2012 (12) TMI 1028 - AT - Income Tax

Disallowance u/s 40A(3) - assessee made the payment in cash which was to be made through cheque therefore there is a contravention to the provisions of Section 40A(3) - advance given to the farmers for acquisition of land - Held that - As advances paid to the land owners for purchasing the land have not resulted in any stock in trade/work in progress for the year under consideration therefore on that particular date it would not qualify for disallowance as expenses or payment within the meaning of Section 40A(1) read with Section 40A(3) - in such a situation we are in agreement with the argument of the learned counsel for the assessee that the claim of expenditure/payment has to form part of the profit & loss account in the first place before the question of its disallowance arises. We are also in agreement with the finding of the learned CIT(A) that the advance given to the farmers for acquisition of land does not form part of stock in trade as on 31.3.2007. Therefore the provision of Section 40A(3) would not apply. - Decided against revenue

Summary

Issues: Disallowance under Section 40A(3) of the Income Tax Act

Issue 1: Disallowance under Section 40A(3)
The Revenue appealed against the order of the first appellate authority, challenging the deletion of the disallowance of Rs. 38,40,000 made under Section 40A(3) of the Income Tax Act. The main contention was that the assessee made cash payments that should have been made through cheques, violating the provisions of Section 40A(3). The Revenue argued that no justification for the cash payments was provided by the assessee, supporting the Assessing Officer's decision to disallow the amount. On the other hand, the assessee's counsel defended the impugned order, stating that the cash payments were advances to farmers for land purchase made beyond banking hours, with cheques also issued to the same individuals. It was emphasized that these payments were not claimed as expenses and were made due to business compulsions. The Tribunal noted that the advance given to farmers for land acquisition did not result in stock in trade or work in progress for the relevant year, as per the audit report and financial statements. Therefore, the Tribunal agreed with the assessee's argument that since the payments were not claimed as expenditure, there was no basis for disallowance under Section 40A(3) at that time. The Tribunal concurred with the first appellate authority's finding that the cash advances did not form part of stock in trade, hence Section 40A(3) did not apply. The Tribunal affirmed the impugned order, granting relief to the assessee with the condition that if the advances were treated as part of work in progress or stock in trade in the future, it would be decided in accordance with the law.

Conclusion
The Tribunal dismissed the Revenue's appeal, upholding the impugned order that deleted the disallowance under Section 40A(3) of the Income Tax Act. The decision was pronounced on 7th December 2012 by the Tribunal.