Question of disallowance under section 40A(3) of Income Tax Act, 1961 would not arise, where assessee had not claimed the payments as expenditure, while computing its business income. Assessee-Company bought the land on behalf of its group company and whatever payment was made to land owners or their relatives for purchase of land was debited to the account of said company. AO disallowed the said expenditure under section 40A(3). However, assessee submitted that no disallowance could be made by AO, being the said payments were reimbursements for purchase of land and was not claimed as expenditure. Section 40A(3) was wrongly invoked by AO, as no expenses relatable to the addition were claimed and the assessee had clearly demonstrated that the payments were reimbursement made by group company.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
These two appeals are filed by the Revenue and the assessee respectively challenging the order dated 18-12-2012 in Appeal No. 495/09-10/284 passed by the learned Commissioner (Appeals)-XXXIII, New Delhi (hereinafter for short called as the “learned Commissioner (Appeals)”).
2. Fats relevant for the disposal of the appeal are that the assessee is a company incorporated under Companies Act, 1956 and is dealing in the Real Estate Development and Operations. For the assessment year 2007-08 they have filed their return of income on 22-10-2007 declaring the loss of Rs. 9,050. Assessing officer during the scrutiny under section 143(3) of the Income Tax Act, 1961 (for short called as the “Act”) made three additions namely a sum of Rs. 43,88,201 on account of the interest paid in respect of the post dated cheques issued by the assessee to the vendors of the land, Rs. 97,45,249 on account of the additional payments made over and above the sale consideration mentioned in the agreement of sale and a further sum of Rs. 4,56,502 on account of the cash payments made for purchase of land from the farmers by invoking section 40(A)(3) of the Act.
3. In appeal learned Commissioner (Appeals) found that wherever the date of post dated cheque was extended, interest was paid at 15% p.a. in cash out of books of account as was evident from the seized material, therefore, the interest on PDC to the extent of extension period was logical. Learned Commissioner (Appeals), therefore, directed the assessing officer to re-compute the interest on PDC either on the sale consideration or additional payment to the extent of extended period of PDCs by the assessing officer and in case the working out of the same is not possible, to re-compute the interest on PDCs after six months from the date of issue of PDCs i.e., date of sale, as six months is taken as reasonable period for giving PDC as per sale deed. In respect of the additional payment of Rs. 97,45,249 learned Commissioner (Appeals) directed the deletion of Rs. 97,27,124 on the ground that such payments were made to the owners of the land or their immediate family members who have got some legal claim over such land, on account of enhanced rate of land at the time of realization of PDC, and since the same is not covered by included for stamp duty. However, he confirmed the rest of the disallowance stating that any payment on account of plants, trees, tube wells or buildings cannot be allowed as deduction as the same will form part of sale consideration and stamp duty is leviable. Lastly, learned Commissioner (Appeals) confirmed the additions made under section 40(A)(3) of the Act stating that the ownership of the land was continued with the assessee and the contention of the assessee that the cost of land was reimbursed by CWPPL was not acceptable, as such the cash payments in excess of Rs. 20,000 are hit by section 40A(3) of the Act.
4. Challenging the findings of the learned Commissioner (Appeals) in granting relief to the assessee in respect of interest on PDCs, and also the additional payment, the Revenue is in appeal before us; whereas challenging the findings of the learned Commissioner (Appeals) in respect of sustaining the interest on PDCs for the period beyond six months, sustaining a part of the additional payments and the disallowance under section 40(A)(3) the assessee is in appeal.
