2013 (4) TMI 783 - AT - Income Tax

Disallowance of 20% cash payment u/s 40A(3) made in respect of its stock-in-trade - Held that - No purpose will be served in deferring disallowance of such expenditure, which is made in cash during the year under consideration. As per our considered view, giving such direction for deferring the disallowance to subsequent years will frustrate the purpose of Section 40A(3), which is meant for discarding cash payment made during the year in respect of trading goods. Furthermore, there will always be uncertainty as to the year in which the assessee come forward and claim such expenditure in its profit and loss account. In the instant case before us, even today, the assessee has not come forward to offer such expenditure in the profit and loss account, when more than 6 years have been passed. For the time being, even if it is presumed that the assessee will come forward in the subsequent year, but in that year, keeping in view the period of limitation, no disallowance could be agreed by the assessee in respect of cash payment made for expenditure incurred in the assessment year 2006-07. Furthermore, entries made in books of account is not so relevant for allowing or disallowing a claim of deduction which is necessarily to, be allowed as per provisions of Income-tax Act, 1961. Accordingly, we confirm the action of the CIT(A) for upholding the disallowance so made under Section 40A(3). - Decided against assessee.

Summary

Issues:
1. Disallowance of 20% cash payment u/s 40A(3) of the Income-tax Act, 1961 for stock-in-trade.

Analysis:
The appeal was filed against the CIT(A)'s order for the assessment year 2006-07, regarding the disallowance of 20% cash payment under Section 40A(3) of the Income-tax Act, 1961, related to the stock-in-trade of the assessee. The assessee, engaged in real estate business, had purchased land partially in cash, which was considered as stock-in-trade. The Assessing Officer disallowed 20% of the cash payment, leading to the appeal.

The CIT(A) upheld the disallowance of Rs. 6 lakhs under Section 40A(3) for a cash payment of Rs. 30 lakhs made for land purchase. The assessee contended that since no expenditure was claimed in the profit and loss account during the year, the invocation of Section 40A(3) was unwarranted. The Authorized Representative cited a Coordinate Bench decision where disallowance under Section 40A(3) was set aside due to unclaimed expenses in the profit and loss account.

The Senior DR argued that the land purchased was part of the stock-in-trade, and as cash payment violated Section 40A(3), the Assessing Officer's disallowance was justified. The Tribunal found that the assessee was in the business of property development, and the purchased land was considered stock-in-trade. Despite not reflecting the transaction in the profit and loss account, the nature of the asset required it to be part of the trading account. Deferring disallowance would defeat the purpose of Section 40A(3) meant to restrict cash payments for trading goods. The Tribunal upheld the CIT(A)'s decision based on these grounds.

The Tribunal also referred to the need for judicial consistency, citing a Supreme Court case. The Tribunal dismissed the assessee's appeal, emphasizing the importance of correcting errors and following judicial conscience. The decision was pronounced on 12th April 2013, confirming the disallowance under Section 40A(3) for the cash payment related to stock-in-trade.

This detailed analysis addresses the issues involved in the legal judgment, covering the arguments presented, the Tribunal's reasoning, and the final decision rendered by the Tribunal.