Where assessee had not claimed cash payment of Rs. 1.50 crores for purchase of land as business expenditure or treated as stock or capitalized the same in order to claim depreciation in the future, disallowance under section 40A(3) could not be made.
FULL TEXT OF THE ITAT JUDGMENT
This appeal filed by the assessee is directed against the order dated 05/10/2016 of CIT(A) – 4, Hyderabad for AY 2009-1 0.
2. The assessee is a partnership firm engaged in the real estate business. The assessee filed its return of income for the AY 2013-14 on 30.09.2013 admitting a total income at Rs.10,85,100/-. A Survey u/s.133A was conducted on 21.01.2015. During the survey proceedings, it was noticed that the assessee purchased Plot no.25 & 26 admeasuring 360 sq. yds. at Haripuri Colony, Nagole vide Doc NO.555/2013 dated 31.01.2013 for a consideration of Rs.58,00,000/-. However, an agreement of sale dated 20.11.2012 shows the value agreed and paid was Rs.2,08,00,000/-. The assessee paid Rs.58 lakhs through cheque and Rs.1,50,00,000/- was paid through cash which violates Section 40A(3). In view of this, the case was reopened by issuing notice u/s.148 on 27.01.2015. In response, the assessee filed revised return of income on 26.05.2015 admitting total income at Rs.61,86,860/-. The assessment was completed u/s.143(3) r.w.s 147 on 31 .03.2016 by determining total income at Rs.2,11,86,863/-.
2.1 The Assessing Officer gave opportunity to assessee to submit its objections for applying the provisions of Section 40A(3) in respect of purchase of business asset. In response, the assessee submitted that the said interest expenditure was not claimed in the P&L account as expenditure. The land was shown in the Balance sheet under “Fixed assets” but not shown in the books of accounts as ‘stock-in-trade’, hence the provisions of Section 40A(3) would not apply. The assessee’s contention was not accepted by the Assessing Officer for the following reasons:
“a) Since the land purchased was a business asset as subsequently, the said land was developed into a residential complex by name “Kalyan Aiswarya Residency”. For the AY 2013-14, the assessee shown the said land as “fixed asset” in the balance sheet, but in the AY 2014-15, the value was shown as “Nil”. This clearly shows that the land purchased was subsequently converted into stock-in-trade. The assessee contention that, at the time of purchase it was fixed asset only, is not acceptable. The land was converted into stock-in-trade for development shows that itself was not merely a fixed asset. The Assessing Officer concluded that the entries in the books of accounts as fixed asset are only manipulating the book entries.
b) Assessee’s contention that the said expenditure was not claimed in the P&L account was also not acceptable. Since the loan towards the said purchase of land claimed as a liability in the balance sheet as “Secured Loans” out of which, this cash has been withdrawn and paid to the vendors in cash. It is also clear that the assessee did not make claim of expenditure in the P&L account just to circumvent the provisions of law. Otherwise, in the case of assessee as a builder when the purchase of land was expenditure, there was no reason to not to make such claim in the P&L account. It would also show that the assessee has manipulated book entries in the P&L account and books of accounts just for their own benefits and to defeat the provision of law.
c) The second proviso of Section 40A(3) reads as under: –
“If an assessee incurs any expenditure in respect of which payment in excess of Rs.20,000- is made otherwise than by an account payee cheque or an account payee bank draft, expenditure will not be allowable as deduction subject to the exceptions as provided under Rule 6DD.”
d) The assessee firm is dealing in Real estate and land purchased is stock in trade. Therefore, the payment made for purchase of land was expenditure in the business of the assessee which attracts the provisions of Section 40A(3) of IT
e) The land purchased is stock-in-trade of the business of the assessee and was not merely an asset. In the statement recorded during the survey proceedings, the assessee has stated that the parties insisted for cash payments hence they made the cash payments and confirmed the cash payments. The cash payments have been staggered over a period of time and the assessee has not filed any evidence.
f) The assessee is dealing in real estate and in land and as such, it was for the assessee to establish that the cash payments have been made for business exigencies which the assessee failed to prove in this case. The assessee has not proved the compelling reasons for payments made in cash. The AO relied on the following judicial pronouncements:
1. Nahgi Lal Vs. CIT, 167 ITR 139 (Raj.)
2. Attar Singh Gurumukh Singh Vs. ITO, (SAC) 191 ITR 667 (SC).
In view of the above, the Assessing officer disallowed total cash payments of Rs.1,50,00,000/- u/s.40A(3) .
3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).
4. Before the CIT(A), the assessee submitted that during the accounting year relevant for the AY 2013-14, the gross receipts amounted to Rs.1,62,65,000/- and the assessee admitted additional income of Rs.15 lakhs and the net income amounted to 61,86,863/-. The assessee submitted the following reasons:
a) The asset acquired was treated as a capital asset and the cost of same was not debited to the Purchase Account.
b) It was mentioned that the land at Saroor nagar is shown in the Balance Sheet as fixed asset and no such amount is debited to the Profit and Loss account and, therefore, there is no question of disallowance of any expenditure incurred thereon.
