2015 (10) TMI 935 - AT - Income Tax

Disallownace of layout formation expenses - AO noticed that the assessee sold a property to Kammagondanahalli Sri Maruti Seva Samithi from which the assessee reduced the cost of acquisition, layout formation expenses and labour charges - only reason given by the AO and CIT(A) in making disallowance was that the sale deed was registered even before the expenditure was incurred and the Assessee as on the date of incurring the expenditure was not owner of the property - Held that - The approach adopted by the Revenue authorities are unsustainable in law. But for incurring of the aforesaid expenditure the Assessee would not have been able to realize the sale consideration. It was part and parcel of the agreement that the Assessee has to incur these expenses. We are of the view that even though the expenditure incurred after the execution of the deed by the assessee, there existed a commitment in relation to such sale by plain reading of clause 4 of the agreement to sale deed. It is binding on the assessee. Moreover, the payment of ₹ 1,04,25,000/- was withheld by the purchaser for completion of the layout formation. Only on completion of the layout formation expenditure, the assessee was able to recover the above said amount on 28/2/2008. The Assessing Officer was not right in holding that the right and interest on the property had been already transferred before such expenditure. There is no dispute that such expenses were incurred by the assessee. In our view, the assessee is eligible to claim the expenditure for the obligation existed even after sealing of the agreement - Decided in favour of assessee. Disallowance u/s 40A(3) - Held that - There is no dispute that the assessee had issued an open bearer cheque to Shri Chandre Gowda for ₹ 20,00,000/-. This was a clear violation of the provisions of Sec.40A(3) of the Act and therefore the disallowance had to be made. Even though the assessee contested that the cheque was issued under special circumstances and business exigencies, in fact, the assessee had contravened the provisions of sec. 40A(3) of the Act. - Decided against assessee.

Summary

Issues:
1. Disallowance of layout formation expenses of Rs. 21,86,375
2. Disallowance u/s 40A(3) of Rs. 20,00,000

Disallowance of Layout Formation Expenses:
The main issue in this case revolved around the disallowance of layout formation expenses amounting to Rs. 21,86,375. The Assessing Officer (AO) noted that the assessee made payments for layout formation charges after selling a property to a specific entity. The AO rejected the deduction claimed by the assessee, stating that the expenses were incurred on a property for which the assessee had already transferred all rights to the purchaser. The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the AO's decision. However, during the appeal before the Tribunal, it was argued that the expenses were mandatory as per the agreement to sell, and the seller was bound to comply with the terms. The Tribunal observed that the expenditure was crucial for realizing the sale consideration and that the commitment to incur these expenses existed even after the sale deed was executed. The Tribunal allowed the appeal, stating that the assessee was eligible to claim the expenditure.

Disallowance u/s 40A(3):
Regarding the disallowance under section 40A(3) of Rs. 20,00,000, the AO disallowed the expenses made through an open bearer cheque, contravening the provisions of the Act. The CIT(A) confirmed this disallowance. The assessee argued that the cheque alteration was due to business exigencies, but the Tribunal found that issuing an open bearer cheque was a clear violation of the law. Therefore, the Tribunal dismissed the relevant ground of appeal by the assessee.

In conclusion, the Tribunal partly allowed the appeal of the assessee, allowing the claim for layout formation expenses but upholding the disallowance under section 40A(3).