If cash payments not covered by exceptions provided under rule 6D expense is disallowable

ITAT BANGALORE BENCH ‘C’

Income-tax Officer

versus

Nam Estates (P.) Ltd.

IT APPEAL NOS. 705 & 706 (BANG.) OF 2011
CROSS OBJECTION NO. 14 (BANG.) OF 2012
[ASSESSMENT YEARS 2006-07 & 2007-08]

OCTOBER  5, 2012

ORDER

Jason P. Boaz, Accountant Member

These appeals of the Revenue are directed against the orders of the Commissioner of Income-tax (Appeals)-III, Bangalore, both dated February 23, 2011 for the assessment years 2006-07 and 2007-08. The cross-objections are filed by the assessee for the assessment year 2006-07. Since the cross-appeals and common issues are involved in these appeals, they are being heard together and disposed of by way of a common order.

2. The facts of the case, in brief, are as under :

The assessee-company (hereinafter referred to as “the company”), engaged in the business of real estate development filed its return of income for the assessment year 2006-07 on December 4, 2006 declaring income of Rs. 3,48,240. A survey under section 133A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) was conducted at the assessee’s business premises being part of the Embassy group. For the assessment year 2007-08, the return of income was filed declaring a loss of Rs.43,03,250. In both years, the case was taken up for scrutiny and assessments were completed by orders under section 143(3) of the Act determining the income of the assessee at Rs. 3,08,96,240 for the assessment year 2006-07 and at Rs.2,83,04,610 for the assessment year 2007-08 dated December 29, 2008 and December 18, 2009 respectively.

3. Aggrieved by the orders of assessment for the impugned assessment years, the assessee preferred appeals before the Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) disposed of the assessee’s appeals for the assessment year 2006-07 by order dated February 23, 2011 giving the assessee partial relief. For the assessment year 2007-08, the learned Commissioner of Income-tax (Appeals) allowed the assessee’s appeal by order dated February 23, 2011.

4. The Revenue is now in appeal before us against the orders for both the assessment years 2006-07 and 2007-08. The assessee has filed cross objections for the assessment year 2006-07.

I.T.A. No. 705/Bang/2011 (assessment year 2006-07)

5. In this appeal Revenue has raised the following grounds :

“1.          The order of the learned Commissioner (Appeals) is opposed to law and facts of the case.

2.            The learned Commissioner (Appeals) erred in deleting the addition of Rs. 3,05,48,000 made under section 2(22)(e) by erroneously accepting the assessee’s version that the amount shown as loan in the balance-sheet was an advance received for sale of land on the basis of an memorandum of understanding with M/s. Dynasty Developers P. Ltd. The learned Commissioner (Appeals) ought to have appreciated the facts and circumstances inasmuch as the memorandum of understanding dated June 15, 2004 has no business sense or significance as the assessee, at that point of time, was not the owner of the land agreed to be sold to the above company. The Commissioner (Appeals) ought to have enquired into the subsequent status of the deal before placing reliance on such a documents produced by the assessee.

3.            For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the Commissioner (Appeals) in so far as it related to the above grounds may be reversed and that the Assessing Officer may be restored.

4.            The appellant craves leave to add, alter, amend and/or delete any of the grounds that may be urged.”

6. The grounds raised at S. Nos. 1, 3 and 4 are general in nature and no adjudication is called for thereon, they are dismissed as infructuous.

7. In the ground raised at S. No. 2, the Revenue has challenged the learned Commissioner (Appeals)’s order deleting the addition of Rs. 3,05,48,000 made under section 2(22)(e) of the Act. The learned Departmental representative submitted that the learned Commissioner (Appeals) erred in accepting the assessee’s claim that this amount shown as loan in the assessee’s balance-sheet was not a loan but an advance received for sale/purchase of land on the basis of a memorandum of understanding dated June 15, 2004 with M/s. Dynasty Developers P. Ltd., when in reality the memorandum of understanding had no business significance at that point since the land in question was not sold to the assessee. The learned Departmental representative further submitted that the learned Commissioner (Appeals) ought to have enquired into the subsequent status of the deal before blindly placing reliance on documents produced by the assessee. The learned Departmental representative drew our attention to the learned Commissioner (Appeals)’s order. He pointed out that the learned Commissioner (Appeals) had faithfully recorded the written and oral submissions of the assessee from paragraphs 5 to 7 on pages 3 to 14 of the order and then in paragraph 8, consisting of about 8 lines, allowed the assessee’s appeal on this issue of deemed dividend under section 2(22)(e) of the Act without any discussion of the facts of the case on this issue, the legal position or assigning any reasons for taking the decision he took. In short, the learned Departmental representative submitted that there was no speaking order passed by the learned Commissioner (Appeals). He, therefore, prayed that the matter of deemed dividend under section 2(22)(e) of the Act required to be remitted back to the file of the Commissioner (Appeals) for de novo consideration in the interest of justice.

