Cash advance not claimed as deduction cannot be disallowed u/s 40A (3)

Madhusudan Buildcon Pvt. Ltd. Vs. ACIT (ITAT Judgment), Appeal No. ITA No. 508/Del/2014 [Assessment Year: 2006-07], Date of Pronouncement: 15.06.2015

Brief Facts:

The assessee company is engaged in real estate business. It paid cash advance for purchasing a plot and reflected it in balance sheet under loans and advances given. The AO made addition of 20 % of amount paid as advance, invoking the provisions of Section 40A(3) of the Income Tax Act, 1961. Assessee Contention :

The assessee submitted that Section 40 A(3) is not applicable, as the assessee has not incurred any expenditure for which deduction is claimed from his income.

Revenue Contention :

Section 40A (3) is applicable on this transaction and thus 20% of the amount paid in cash is to be disallowed and added to the income of the assessee.

ITAT Order

1. The relevant part of section 40 A (3) is as under:-

“(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than 31st day of March, 1969), as may be specified in this behalf by the Central Government by notification in the Official Gazette in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, twenty per cent of such expenditure shall not be allowed as a deduction ……..”

2. 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 section 40A(3), it is sine qua non that the assessee must have incurred expenditure in respect of which such payment is made in cash. Section 40A has the marginal note: ‘Expenses or payments not deductible in certain circumstances’. This section has been placed under Chapter IVD of the Act. Sub-section (1) of section 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.

4. In this 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. This amount has been directly taken to the balance sheet and has been shown as advance under the head ‘Loans and advances.’ Under such circumstances, when there is no claim for deduction of Rs.1lac, the provisions of section 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.

Analysed by CA Amit Handa