2016 (5) TMI 1515 - AT - Income Tax

Addition u/s 40A(3) - assessee had made payments in cash - HELD THAT - AO has presumed that only sold quantity of land was purchased during the year under consideration. There is nothing on record with the Authorities Below to arrive at this conclusion. In view of the above facts and circumstances we do not find that action of learned CIT(A) in confirming the disallowance made by AO u/s 40A(3) of the Act, can be upheld as there is no evidence of purchase of land by assessee and also there is no evidence that assessee had made payments to the owners of land as has already been established by the fact that owners had received payments form actual buyers only and therefore, there can not be any question of disallowance u/s 40A(3). Therefore, we hold that on merits and facts of the case no disallowance was warranted u/s 40A(3). Even otherwise, if it is assumed that assessee must have first purchased the land and had made payments in cash even then the disallowance u/s 40A(3) cannot be made in view of the judgment in the case of Sh. Gurdas Garg 2015 (8) TMI 569 - PUNJAB HARYANA HIGH COURT Where the identity of the persons who has received payment in cash is established and genuineness of transactions is established, no disallowance can be made under the provisions of section 40A(3). In the present case even if it is assumed that assessee had first purchased the land and had made the payments to sellers of land the identity of sellers of land is established as is evident from the copy of agreement to sell impounded during survey and also the identity of assessee is established who is deemed to have purchased the land and therefore, also the facts and circumstances of the present case read with judgment of Hon ble Punjab Haryana High Court in the case of Sh. Gurdas Garg suggest that no disallowance could have been made in the present case. In view of the above we allow ground Nos.3 to 6 of the appeal of the assessee.

Issues Involved:
1. Whether the transaction of purchase and sale of land by the assessee was a business venture or an investment.
2. Whether the set-off of unabsorbed brought forward short-term capital loss against the short-term capital gain of the current year was correctly denied.
3. Whether the disallowance under section 40A(3) of the Income Tax Act, 1961, was justified.
4. Whether the payment of ?25,00,000/- in cash was correctly disallowed under section 40A(3).

Issue-wise Detailed Analysis:

1. Nature of Transaction: Business Venture vs. Investment
The primary issue was whether the transaction of purchase and sale of land by the assessee was a business venture or an investment. The Assessing Officer (AO) treated the transaction as a business venture, citing factors such as the quick resale of land in plots, development activities, and the short holding period. The AO referred to several Supreme Court judgments, including Smt. Indramani Bai vs. Additional Commissioner of Income-tax and G. Venkataswami Naidu & Co. v. CIT, to support the view that the transaction was an adventure in the nature of trade. The CIT(A) upheld the AO's decision, emphasizing the assessee's lack of funds to complete the purchase, the quick resale of plots, and the development activities undertaken. The Tribunal agreed with the lower authorities, noting the evidence of plotting and quick resale, and concluded that the transaction was indeed a business venture.

2. Set-off of Unabsorbed Short-term Capital Loss
The assessee contended that the CIT(A) erred in denying the set-off of unabsorbed brought forward short-term capital loss against the short-term capital gain of the current year. However, given the Tribunal's conclusion that the transaction was a business venture and not a capital investment, this issue became moot. The income from the transaction was to be assessed as business income, not capital gains, thereby nullifying the relevance of set-off provisions applicable to capital gains.

3. Disallowance under Section 40A(3)
The AO disallowed ?1,53,60,890/- under section 40A(3), asserting that the assessee had made cash payments for the purchase of land, which violated the provisions of the section. The CIT(A) partly upheld this disallowance but reduced it to ?1,28,60,890/-, excluding the initial advance of ?25,00,000/- which was offered as income under "income from other sources." The Tribunal, however, found that the presumption that the assessee made cash payments was not supported by evidence. The Tribunal noted that sale deeds were executed directly by the sellers to various buyers, and there was no mention of the assessee in these deeds. Therefore, the disallowance under section 40A(3) was not justified.

4. Payment of ?25,00,000/- in Cash
The Revenue challenged the CIT(A)'s decision to allow relief of ?25,00,000/- paid in cash, arguing that it violated section 40A(3). The Tribunal upheld the CIT(A)'s decision, noting that further disallowance would result in double taxation since the amount was already offered as other income. Additionally, the Tribunal referred to the Punjab & Haryana High Court's judgment in Gurdas Garg vs. CIT, which held that disallowance under section 40A(3) is not warranted if the identity of the payees and the genuineness of the transactions are established.

Conclusion:
The Tribunal partly allowed the assessee's appeal, holding that the disallowance under section 40A(3) was not warranted and that the transaction was a business venture. The Revenue's appeal was dismissed, as the disallowance of ?25,00,000/- was correctly deleted by the CIT(A) to avoid double taxation, and the tax effect was below the threshold for appeal as per CBDT Instruction No.21 of 2015.

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