8. Learned counsel for the assessee supported the order of the learned Commissioner (Appeals), but submitted that he had no objection if the issue of deemed dividend under section 2(22)(e) of the Act be remanded to the file of the Commissioner (Appeals) for consideration afresh.

9. We have heard both parties and carefully perused the material on record. We have perused the order of the learned Commissioner (Appeals) on the issue of deemed dividend under section 2(22)(e) of the Act and agree with the contention of the learned Departmental representative that the learned Commissioner (Appeals) merely recorded the submissions of the assessee at paragraphs 6 and 7 from pages 3 to 14 of his order and then in paragraph 8 allowed the appeal of the assessee in a summary manner, bereft of any discussions of the facts of the case as brought out by the Assessing Officer and the assessee and without assigning any reasons for reaching the finding he made. We, therefore, reproduce hereunder the referred paragraph 8 on page 14 of the Commissioner (Appeals)’s order which will clarify the situation :

“8.0 Considering the facts and circumstances of the case and following the rationale of the above decisions, I hold that the advance of Rs. 3,05,48,000 received by the appellant from another company, also engaged in real estate developments towards sale of property in the course of business and considering the facts of the case, such advances are not hit by the provisions of section 2(22)(e) of the Act. The addition of Rs. 3,05,48,000 made to the income as deemed dividend as per the provisions of section 2(22)(e) of the Act is deleted.”

10. Paragraph 8 (supra) reinforces our view that the learned Commissioner (Appeals) failed to pass a speaking order on the issue at hand. Not only that, when the learned Departmental representative prayed for remitting the issue of deemed dividend under section 2(22)(e) of the Act to the file of the learned Commissioner (Appeals) for passing a speaking and reasoned order thereon, learned counsel for the assessee did not object to the learned Departmental representative’s plea. In the facts and circumstances of the case, as discussed above, we are of the view that in the interest of equity and justice it would be in the fitness of things for the issue of deemed dividend under section 2(22)(e) of the Act to be remitted to the file of the learned Commissioner (Appeals) for de novo consideration by him taking into consideration the facts of the case, the findings of the Assessing Officer in order of assessment, the submissions of the assessee, the judicial decisions cited and to pass fresh speaking orders thereon. It is ordered accordingly.

11. In the result, the Revenue’s appeal is allowed for statistical purposes.

C. O. No. 14/Bang/2012 (assessment year 2006-07)

12. In the cross-objection, the assessee has challenged the order of the learned Commissioner (Appeals) sustaining the following additions :

13. We will consider and dispose of them in seriatim. The grounds raised in cross-objection are as follows :

“(a)         Payment for purchase of land disallowed under section 40A(3) of Rs. 17,58,527.

(i)           He failed to appreciate that the payments were made to agriculturists and farmers who insisted on cash payments ;

(ii)          The respondent submits that the Commissioner (Appeals), having accepted that the transactions were genuine, should not have sustained the additions since the payments were made under ‘exceptional and unavoidable circumstances’.

(b)          Disallowance of commission and brokerage of Rs. 4,44,342.

(i)           He failed to appreciate that the entire payments were supported by vouchers.

(ii)          The Commissioner (Appeals) failed to appreciate that non-deduction of tax could not be a reason for disallowance of expenditure.

(c)          Disallowance under levelling and fencing charges of Rs. 7,32,280.

(i)           The Commissioner (Appeals), having held that the levelling charges were allowable should not have sustained the addition of Rs. 7,32,280.

(ii)          He failed to appreciate that these expenses, by its very nature, could be supported by self-made vouchers and cash receipts.

(iii)         The appellant submits that, in any case, the additions made are excessive and unreasonable.

(iv)         The appellant, therefore prays that the additions may be deleted.”