Further, the assessee submitted that it had not claimed any expenditure and when the assessee treated the amount as capital expenditure, there is no requirement for making any such disallowance. The provisions of Section 40A(3) have application only to the revenue expenditure debited to the P&L account where such expenditure was claimed. In the case of the assessee, no such claim was made and, therefore, there is no question of making any disallowance. The appellant submitted return of income, revised statement of income and Form 3CB for the AY 2013-14.
4. After considering the submissions of the assessee, the CIT(A) confirmed the addition made by the AO by observing as under:
“3. The submissions of the appellant have been carefully considered. It is seen that the Appellant had purchased Plot No.25 & 26 admeasuring 360 sq. yds at Haripuri Colony, Nagole for a consideration of Rs.2,08,00,000/-. Out of the total amount, Rs.58,00,000/- was paid through bank and the balance of Rs. 1,50,00,000/- was paid through Cash. The Assessing Officer disallowed cash payments of Rs. 1,50,00,000/- since it violates the Section 40A(3). The Assessing Officer made disallowance with regard to cash payments on the purchase of plot at Nagole. Before me, the appellant explains about the land at Saroor Nagar. The appellant has not submitted any explanation as to why such huge payments were made in cash and what were the other relevant factors for which the cash payment has been made. It is pertinent to note that the appellant is engaged in the business of real estate and any payments for a business transactions is subjected to attraction of Section 40A(3).
It is pertinent to note that the issue is not that whether this transaction expenditure has been claimed in the books of accounts or not. The issue is whether the cash payments in business transaction should be allowed or not. The appellant has not submitted purchase document or bank statements before me. The appellant has not submitted any explanation the urgent need to make cash payments in Saroor Nagar, which is part of urban centre. It is also to be pointed that the cash payments during this transaction is not one time. The appellant has made transactions for 5 times in cash to the same party. Whether the appellant brings in to the books or not is not relevant. The pertinent question is this transaction was found in consequence to a Survey. Had there have been no survey, the whole transaction would have become outside the books of the accounts, as this was not reflected in the regular books. Hence, the appellant’s claim is not supported. The addition is upheld.”
5. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:
1. The order of the learned Commissioner of Income-Tax (Appeals) is erroneous both on facts and in law.
2. The learned Commissioner of Income-Tax (Appeals) erred in confirming the addition of Rs.1,50,00,000/- made by the Assessing Officer by applying he provisions of Sec. 4OA(3) of the I.T. Act.
3. The learned Commissioner of Income-Tax (Appeals) ought to have considered the fact that the said amount is not debited to the Profit and Loss account and that therefore, no disallowance could have been made by the Assessing Officer.
4. The learned Commissioner of Income-Tax (Appeals) erred in confirming levy of interest u/ s 234B and 234C of the LT. Act.
5. Any other ground that may be urged at the time of hearing.”
6. Ld. AR reiterated the submissions as made before the CIT(A). He further submitted that the asset acquired was treated as a capital asset and the cost of the same was not debited to the purchases Account He submitted that the land at Saroornagar is shown in the Balance Sheet as fixed asset and no such amount is debited to the Profit and Loss account and, therefore, there is no question of disallowance of any expenditure incurred thereon. The Assessing Officer, however, added the amount of Rs.1.50 crores while completing the assessment u/s 143(3) r.w.s. 147 of the I.T. Act and determined the total income at Rs.2,11,86,1863/-. He submitted that the Assessing officer is of the view that showing the amount under the “fixed assets” is only an after thought and that there is no reason as to why such claim for deduction was not made. The Assessing Officer referred to the decision of the Supreme Court in the case of Attar Singh Gurumukh Singh Vs. ITO reported in 191 ITR 667. He submitted that the provisions of Sec. 4OA(3) mention that where an assessee incurs any expenditure in respect of which payments were made to a person otherwise than by way of crossed cheque or account payee cheque, no deduction shall be allowed in respect of such expenditure. It is humbly submitted that when the assessee himself has not claimed any expenditure and when the assessee treated the amount as capital expenditure, there is no requirement for making any such disallowance. The provision of sec. 4OA(3) has application only to the revenue expenditure debited to the Profit and Loss account where such expenditure is claimed. In the case of the assessee, no such claim was made in the P&L A/c and also the assessee has not capitalized the full value as per agreement of sale, but, capitalized only the amount as per registered sale deed, therefore, there is no question of making any disallowance. Therefore, the ld. AR pleaded that the addition made may be deleted in view of the above submissions.
7. Ld. DR relied on the orders of revenue authorities and submitted a letter of AO dated 19/04/2018 addressed to Ld. DR, on the proceedings before AO, the contents of which are reproduced below:
“Sub: Appellate proceedings in the case of Mss. Kalyan Constructions, Hyderabad for the A. Y 2013-14 – submission of report – regarding.
