Brief Facts of the case:
The assessee was engaged in real estate business. During the course of the year in question, it entered into a joint venture with M/s Newera Sanitarware Pvt. Ltd. and M/s Yah Softech Pvt. Ltd., for purchasing a plot of land admeasuring 121 kanals and 10 marlas, situated at Mouja Dhankot, Tehsil district Gurgaon. The assessee’s share in the plot was 25%. While entering into the agreement for the purchase of property, the three companies made an initial advance of Rs.35 lacs.
While making such initial advance payment, a total cash payment of Rs.4 lac was also made. The assessee’s 25% share in such cash payment was at Rs.1 lac. Such cash payment of Rs.1 lac was recorded by the assessee in its books of accounts as on Dec 29, 2005. Due to some dispute arose between the parties and the deal could not be finalized and the same is still undecided. The Assessing Officer during the course of scrutiny assessment proceedings invoked the provisions of Sec 40A (3) and made an addition of Rs. 20,000 being 20%# of Rs. 1 lacs paid by the assesseee in cash.
The action of AO was upheld by CIT(A).Aggrieved by the order of the CIT(A) assessee approached to ITAT.
#(for AY 2006-07 disallowance was 20% of cash payments in in excess of Rs. 20,000).
Contention of the assessee:
The learned counsel for the assessee contended that the advance made by assessee to purchase share in land was a payment made to acquire an asset to be capitalized in balance sheet and in respect of which no deduction has been claimed by the assessee. The payment was in no way any expenditure which could be routed through P&L A/c and can be claimed as deduction from the profits of business. Thus, section 40A (3) not at all cover such payments and disallowance made by AO is not tenable in law.
Contention of the Revenue:
The AO contended that since the payment has been made in excess of Rs. 20,000 in cash .thus, the same is hit by the disallowance of Sec 40A(3) and it is irrelevant how the transaction is recorded by the assesseee in accordance with the generally accepted accounting practices .
Thus, the 20% amount is disallowable u/s 40A(3).
Decision of the ITAT:
The ITAT after hearing the rival submissions observed that as per Sec 40A(3) any expenditure in respect of which payment is made’ in a sum exceeding Rs.20,000/- otherwise than by account payee cheque etc., then, 20% 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(indispensable) that the assessee must have incurred expenditure in respect of which such payment is made in cash.
Therefore, 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. But if the assessee has not claimed any deduction, directly or indirectly, even if the payment is made in cash, the provisions of section 40A(3) will become non-operative.
Therefore, the tribunal hereby set aside the order of CIT(A) and appeal of the assessee is hereby allowed.
(Analysed by CA Saurabh Chokhra)