Payments for purchase of land disallowed under section 40A(3) : Rs.17,58,527

14. Learned counsel for the assessee reiterated the grounds raised by the assessee in the cross-objection that the learned Commissioner (Appeals) failed to appreciate that the payments were made to agriculturists and farmers who insisted on cash payments. It is further submitted that the learned Commissioner (Appeals) having accepted that the transactions were genuine should not have sustained the addition since the payments made were under exceptional circumstances. In view of this, learned counsel for the assessee pleaded that the disallowance made under section 40A(3) by the Assessing Officer and sustained by the learned Commissioner (Appeals) be reversed and the assessee’s appeal be allowed.

15. The learned Departmental representative on his part strongly supported the orders of the authorities below submitting that the assessee was not able to controvert the findings of the Assessing Officer and the learned Commissioner (Appeals) on the disallowance made under section 40A(3) of the Act and therefore its grounds were liable to be dismissed.

16. We have heard both parties and carefully perused and considered the material on record. It is seen that in the course of the assessment proceedings the Assessing Officer found that the assessee had made payments towards purchase of land in the Devanahalli taluk of Bangalore District out of which sums amounting to Rs. 87,92,635 were found to have been paid in cash in contravention of the provisions of section 40A(3) of the Act. The assessee’s explanation in letter dated December 18, 2008, that the payments were made at places which were not served by any banking facilities was not accepted by the Assessing Officer for the reason that Devanahalli taluk is a well developed suburb of Bangalore having a large number of banks and the recipients of the consideration were residing in that area and some of them were in receipt of government compensation for land acquisition and had accounts and deposits in such banks. In this view of the matter, the Assessing Officer held that the provisions of section 40A(3) of the Act was applicable in the present case and consequently disallowed a sum of Rs. 17,58,527 (being 20 per cent. of the amount paid in cash, i.e., Rs.87,92,635). In appeal, we find the learned Commissioner (Appeals) after examination of the facts upheld the disallowance made by the Assessing Officer as he was of the view that the assessee could not demonstrate with any cogent evidence that there was any business expediency or sufficient cause for such cash payments to various parties in the relevant period. Before us, learned counsel for the assessee merely reiterated the submissions made before the learned Commissioner (Appeals). On careful consideration of the facts and circumstances of the case, we find that the assessee’s arguments that the transactions were genuine ; that the cash payments were made in the absence of proper banking facilities being available in Devanahalli, that the payments were made on consideration of business expediency, etc., are not acceptable as the assessee has failed to prove with any cogent evidence that it was covered by exceptional circumstances as per the exemption clause under section 40A(3) read with rule 6DD. It is also seen that the assessee has failed to establish that Devanahalli taluk of Bangalore District had no banking facilities at the time these payments were made. In this view of the matter, we have no hesitation in upholding and sustaining the disallowance of Rs. 17,58,527 (being 20 per cent. of the amount paid in cash, i.e., Rs.87,92,635) made by the Assessing Officer under section 40A(3) of the Act. Consequently, the assessee’s objection is dismissed.

10. Commission and brokerage expenses : Rs. 4,44,342.

17. Learned counsel for the assessee submitted that the learned Commissioner (Appeals) was wrong in sustaining the disallowance of commission and brokerage expenses to the extent of Rs. 4,44,342 out of total claim of Rs. 92,20,663 as he had failed to appreciate that the entire payment of these expenses were supported by vouchers. Learned counsel for the assessee reiterated the submissions and prayed that the disallowance of Rs. 4,44,342 sustained by the learned Commissioner (Appeals) needs to be deleted in toto by accepting the assessee’s arguments.

18. The learned Departmental representative on the other hand, strongly objected to the assessee’s claim. It was submitted that the learned Commissioner (Appeals) after examining the entire expenses of Rs. 92,20,663 debited under the head brokerage and commission, held that expenses to the extent of Rs. 87,76,321 on which TDS had been deducted were genuine as they were incurred for the purpose of the assessee’s business and disallowed only the balance of Rs. 4,44,342 for which no cogent evidence was produced. It was submitted by the learned Departmental representative that in these circumstances, the assessee was not eligible for any further relief in the matter and its ground be accordingly dismissed.

