2015 (7) TMI 692 - HC - Income Tax

Applicability of section 40A(3) - amount paid in cash by the appellant for purchase of property - Whether the Tribunal justified in holding that the amounts paid towards the acquisition of capital asset and later converted into stock-in-trade would attract the provisions of Section 40A(3)? - Held that - If the authorities below were to treat the transaction of purchase of land as a stock-in-trade (business purpose) and not as a capital asset, then they ought to have given sufficient opportunity to the assessee to prove her stand because this has not been done even though the genuineness of the transaction has not been disputed by the authorities and even the books of account of the assessee came to be accepted. In our view, the department has also not provided sufficient opportunity to the assessee with regard to her establishing that business exigency required payment in cash, in as much as the department if it was not satisfied by the explanation given by the assessee, ought to have issued a show cause notice to her to explain the same. Thus on account of petitioner not having been afforded adequate opportunity to show cause before a final decision was taken, the matter requires to be remanded back to the assessing officer for deciding the case afresh in accordance with law and after giving an opportunity to the appellant-assessee. Since we are remanding the matter back to the assessing officer, we are not answering the questions which have been framed in this appeal and leave it open to the authorities to decide the matter in accordance with law. Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Applicability of Section 40A(3) of the Income Tax Act, 1961 on cash payments for property purchase.
2. Treatment of property purchase as capital asset or stock-in-trade.
3. Justification of disallowance under Section 40A(3) despite genuine transactions.

Analysis:
1. The main issue in this appeal was whether the cash payments made by the appellant for property purchase would attract Section 40A(3) of the Income Tax Act, 1961. The appellant had purchased 12 properties, with payments for nine made by cheques/bank drafts and the remaining three by cash. The Assessing Officer found that the cash payments for the three properties were for business purposes, invoking Section 40A(3) due to payments exceeding Rs. 20,000. The appellant argued that the land was initially purchased as a capital asset and later converted to stock-in-trade, seeking exemption under the second proviso of Section 40A(3) citing business exigency and seller identification. The appellant relied on various legal precedents to support their case.

2. The appellant contended that the purpose of Section 40A(3) was preventive, not penalizing, aiming to curb tax evasion and unaccounted money flow. They argued that even after converting the property to stock-in-trade, it should not be considered a business transaction if initially purchased as a capital asset. The appellant criticized the assessing officer for denying benefits without giving an opportunity to explain and for not accepting the books of accounts showing the purchase as a capital asset. The appellant also challenged the CIT's order, claiming that relevant documents were provided to identify sellers and their PAN numbers, but no further opportunity was granted to produce evidence.

3. On the other hand, the revenue contended that the appellant failed to demonstrate a business exigency for cash payments and that converting the property to stock-in-trade was an afterthought. The revenue argued that the land was purchased for business purposes as per the appellant's disclosure of being in the land sale and development business. The court observed that the authorities should have provided the appellant with sufficient opportunity to prove her stand, especially regarding business exigency for cash payments. The court emphasized that the department should have issued a show cause notice if unsatisfied with the appellant's explanation.

4. Ultimately, the court decided to remand the matter back to the assessing officer for a fresh decision, emphasizing the lack of adequate opportunity provided to the appellant to present her case. The court highlighted the need for a fair process and opportunity for the appellant to explain business exigencies and other relevant factors. The court refrained from answering the framed questions, leaving it to the authorities to decide the matter in accordance with the law, ensuring that all contentions from both parties could be raised before the assessing officer.