5. Now coming to the aspect of interest on PDCs, it is an admitted fact that the assessee is a part of BPTP Group and similar additions were made in respect of many group entities. Some matters were disposed of by the Tribunal also. Learned Authorised Representative submitted before us that in respect of the interest on PDCs, when a similar addition was made in the case of M/s. IAG Promoters and Developers (P) Ltd., a coordinate bench of this Tribunal in ITA No. 1674/Del/2013 examined the issue at length and reached a conclusion that the directions given by the learned Commissioner (Appeals) to recalculate the interest on PDCs was on a sound logic and was upheld. The observations of the Tribunal, vide paragraph no. 5 are as follows :–
“After examining the loose papers seized at the time of search at the assessee’s premises, it was noticed that interest is paid on the PDCs only during the period of extension of PDCs and, therefore, he directed the assessing officer to recomputed the interest on PDCs at the time of extension of the PDCs. He has further observed that if it is not possible to work out the extension of PDCs in each case, then the assessing officer is directed to recomputed interest on PDCs after six months from the date of issue of the PDCs. Therefore, the ground of appeal of the Revenue that the Commissioner (Appeals) deleted the addition of Rs. 5,06,625 made by the assessing officer on account of interest on PDCs is factually incorrect and contrary to the order of the Commissioner (Appeals). The Commissioner (Appeals) directed to recalculate the interest on PDCs and there was a sound logic for such direction. His direction is based on material found and seized at the time of search. In view of the above, we do not find any justification to interfere with the order of learned Commissioner (Appeals) in this regard…”
6. Now coming to the additional payment over and above the agreement price, a similar payment was involved in the case of M/s. IAG Promoters and Developers (P) Ltd. and vide paragraph no. 11, the Tribunal considered this issue and found that there was neither any finding by the learned Commissioner (Appeals) nor by the assessing officer on the aspect of whether such a payment was claimed as an expenditure while computing its business income, as such, the issue was set aside to the file of the assessing officer directing him to verify whether the assessee has claimed such payment as an expenditure, and in case no deduction was claimed the question of any disallowance would not arise, and its only if the deduction was claimed then the assessing officer would work out the disallowance as directed by the learned Commissioner. Relevant observations are as follow :–
“11. We have carefully considered the submissions of both the sides. So far as the legal principle is concerned, we agree with the legal proposition made by the learned counsel that when no expenditure is claimed by the assessee, the question of disallowing the same by the assessing officer does not arise. It was explained by the learned counsel that the assessee was purchasing the land for and on behalf of another company of BPTP Group viz., M/s. Countrywide Promoters (P) Ltd. and whatever payment is made by the assessee to land owners or their relatives for purchase of land was debited by the assessee to the account of CWPPL and the payment for purchase of land whether as per stamp duty or additional payment has not been claimed as an expenditure by the assessee. We find that on this factual aspect, there is neither any finding by the Commissioner (Appeals) nor by the assessing officer. The ITAT in the case of M/s. Westland Developers (P) Ltd. (supra) has also accepted the principle that when the expenditure is not claimed by the assessee, the same cannot be disallowed. In fact, there cannot be any dispute to the said legal proposition. However, the question still remains whether such payment i.e., additional payment made by the assessee to land owners or their relatives is claimed by the assessee as a deduction or not. We, therefore, set aside this matter to the file of the assessing officer and direct him to verify whether the assessee has claimed the payment of Rs. 1,01,32,501 as an expenditure while computing its business income. If no deduction is claimed, then the question of any disallowance would not arise. If the deduction is claimed, then the assessing officer would work out the disallowance as directed by the Commissioner (Appeals).”
7. Nothing contrary is brought to our notice on either of the aspects. Hence, while respectfully following the above, we upheld the findings of the learned Commissioner (Appeals) and dismiss the grounds of appeals of both assessee and the learned Commissioner (Appeals) on the aspect of interest on PDCs and set aside the issue relating to the payments made in addition to the agreement amount to the file of learned assessing officer for verification as to whether the assessee has claimed the payment of as an expenditure while computing its business income. If no deduction is claimed, then the question of any disallowance would not arise. If the deduction is claimed, then the assessing officer would work out the disallowance as directed by the Commissioner (Appeals).
8. Now coming to the disallowance under section 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. v. 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 judgment of the Jurisdictional High Court in the case of CIT v. Industrial Engineering Projects (P) 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 judgment 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 learned Departmental Representative been able to address the applicability of the said judgment to the issue at hand. We have taken ourselves through the said judgment 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 judgments relied upon before the Commissioner (Appeals) 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 judgments relied upon 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 reimbursement 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 (P) Ltd. and Westland Developers (P) Ltd. that when the payments are not claimed as expense no disallowance arises. We, therefore, hold that disallowance under section 40(A)(3) is not sustainable and the same has to be deleted. We direct the assessing officer to do so. Grounds of appeal on this aspect are answered accordingly.
10. In view of our findings in the preceding paragraph, the findings of the learned Commissioner (Appeals) in respect of the interest on the PDCs is upheld, the matter relating to the additional payments is restored to the file of the assessing officer for re-computation as directed above and the disallowance under section 40(A)(3) is directed to be deleted.
11. In the result, the appeals of the both Revenue & assessee are allowed in part for statistical purposes.