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2016 (3) TMI 1304 - AT - Income TaxAddition made u/s 40A(3) on account of cash payment towards purchase of land - Held that - where a Developer had made payments to farmers in cash at the time of purchase of land through a registered sale deed executed before Sub Registrar, the component of cash payment was held as admissible and the invocation of the provisions of section 40A(3) was found to be unjust - reliance is placed on ITAT, Raipur Bench in the case of ACIT vs. R.P. Real Estate Pvt. Ltd. 2015 (7) TMI 1283 - ITAT RAIPUR - thus it was unjust to invoke the provisions of section 40A(3) - we hereby reverse the findings of the authorities below and direct to delete the addition - Decided in favor of assessee. Whether the expenditure incurred by the assessee for development of land is to be included for the purpose of valuation of closing stock of land - Held that - method adopted by the assessee was average purchase price - assessee has furnished the calculation of the valuation stock and before the AO he has admitted that at best a difference in stock of ₹ 2,31,360/- could be assessed. This offer of the assessee has duly been recorded in the assessment order - we therefore, hold that after considering the submissions as well as the method of valuation, at best, a sum of ₹ 2,31,360/- could be upheld by CIT(A), instead of granting the total relief - thus AO is directed to compute the addition accordingly - allowed for statistical purposes. Disallowance made u/s 40A(3) - Held that - the expenditure was towards purchase of uniform and payment to staff. Each payment was described by the assessee - CIT(A) has examined the expenditure incurred and thereupon arrived at a conclusion that the payments although were in cash but petty in nature - On that basis he has held that the provisions of section 40A(3) were wrongly invoked - Decided in favor of assessee. Disallowance of expenditure incurred by partners - Held that - the expenses was incurred for the purpose of travel, pooja expenses, office expenses etc. CIT(A) has held that considering the nature of the business as well as the scale of the business, the expenditure in question was related to the business activities of the assessee - thus CIT(A) has rightly granted relief after considering the nature of expenditure - Decided in favor of assessee. Disallowance of expenditure - Travelling for marketing - Held that - CIT(A) has allowed the claim by assigning the reason that in real estate business travelling is required. However, the said reasoning is general in nature as against that the AO had made specific observation that some of the expenditure were connected with the business but personal in nature - thus we hereby uphold the addition to the extent of ₹ 25,000/- and for rest of the amount the relief granted by learned CIT(A). Disallowance u/s 40a(2)(b) - Held that - the first onus is on the AO to place on record his satisfaction that the expenditure was in excess of the fair market value. In this case no such attempt had been made by the AO - assessee s explanation was that the payment of commission was an ascertained liability of the assessee, hence in the interest of business the commission was paid even if the post dated cheques have been received from the customers at the time of booking of the plot - hence the decision of payment of commission appears to be a business decision of the assessee. Moreover, the AO was not justified to invoke the provisions of section 40A(2)(b) in the absence of any evidence to compare the fair market value - Decided against the revenue.
Issues Involved:
1. Sustaining addition under Section 40A(3) for cash payment towards land purchase. 2. Inclusion of land development expenditure in closing stock valuation. 3. Deletion of disallowance under Section 40A(3) for petty cash payments. 4. Deletion of additions for personal use expenses. 5. Deletion of additions for traveling expenses. 6. Deletion of entertainment expenses. 7. Deletion of disallowance under Section 40A(2)(b) for commission payments to relatives. Issue-wise Detailed Analysis: 1. Sustaining Addition under Section 40A(3) for Cash Payment towards Land Purchase: The assessee firm, engaged in land development and construction, was found to have made cash payments totaling ?64,35,000/- for land purchases, which exceeded the limit prescribed under Section 40A(3). The assessee argued that payments were made to farmers who insisted on cash transactions, and the genuineness of the transactions was not in doubt. The ITAT referenced the case of ACIT vs. R.P. Real Estate Pvt. Ltd., where payments to illiterate villagers were considered admissible, and the invocation of Section 40A(3) was deemed unjust. Following this precedent, the ITAT reversed the authorities' findings and directed the deletion of the addition. 2. Inclusion of Land Development Expenditure in Closing Stock Valuation: The AO questioned the difference in closing stock valuation, attributing it to unaccounted development expenses. The CIT(A) found that the assessee consistently valued stock at purchase price and changing the method would nullify the impact. The ITAT upheld the CIT(A)'s decision but modified it to recognize an admitted difference of ?2,31,360/- in stock valuation, directing the AO to compute the addition accordingly. 3. Deletion of Disallowance under Section 40A(3) for Petty Cash Payments: The AO disallowed ?46,660/- for uniform and staff payments, citing unsupported vouchers. The CIT(A) found the payments petty and below ?20,000/-, thus not invoking Section 40A(3). The ITAT agreed with the CIT(A) and dismissed the Revenue's ground. 4. Deletion of Additions for Personal Use Expenses: The AO disallowed ?39,915/- for expenses deemed personal. The CIT(A) recognized these as business-related, considering the nature and scale of the business. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's ground. 5. Deletion of Additions for Traveling Expenses: The AO disallowed ?89,700/- out of ?1,64,871/- for traveling expenses, citing personal use. The CIT(A) allowed the claim, noting the necessity of travel in real estate. The ITAT partially upheld the addition to ?25,000/-, approving the rest of the relief granted by CIT(A). 6. Deletion of Entertainment Expenses: The AO disallowed ?17,689/- out of ?1,61,980/- for entertainment expenses, citing personal use. The CIT(A) allowed the claim, but the ITAT reversed this finding, confirming the AO's addition due to the personal element involved. 7. Deletion of Disallowance under Section 40A(2)(b) for Commission Payments to Relatives: The AO disallowed ?5,02,900/- in commission payments to relatives, arguing they were unjustified due to outstanding plot payments. The CIT(A) found no basis for invoking Section 40A(2)(b) without comparing fair market value. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's ground. Conclusion: The assessee's appeal was allowed, the Revenue's appeal was partly allowed, and the assessee's cross-objection was partly allowed. The ITAT's decisions were based on precedents, the nature of the business, and the genuineness of transactions, ensuring a fair and just outcome.
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