Ref: Letter in F.No. ITAT-B Bench. ITA No.2112-21 13/Hyd/2017 dated 10.04.20 18.
Kind reference is invited to the above.
For the A. Y. 2013-14 Scrutiny Assessment U/s. 143(3) r.w.s 147 of the Income tax Act was completed on 3 1.03.2016. Aggrieved by the additions made, the assessee preferred appeal before the CIT(A)-1, Hyderabad. The 1st appellate authority vide appeal No. 0097 dated 03.08.2017 had upheld the additions made by the AO in the Assessment order. On the said order, the Assessee is in appeal before the Hon’ble ITAT.
The Assessing Officer rebutted the objections raised by the assessee by observing that the subject land constitutes business asset as it was developed into residential complex by name Kalyan Aishwarya Residency in later years. This fact is also evident from the value that the said land was shown by the assessee at Rs. Nil in the immediately succeeding year. The assessee has shown expenditure of Rs. 90.03 lakhs towards purchase of various building material. Further, expenditure to the extent of Rs. 16.37 lakhs was claimed towards labour charges. All these activities prove that the assessee had carried out construction activity. There cannot be any construction activity without land component. The assessee is in the line of construction. Taking a holistic view of facts and circumstances of the case the observation of the Assessing Officer that the subject land constitutes stock in trade of the assessee appears factually correct. Consequently, the cash payments made by the assessee towards acquisition of land is in violation of the provisions of Section 40A(3) of the 1. 1. Act, hence the same was brought to tax by the Assessing Officer.
Without prejudice to the above, the following submissions may please be considered.
As per the Agreement of sale dated 20.11.2012, the assessee firm had purchased the said land of 720 Sq. Yards for a consideration of Rs. 2,08,00,000. Out of which an amount of Rs. 58,00,000 was paid through cheque/Demand Draft. The balance amount of Rs. 1,50,00,000 was paid in cash as evident from the said agreement of sale. In the return of income filed for the subsequent Assessment years, i.e. 14-15 and 15-16 the assessee filed its return of income U/s. 44AD. In Assessment Year 2014-15, the Net Profit was taken at Rs.1,23,640. The assessee is not maintaining any books of accounts which shows that the assessee has opted for 44 AD. Thus the turnover is shown at Rs. 15,45,500 for the A. Y. 2014-15. Similarly for the A. Y. 15-16 also the turnover is taken at Rs. 60,33,000 and offered net income of Rs. 4,82,640 U/s. 44AD.
Thus the subsequent events of A Y. 2014-15 and 2015-16 wherein the turnover is shown at Rs. 15,45,500 and 60,33,000 clearly shows that the assessee had taken the cost of land at Rs.58,00,000 only as against the actual consideration paid of Rs. 2,08,00,000.
In view of the above, the consideration paid amounting to Rs. 1,50,00,000 over and above the consideration of Rs. 58,00,000 shown as per agreement of sale is nothing but investment made by the assessee outside the books of accounts. According it is humbly prayed that the addition made by the Assessing Officer may please b e upheld. The copy of the ROl’s for the A. Y. 2014-15 and 2015-16 are enclosed herewith for verifying the incomes offered u/s. 44AD for kind perusal of Hon’ble bench.”
8. Considered the rival submissions and perused the material on record. We notice that assessee has purchased the land at Haripuri colony with the registered value of Rs. 58 lakhs, but, he has entered in to agreement of sale for Rs. 2.08 crores. He paid the registered value by cheque and balance in cash. In the reassessment, the AO disallowed the payment in cash u/s 40A(3). In our considered view, section 40A(3) can be invoked only when the assessee claims the payment in cash as business expenditure or treated as stock or capitalized the same in order to claim depreciation in the future. We notice that the assessee has not claimed the payment of Rs. 1 .50 crores as expenditure or capitalized the same in the value of the land.
The assessee has submitted copy of the ledger “land at Saroor Nagar”, as per which, assessee has debited the value as per registered document and further development expenditure in that project. It has not charged the cash payment of Rs. 1 .50 crores to the said land at Saroor Nagar. This fact was also confirmed by the AO in his submission which was submitted by ld. DR before us. This submission is extracted in para 7. It clearly shows that assessee has not capitalized the above cash payment in fixed assets. Therefore, assessee cannot claim any expenditure or even convert the same as business assets or stock in trade, the cash payment of Rs. 1 .50 crores is not part of value of land. Hence, it cannot be a part of future business expenditure. Therefore, the contention of the revenue authorities is not correct to say that assessee has converted the land in the subsequent year amounts to claim of expenditure in the subsequent AY, as the value of Rs. 1.50 crore is not part of land in first place. Hence, the disallowance u/s 40A(3) is accordingly deleted. Accordingly, ground Nos. 2 & 3 are allowed.
9. Ground No. 4 is regarding charging of interest u/s 234B and Since charging of interest u/s 234B and 234C is consequential in nature, therefore, the AO is directed accordingly.
10. Ground Nos. 1 & 2 are general in nature, hence, need no
11. In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 31st July, 2018.