40A has been placed under Chapter IVD of th ACT. Sub-section (1) of sec.40A provides that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head Profits and gains of business or profession.
3. A cursory look at the above provisions divulges that in order to make any disallowance under section 40A(3) it is a precondition that the assessee must have claimed deduction, directly or indirectly for which payment is made in cash exceeding the specified limit. Per contra, if the assessee has not claimed any deduction, directly or indirectly, even if the payment is made in cash, the provisions of the computation of income under the head Profits and gains of business or profession shall not apply to that extent and section 40A(3) will become non- operative.
In the situation, the assessee has made payment of Rs.1 lac in cash towards advance for purchase of a piece of land, but no deduction was claimed for this sum. The amount has been directly taken to the balance sheet and has been shown as advances under the head ‘Loans and advances”. Under such circumstance, when there is no claim for deduction of Rs.1 lac, the provisions of sec.40A(3) cannot be attracted for making any disallowance for a sum of Rs.20,000/- as this payment is not towards any expenditure incurred during the year and has not been claimed as deduction by the assessee. Thus, the addition is deleted”.
Therefore, in the circumstances of the case and following the order of the Tribunal in case of Madhusudan Buuildcon Pvt.Ltd (Supra) we do not find any error in the order of the CIT(A) in deleting the addition made by the AO u/s 40A(3) of the Act.
Similarly, in the case of M/s Mohitsham Complexes Pvt.Ltd the assessee has challenged the order of the CIT(A) deleting the addition n respect of the payment in cash of Rs.1,68,40,850/-.
We have heard the learned DR as well as the learned AR of the assessee and considered the material on record. There is no dispute that the assessee did not claim the said expenditure in the P&L account even the AO made protective addition in the hands of the assessee. In view of our findings in case of M/s Mohitsham Estates Pvt. Ltd. the impugned order of the CIT(A) on this issue is upheld.
Appeal by the assessee: Only issue raised by the assessee is disallowance u/s 40A(3) in respect of the expenditure claimed in the P&L account and payments were made in cash. The assesse challenged the action of the AO before the CIT(A( and contended that various amounts paid by the assessee are less than Rs.20,000/-.
Therefore, the provision of sec.40A(3) are not attracted. The CIT(A) did not accept the contention of the assessee and confirmed the action of the AO.
Before us learned AR of the assessee has referred to the arguments filed before the CIT(A) in respect of ground no.1 & 2 and submitted that the assessee raised a specific ground that several payments are below the limit of Rs.20,000/-and seized documents is a consolidation of several payments to various parties below the limit.
The learned AR further submitted that this fact was pointed out to the AO as it was recorded by the AO at page 4 of his order, but the AO has not discussed the fact while making the disallowance in question.
The learned AR has then pointed out that the CIT(A) has also not examined the fact that several payments were below the limit of Rs.20,000/- and therefore, the provisions of sec.40A(3) cannot be applied in respect of the said payments.
On the other hand, learned DR has submitted at the CIT(A) has considered the contention of the assessee and rejected the same on the ground that the assessee was unable to show the payments referred to are below Rs.20,000/- per day, as claimed by it.
In a rebuttal, the learned AR referred to the details of the payments as recorded by the AO in assessment order and submitted that the details itself show that various payments are below Rs.20,000/-. Thus, the learned AR pleaded the matter may be remanded to the AO for verification.
We have considered the rival submissions and material on record. The limited grievance of the assessee is that the AO made the addition u/s 40A(3) of the Act even in respect of the payment made in cash below Rs.20,000/-. Before the CIT(A), the assessee has specifically raised this point, however, the CIT(A) without going into the details and verification of the fact has rejected the argument of the assessee on the ground that the assessee was not able to show that the payments were of below Rs.20,000/-. We find that at page-9 of the assessment order, the AO had reproduced the details of the payment made in cash and claimed by the assessee as expenditure. Prima facie it appears that some of the payments are below Rs.20,000/- therefore, this fact has not been properly examined by the AO while making the disallowance u/s 40A(3) of the Act.
In the facts and circumstances of the case, we set aside this issue to the record of the AO for proper examination and verification of the claim of the assessee that certain payments are below the limit of Rs.20,000/-. The AO is directed to adjudicate the issue after giving an opportunity of hearing to the assessee.
In the result, the appeals of the revenue are dismissed and the appeal of the assessee is allowed for statistical purposes.
Pronounced in the open Court on the 17th July, 2015.