2016 (3) TMI 1233 - AT - Income Tax

Addition u/s 40A(3) - purchase of land by making cash payment to the Sellers - Held that - From the perusal of accounts filed before us, we see that no claim of any expenditure or even purchases have been made during the year. The lands purchased have been transferred to project in progress account. The language of the section is very clear that in cases of expenditure incurred by the assessee in cash, no deduction on account of that expenditure is allowed under this provision. We are aware of the proposition that even if the expenditure is in the nature of purchases, the same is prone to disallowance under section 40A(3) of the Act. However, when no claimed of any such expenditure or purchases has been made, how can a disallowance be made. In view of this, we direct the Assessing Officer to delete the disallowance. - Decided in favour of assessee Disallowance u/s 40A(3) - proof of genuineness of the transaction being carried out of business exigency. - Held that - Even if the assessee does not fall in any of the clauses of Rule 6DD, being the exceptions provided invoking the provisions of section 40A(3) of the Act can be dispensed with if the assessee is able to prove the business expediency out of which it had to make the cash payments and the genuineness of the transaction has also to be proved. We observe that none of the lower authorities have questioned the genuineness of the transaction. The only reason for disallowance is the provisions of section 40A(3) of the Act. The assessee had all along stated the reason of business exigency out of which he had to make cash payments, which were also not doubted by any of the lower authorities. Further, we see that the facts of the case are exactly same as that of Gurdas Garg (2015 (8) TMI 569 - PUNJAB & HARYANA HIGH COURT ). Therefore, we are inclined to hold that the said cash payments cannot be disallowed to the assessee. The addition is hereby deleted.- Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the Income Tax Act, 1961 regarding cash payments exceeding ?20,000.
2. Genuineness of transactions and business expediency for cash payments.

Detailed Analysis:

Issue 1: Applicability of Section 40A(3) of the Income Tax Act, 1961

The primary issue in all the appeals is the applicability of Section 40A(3) of the Income Tax Act, 1961, which disallows deductions for expenditures exceeding ?20,000 made in cash. The Assessing Officer (AO) disallowed 20% of the cash payments made by the assessee for the purchase of land, amounting to ?12,10,000/-, ?15,85,300/-, ?2,53,66,000/-, and ?1,22,57,417/- for the respective assessment years.

The assessee contended that no business was conducted during the year, and the land purchases were transferred to the 'project in progress' account without claiming any expenses. Therefore, Section 40A(3) should not apply. The CIT (Appeals) rejected this argument, emphasizing that the onus was on the assessee to prove exceptional circumstances justifying cash payments.

Upon appeal, it was noted that since no expenses were claimed by the assessee, Section 40A(3) could not be invoked. The Tribunal directed the AO to delete the disallowance, as the language of Section 40A(3) clearly pertains to incurred expenditures, which were not claimed in this case.

Issue 2: Genuineness of Transactions and Business Expediency

For the assessment years where the purchases formed part of stock-in-trade, the assessee argued the genuineness of transactions and business exigency necessitating cash payments. The Tribunal referred to the judgment of the Punjab & Haryana High Court in the case of Gurdas Garg Vs. CIT, which held that cash payments made by real estate developers cannot be disallowed under Section 40A(3) if the transactions are genuine and made out of business necessity.

The Tribunal observed that the lower authorities did not question the genuineness of the transactions or the business exigency. Following the precedent set by the Punjab & Haryana High Court, the Tribunal concluded that the cash payments could not be disallowed under Section 40A(3), as the assessee demonstrated business exigency and the genuineness of the transactions.

Conclusion:

In summary, the Tribunal allowed all the appeals, emphasizing that Section 40A(3) is not applicable when no expenses are claimed, and cash payments made out of business exigency and genuine transactions should not be disallowed. The Tribunal directed the AO to delete the disallowances made under Section 40A(3) for all the assessment years in question.