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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD & SHRI ARUN KHODPIA
आदेश / ORDER PER RAVISH SOOD, JM : The present appeal filed by the assessee is directed against the order passed by the CIT(Appeals)-II, Raipur dated 25.11.2019, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income-Tax Act, 1961 (for short ‘the Act’) dated 21.12.2017 for assessment year 2015-16. Before us the assessee has assailed the impugned order on the following grounds of appeal:
“1. In the facts and circumstances of the case and in law, the ld. Commissioner of Income tax (Appeals) has erred in disallowing Rs.45,65,300/- u/s.40A(3) of the Income Tax Act, 1961 although no expenditure was claimed in this regard. 2. In the facts and circumstances of the case and in law, the ld. Commissioner of Income tax (Appeals) has erred in invoking section 69C of the Income Tax Act, 1961 which operates totally on different field and is not applicable to the facts of the case. 3. The impugned order is bad in law and in facts. 4. The appellant reserves the right to add, alter, amend, omit or withdraw all or any of the grounds of appeal in the interest of justice.”
Controversy involved in the present appeal hinges around the sustainability of the disallowance of Rs. 45,65,300/- made by the A.O u/ss. 40A(3)/69C of the Act.
Shorn of unnecessary details, the assessee who is engaged in the business of a real estate contractor and land broker had during the year
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under consideration purchased certain immovable properties aggregating to an amount of Rs.45,65,300/- , as under:
Although, it was submitted by the assessee that the aforementioned properties were purchased by him as investments and no expenditure as regards the same was claimed as a deduction, however, the A.O holding a conviction that as the assessee was engaged in the business of purchase/sale of land and developing the same by carving out residential plots, thus, did not find favour with his aforesaid explanation. The AO after relying on certain judicial pronouncements and taking cognizance of the fact
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that the cash payments aggregating to Rs.45.65 (supra) did not fall within the realm of the exceptions carved out in Rule 6DD of the Income-Tax Rules, 1962, held that the assessee had made the aforesaid payments in contravention of the provision of Section 40A(3) of the Act. At the same time, it was observed by the A.O that as the assessee had failed to come forth with any plausible explanation as regards the source of the aforesaid expenditure, therefore, the same even otherwise was to be treated as an unexplained expenditure and added to his income u/s.69C of the Act. Accordingly, the A.O on the basis of his aforesaid deliberations vide his order passed u/s.143(3), dated 21.12.2017 after, inter alia, making the aforesaid addition/disallowance assessed the income of the assessee at Rs.71,73,469/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(Appeals) but without any success in so far the aforesaid addition/disallowance u/ss. 40A(3)/69C of the Act were concerned.
The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.
We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on
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record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.
Ostensibly, a perusal of the assessment order reveals that the A.O had made addition of the aforesaid amount of Rs.45.65 lac (supra) under both the Sections i.e 40A(3) and Section 69C of the Act. As is discernible from the orders of the lower authorities, it transpires that the properties in question, viz. (i) property at Risali, Ward No.63, Patwari Halka No.19/22, Khasra No.420/19 [purchased by the assessee and shown as an investment in his balance sheet for the year ending on 31.03.2015]; and (ii) property at Farid Nagar, Ward, Patwari Halka No.14/19, Khasra No. Naya 1911 [purchased in the name of Shri Rishav Sukla, minor son of the assessee out of gift received from the assessee], were claimed by the assessee to have been purchased as investments. It was the claim of the assessee that that now when no expenditure as regards the investments made by him in the aforesaid properties was claimed as a deduction while computing of his income for the year under consideration, therefore, no part of the same could have been disallowed under sub-section (3) of Section 40A of the Act. In sum and substance, it was the claim of the assessee that now when the expenditure incurred on acquisition of the aforesaid properties was in the nature of a capital expenditure, therefore, disallowance made by the A.O u/s.40A(3) of the Act was beyond comprehension.
