Case Law Details

Case Name : DCIT Vs Kolli Gopi Krishna (ITAT Hyderabad)
Appeal Number : ITA No. 389/Hyd/2015
Date of Judgement/Order : 26/06/2015
Related Assessment Year : 2011-12
Courts : All ITAT (5321) ITAT Hyderabad (313)

Issue before court:

  • Whether expenditure paid in cash, which is not disallowed u/s 37 (1), can be disallowed under section 40A(3).
  • Whether provision of section 54F are applicable where nature of property turned into commercial purpose.

Brief facts:

  • Assessee is a non-resident individual. He filed return of income declaring income of Rs. 4,61,77,622/- after claiming deduction u/s. 54F. The income mainly consists of Long Term Capital Gains on sale of land and Short Term Capital Gains on sale of building.
  • AO was of the opinion that assessee indulged in adventure in nature of trade in constructing a commercial complex and selling the same and he determined the income under the head ‘Income from Business/Profession’ as against income from capital gains.AO also disallowed construction expenses claimed by assessee to an extent of Rs. 3,32,21,752/- which included an amount of Rs. 45.50 Lakhs paid to M/s. M. Gopal Stone Cutting & Earth Contractors u/s 40 A (3).
  • As against the claim of assessee u/s. 54F amounting to Rs. 6,69,37,700/-, AO noticed that assessee has modified the building to commercial and accordingly, the claim of 54F cannot be allowed. With these disallowances/additions, the total income was determined at Rs. 12,07,24,837/-.
  • On appeal CIT (A) directed AO to treat assessee income under the head capital gain in place of income from business & profession. He also directed AO to allow the expenses as provision of section 40A(3) are not applicable.CIT (A) dismissed ground of assessee regarding claim u/s 54 F.

Contention of the revenue:

  • The main reason for disallowing the expenditure was that there were cash payments which violated the provisions of Section 40A(3). In an alternate observation that in case the amounts are to be assessed under the head ‘Capital Gains’ 50% of the expenditure claimed should be disallowed as non-genuine.
  • Assessee has modified the building to commercial and accordingly, the claim of 54F cannot be allowed.

Contention of the assessee:

  • AO was not correct in treating the transaction as adventure in nature of trade as assessee is a non-resident and has intended to develop property as a residential house but when building was constructed, loans could not be obtained/NOC could not be obtained in view of the Metro Project which was passing through part of land.
  • On sale the land cost was offered as Long Term Capital Gain and building sale was offered as Short Term Capital Gain.
  • Only part of the expenditure was paid in cash particularly for labour, purchase of sand etc.

Held by the court:

  • Provisions of Section 40A(3) can only be invoked on the expenditure which was paid in cash, otherwise not disallowable u/s. 37(1).
  • Since AO has not disallowed anything u/s. 37(1) we are of the opinion that CIT(A) is correct in treating the amount as genuine expenditure.
  • Assessee has demolished the existing structure, constructed a commercial property and later on let out. Therefore, provisions of Section 54F do not apply.
  • Assessee is not eligible for deduction u/s. 54F as nature of property has turned out to be commercial property and accordingly, provisions of Section 54F do not apply.


Section 40 (3) applies to the payments made in cast not through by way of cheques. In a business of construction some expenditure like payment to labour, it was assumed that they are not having any bank account, was made on daily routine so that construction can be run in normal course. That expenditure was genuine in nature and debited to account as collective sum while payment was made to many labours. Also on another issue tribunal held that provision of section 54 F are not applicable where nature of property turned out into commercial in place of residential.

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Category : Income Tax (27907)
Type : Judiciary (12080)
Tags : ITAT Judgments (5503) Jagjeet Singh (141) Section 40A(3) (41) Section 54F (175)

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