19. We have heard both parties and carefully perused the material on record. Out of the total expenses of Rs. 92,20,663 claimed under the head brokerage and commission, we find that the Assessing Officer holding that in this line of business of land transaction the average percentage of commission and brokerage is one per cent., disallowed the balance of Rs.33,52,658. It is seen that the learned Commissioner (Appeals) examined the matter in detail and came to the view that expenses on commission and brokerage charges, on which TDS had been deducted and remitted to the treasury in the instant case were genuine as per the facts placed before him and accordingly allowed the assessee relief of Rs. 29,10,316 and sustained the disallowance to Rs. 4,44,342. Before us learned counsel for the assessee has merely reiterated the submission made before the learned Commissioner (Appeals). No cogent evidence has been brought on record to establish that any part of the expenses, brokerage and commission out of Rs.4,44,342 were genuine. In this view of the matter, we find there is no reason to interfere with the finding of the learned Commissioner (Appeals) and, therefore, uphold the disallowance of Rs. 4,44,342 out of commission and brokerage charges as sustained by the learned Commissioner (Appeals). The assessee’s ground is accordingly dismissed.

Levelling and fencing charges : Rs. 7,32,280

20. Learned counsel for the assessee submitted that the learned Commissioner (Appeals) should not have sustained the disallowance to the extent of Rs. 7,32,280. It was argued that these expenses by their very nature could only be supported by self vouchers and cash receipts and did not call for any disallowance and that the disallowance made were excessive and unreasonable. It was submitted that, in these circumstances, the disallowance be deleted and the assessee’s appeal on this issue be allowed.

21. Per contra, the learned Departmental representative pointed out that the Assessing Officer had made an ad hoc disallowance of Rs. 91,53,500, i.e., 25 per cent. of the expenditure of Rs. 3,66,14,000 claimed on levelling and fencing charges. The learned Commissioner (Appeals) had examined the entire details of these expenses from the books of account for each property and as per the concerned agreement for this work. It was submitted that after examining these details while the learned Commissioner (Appeals) was of the view that such expenses appear to be genuine and are generally incurred in the course of the assessee’s line of business, he also found that some of such expenses are supported only by self vouchers and cash receipts which are not verifiable, and therefore restricted the disallowance to Rs. 7,32,280 (i.e. 2 per cent. of Rs. 3,66,14,000) as against the disallowance of Rs. 91,53,500 (i.e. 25 per cent. of Rs. 3,66,14,000) made by the Assessing Officer. In this view of the matter, the learned Departmental representative submitted that the disallowance as sustained by the learned Commissioner (Appeals) at Rs. 7,32,280 be upheld.

22. We have heard both parties and carefully perused the material on record. We find from the record that the learned Commissioner (Appeals) has examined this issue in detail, looking into the books of account and the agreements for such work for each property before coming to the view that such fencing and levelling expenses being normally incurred in this line of business appear to be genuine. The learned Commissioner (Appeals) also noted that some of such expenses have been claimed only on the basis of self vouchers and cash receipts and were not verifiable and therefore on this account sustained the disallowance to the extent of Rs. 7,32,280 (i.e. 2 per cent. of Rs. 3,66,14,000) out of the disallowance of Rs. 91,53,500 (i.e. 25 per cent. of Rs. 3,66,14,000) made by the Assessing Officer thereby giving the assessee relief of Rs. 84,21,220. Before us except for making the plea, the assessee has not furnished any cogent evidence to establish that the expenses of Rs. 7,32,280, which stood disallowed, were verifiable. In these circumstances, we are of the considered opinion that there is no reason or cause for us to interfere with the finding of the learned Commissioner (Appeals) and therefore sustain the disallowance of Rs. 7,32,280 out of levelling and fencing charges. The cross objection of the assessee accordingly stands dismissed.

23. In the result, the cross-objection of the assessee is dismissed. I. T. A. No.706/Bang/2011 (assessment year 2007-08)

24. In this appeal, the Revenue has raised the following grounds :

“1.          The order of the learned Commissioner (Appeals) is opposed to law and facts of the case.

2.            The learned Commissioner (Appeals) erred in deleting the addition of Rs. 3,26,07,860 made under section 2(22)(e) by erroneously accepting the assessee’s version that the amount shown as loan in the balance-sheet was an advance received for sale of land on the basis of an memorandum of understanding with M/s. Dynasty Developers P. Ltd. The learned Commissioner (Appeals) ought to have appreciated the facts and circumstances inasmuch as the consideration for sale as per memorandum of understanding was only Rs. 3.50 crores whereas, having already received by the assessee during the relevant previous year was far in excess of the agreed consideration and, in such circumstances, the amount received cannot be termed as advance.