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Before proceeding any further we deem it fit to cull out the provisions of Section 40A(3) of the Act, which reads as under: “(3) where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees no deduction shall be allowed in respect of such expenditure.” (emphasis supplied by us) On a perusal of the aforesaid statutory provision, it transpires that the same contemplates declining of the assessee’s claim for deduction of an expenditure, which is not found to be in conformity within the methodology therein contemplated, i.e., the expenditure in excess of an amount of Rs.20,000/- which is paid in a day otherwise than by an account payee cheque or bank draft is to be disallowed while computing the income of the assessee under the head ‘Profits and gains of business or profession’. Clearly the aforesaid statutory provision had been tailor made to cater to a specific purpose, i.e, disallowing a claim for deduction of an expenditure, and thus, would not take within its sweep any such payment that had not been claimed by the assessee as an expenditure for the purpose of computing his income under the head “Profits and gains of business or profession”. In sum and substance, where the payment made by the assessee has not been claimed as an expenditure for the purpose of computing his income under the head “Profits and gains of business or profession”, then, de hors any such claim of deduction no question of disallowance of the same would arise
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at all. Our aforesaid view is fortified by the order of this tribunal in the case of M/s C.G Housing Company Vs. The ITO-1, Bhilai, ITA No. 80/RPR/2019 and that of the ITAT, Delhi Bench ‘D’ in the case of Jasmine Buildtech (P) Ltd. Vs. ACIT, ITA No.1767/Del/2013 dated 21.11.2017. In the case of Jasmine Buildtech (P) Ltd. (supra), it was observed by the Tribunal that when no payment was claimed by the assessee as an expense, then, there could not be any question of disallowing the same by triggering the provisions of Sec.40A(3) of the Act. For the sake of clarity the relevant observation of the Tribunal is culled out as under: “8. Now coming to the disallowance u/s 40(A)(3), similar pleas taken by the assessee to the effect that when no payments were claimed as expense the question of deduction does not arise and in the case of a group company namely Westland Developers P. Ltd. vs. ACIT, I.T.A .No. 1752/Del/2013 (Assessment Year-2006-07) a coordinate bench of this Tribunal held as follows: "10. We have also taken ourselves through the judgement of the Jurisdictional High Court in the case of CIT vs Industrial Engineering Projects Pvt. Ltd. (cited supra) which has been relied upon before us for the proposition that reimbursement of expenses cannot be treated to be a Revenue receipt. How the judgement of the Apex Court in Tuticorin Alkali Chemicals & Fertilizers is applicable to the facts of the present case has not been set out in the order of the authorities nor has the Ld. DR been able to address the applicability of the said judgement to the issue at hand. We have taken ourselves through the said judgement and seen that it proceeds on entirety different facts and circumstances and has no applicability to the facts of the present case. Consequently, it is seen that from the ratio of the judgements relied upon before the CIT(A) and also before us which have been discussed in the earlier part of this order no arguments have been advanced by the Revenue so as to contend how they are not applicable to the case at hand, no distinguishing fact, circumstance or position of law has been relied upon so as to come to a contrary finding than the one arrived at. Accordingly on a consideration of the peculiar facts and circumstances of the case and the judgements relied upon
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considering the relevant provision of the Act namely Section 40A(3), we hold for the detailed reasons given hereinabove that Section 40A(3) of the Act has been wrongly invoked as admittedly no expenses relatable to the addition has been claimed and the assessee has successfully demonstrated that the payment were re- imbursement made by CWPPL." 9. We have perused the orders in the group company's cases and it is held in both M/s IAG Promoters and Developers Pvt. Ltd. and Westland Developers P. Ltd. that when the payments are not claimed as expense no disallowance arises. We, therefore, hold that disallowance u/s 40(A)(3) is not sustainable and the same has to be deleted. We direct the AO to do so. Grounds of appeal on this aspect are answered accordingly.” Also, a similar view had been taken by the Tribunal in the case of Kanshi Ram Madan Lal Vs. Income Tax Officer Vs. ITO, (1983) 3 ITD 290 (Del). Referring to the purposive legislation behind the insertion of Sec. 40A(3) vide the Finance Bill, 1968 it was observed by the Tribunal that the aforesaid statutory provision did not take within its sweep capital expenditure.
Ostensibly, the aforesaid statutory provision, i.e. sub-section (3) of Section 40A of the Act only contemplates disallowance of the assessee’s claim for deduction of an expenditure which is incurred in a manner otherwise than that therein provided. Our aforesaid conviction is further fortified from a perusal of the budget speech of the Finance Minister on 29th May, 1968, wherein explaining the underlying reason for making available Sec. 40A(3) on the statute it was stated by him as under : “45. Tax liability is sometimes artificially reduced by diverting profits to relatives and associate concerns in the form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often
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with a view to frustrating investigation as to the identity of the recipients and the genuineness of the claim. To plug these loopholes I propose to provide that payments made in business and professions to relatives or associate concerns will have to pass the test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after a date to be notified later, will be allowed as a deduction only if these are made by crossed cheques or by crossed bank drafts.”
We shall on the basis our aforesaid observation that Sec.40A(3) of the Act does not take within its sweep a capital expenditure, thus, deal with the sustainability of the disallowance of Rs.45.65 lac (supra) made by the A.O. Observation of the A.O that the assessee had purchased the land in question not as an investment but as stock-in-trade of his business as that of a land developer is merely on the basis of his assumption that as the assessee was engaged in the business of a real estate developer, therefore, the land in question in all probability would have been purchased by him for the said business purpose, i.e, developing of a residential housing project on the same. Undeniably, the dislodging of the assessee’s claim is only backed by an unsubstantiated assumption of the AO and is not supported by any material proving otherwise. We are afraid that the aforesaid observation of the A.O does not find favour with us, for the reason that the land at Risali, Ward No. 63, PatariHalka No.19/22, Khasra No.420/19 (i.e. land at Krishna Talkies Road) was purchased by the assessee as an investment and was shown as such in his balance sheet for the year under consideration. Notwithstanding the fact that the assessee had purchased the aforesaid
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property in question as an investment, even if it is to be presumed that the same in the coming times is to be commercially exploited by him for carving out residential plots, the same merely on the said basis would not trigger the provisions of sub-section (3) of Section 40A, as at the relevant point of time the assessee had made an investment towards purchase of a capital asset and not stock-in-trade. On a subsequent conversion or treatment by the assessee of the aforesaid capital asset as a stock-in-trade of his business of a real estate developer the provisions of sub-section (2) of Section 45 would though get triggered, but then such subsequent event would by no means during the year of investment lead to invocation of section 40A(3) of the Act.
Be that as it may, as the assessee in the case before us had at the relevant point of time made an investment towards purchase of the aforesaid land i.e. land at Risali/Krishna Talkies as a capital asset, which falls beyond the realm of sub-section (3) of Sec.40A of the Act, therefore, as claimed by the Ld. AR and, rightly so, no disallowance of the purchase consideration was called for in his hands under the said statutory provision.
As regards the other property i.e property at Farid Nagar (supra) which was claimed by the assessee to have been purchased in the name of his minor son, Shri Rishav Sukla (supra), though the same is not reflected as an investment in the balance sheet of the assessee for the year under
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consideration, but considering the very fact that the assessee had not claimed any deduction in respect of the expenditure incurred on the purchase of the said property, therefore, the provisions of sub-section (3) of Section 40A on the said count itself would not be triggered in the case of the assessee. We, thus, are of the considered view that the disallowance of the aforesaid amount of Rs.45,65,300/- (supra) u/s.40A(3) of the Act cannot be sustained and is liable to be vacated. Thus, the Ground of appeal No.1 raised by the assessee is allowed in terms of our aforesaid observations.
We shall now take up the issue of addition of the aforementioned amount of Rs.45.65 lac (supra) made by the A.O u/s.69C of the Act, for the reason that the assessee had failed to explain the source out of which the said expenditure was incurred by him.
As the purchase of the property at Risali/Krishna Talkies is shown by the assessee to have been made from his books of account, and thus, forms part of his balance sheet for the year ending on 31.03.2015, therefore, we are unable to comprehend as to how the addition in so far the investment of Rs. 34.15 lac (supra) of the assessee (cash component) had been made by the A.O u/s.69C of the Act. As the investment towards purchase of the aforesaid property i.e. Risali/Krishna Talkies (supra) is claimed by the assessee to have been made from his books of account, therefore, finding no
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justification in making of an addition of the said amount u/s 69C of the Act by the A.O, we vacate the same.
Adverting to the property purchased by the assessee in the name of his minor son Shri Rishav Sukla (supra), it transpires that the assessee had claimed to have made a cash payment of Rs.11.50 lacs (cash component) out of gift which was given by him to his son. Although it is the claim of the assessee that the source of the aforesaid investment (cash payment) of Rs. 11.50 lac (supra) was made out of the gift of Rs. 25.70 lac that was given by him to his son out of his ‘capital account’ (as is discernible from the balance sheet), however, it transpires that the said claim of the assessee had not been verified by the lower authorities. We, thus, in terms of our aforesaid observations are of the considered view that the matter in all fairness requires to be revisited by the A.O. Accordingly, the AO is directed to re- adjudicate the aforesaid matter to the limited extent of verifying the assessee’s claim of having made the investment of Rs. 11.50 lac (cash component of investment) out of his duly disclosed sources. Needless to say, the AO shall in the course of the set-aside proceedings afford a reasonable opportunity of being heard to the assessee, wherein the latter shall remain at a liberty to substantiate his explanation on the basis of fresh documentary evidence, if any. Thus, the Ground of appeal No. 2 is partly allowed for statistical purposes in terms of our aforesaid observation.
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Ground of appeal No.3 being general in nature is dismissed as not pressed.
In the result, appeal of the assesee is partly allowed for statistical purposes in terms of our aforesaid observations.
Order pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board. Sd/- Sd/- ARUN KHODPIA RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायपुर/ RAIPUR ; �दनांक / Dated : 17th October, 2022 ***SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant. 2. ��यथ� / The Respondent. 3. The CIT(Appeals)-II, Raipur (C.G) 4. The Pr. CIT-II, Raipur (C.G) 5.�वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण,रायपुरब�च, रायपुर / DR, ITAT, Raipur Bench, Raipur. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // �नजी स�चव / Private Secretary आयकर अपील�यअ�धकरण, रायपुर / ITAT, Raipur.