3.            For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the Commissioner (Appeals) in so far as it related to the above grounds may be reversed and that the Assessing Officer may be restored.

4.            The appellant craves leave to add, alter, amend and/or delete any of the grounds that may be urged.”

25. The grounds of appeal at S. Nos. 1, 3 and 4, are general in nature and no adjudication being called for thereon, they are dismissed as infructuous.

26. In the ground raised at S. No. 2, the Revenue has challenged the learned Commissioner (Appeals)’s order deleting the addition of Rs. 3,26,07,860 made under section 2(22)(e) of the Act. The learned Departmental representative submitted that the learned Commissioner (Appeals) erred in accepting the assessee’s claim that this amount shown as loan in the assessee’s balance-sheet was not a loan but an advance received for sale/purchase of land on the basis of a memorandum of understanding dated June 15, 2004 with M/s. Dynasty Developers P. Ltd. It was submitted that as per the memorandum of understanding, the sale consideration was only Rs. 3.50 crores, whereas the assessee had already received an amount of Rs. 3,05,48,000 in the preceding year and together with Rs. 3,26,07,860 received in the relevant period the amount received by the assessee was far in excess of the agreed consideration. The learned Departmental representative further submitted that the learned Commissioner (Appeals) ought to have enquired into the matter before blindly placing reliance on documents produced by the assessee. The learned Departmental representative drew our attention to the learned Commissioner (Appeals)’s order. He pointed out that the learned Commissioner (Appeals) had faithfully recorded the written and oral submissions of the assessee from paragraph 2 to paragraph 5.5 on pages 2 to 13 of the order and then in paragraph 6, consisting of about 8 lines, allowed the assessee’s appeal on this issue of deemed dividend under section 2(22)(e) of the Act without any discussion of the facts of the case on this issue, the legal position or assigning any reasons for taking the decision he took. In short, the learned Departmental representative submitted that there was no speaking order passed by the learned Commissioner (Appeals). He, therefore, prayed that the matter of deemed dividend under section 2(22)(e) of the Act required to be remitted back to the file of the Commissioner (Appeals) for de novo consideration in the interest of justice.

27. Learned counsel for the assessee supported the order of the learned Commissioner (Appeals), but submitted that he had no objection if the issue of deemed dividend under section 2(22)(e) of the Act be remanded to the file of the Commissioner (Appeals) for consideration afresh.

28. We have heard both parties and carefully perused the material on record. We have perused the order of the learned Commissioner (Appeals) on the issue of deemed dividend under section 2(22)(e) of the Act and agree with the contention of the learned Departmental representative that the learned Commissioner (Appeals) merely recorded the submissions of the assessee at paragraphs 2 to 5.5 from pages 2 to 13 of his order and then in paragraph 6 of his order allowed the appeal of the assessee in a summary manner, bereft of any discussions of the facts of the case as brought out by the Assessing Officer and the assessee, and without assigning any reasons for reaching the finding he made. We, therefore, reproduce hereunder the referred paragraph 6 on page 14 of the Commissioner (Appeals)’s order which will clarify the situation :

“6. Considering the facts and circumstances of the case and following the rationale of the above decisions, I hold that the advance of Rs. 3,26,07,860 received by the appellant from another company, also engaged in real estate development is towards sale of property in the course of business and considering the facts of the case, such advances are not hit by the provisions of section 2(22)(e) of the Act. The addition of Rs. 3,26,07,860 made to the income as deemed dividend as per the provisions of section 2(22)(e) of the Act is deleted.”

29. Paragraph 6 (supra) reinforces our view that the learned Commissioner (Appeals) failed to pass a speaking order on the issue at hand. Not only that, when the learned Departmental representative prayed for remitting the issue of deemed dividend under section 2(22)(e) of the Act to the file of the learned Commissioner (Appeals) for passing a speaking and reasoned order thereon, learned counsel for the assessee did not object to the learned Departmental representative’s plea. In the facts and circumstances of the case, as discussed above, we are of the view that in the interest of equity and justice it would be in the fitness of things for the issue of deemed dividend under section 2(22)(e) of the Act to be remitted to the file of the learned Commissioner (Appeals) for de novo consideration by him taking into consideration the facts of the case, the finding of the Assessing Officer in order of assessment, the submissions of the assessee, the judicial decisions cited and to pass fresh speaking orders thereon. It is ordered accordingly.

30. In the result, the Revenue’s appeal is allowed for statistical purposes.