2019 (3) TMI 1714 - AT - Income Tax

Disallowance u/s 40(A)(2)(b) - assessee during the year had purchased land worth ₹ 1.75 crores from one of the Directors namely Ranjit Shitole - payment made in excess to the fair market value of the land - HELD THAT - Undoubtedly, the plots which are so developed are smaller in size and would fetch higher price as compared to the price paid for the large plots of land. There is no dispute to the same. However, we must consider the sale transaction entered into by the assessee, wherein the said plot of land measuring 300 square meters was sold for ₹ 9,90,165/- i.e. sale price agreed upon between the parties. The market value of said piece of land as per stamp duty valuation was ₹ 49,940/-. The sale consideration has been accepted by the AO in toto and adopted for working the income in the hands of assessee. However, if we consider the totality of facts, we find that the market value as determined by stamp duty and sale consideration received by the assessee had huge difference in value. The fair market value of the property was much higher than the Government / Stamp duty valuation. On such simile, plot which was purchased by the assessee for ₹ 1.75 crores as negotiated and for business needs of assessee, wherein on its sale (partial), the assessee had already received ₹ 17.85 crores, it cannot be said that the assessee has paid more than the market value of plot of land to the Director and hence, provisions of section 40A(2)(b) of the Act are attracted / applied. There is no merit in the stand of authorities below in this regard. Another aspect which needs to be kept in mind is that person Shri Ranjit Shitole from whom the said plot of land was purchased was taken as Director / shareholder and also given option to share the profits by the assessee company, since it was not in a position to pay huge amount to the said person. No merit in the orders of authorities below in applying the provisions of section 40A(2)(b) of the Act on the ground that transaction is with related party as defined in section 40A(2)(b). - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance under section 40A(2)(b) of the Income-tax Act, 1961 relating to excessive payment made for purchase of land from a Director.

Detailed Analysis:
The appeal filed by the assessee was against the order of the Commissioner of Income Tax Appeals-1 confirming the disallowance under section 40(A)(2)(b) of the Act amounting to ? 45,57,905 made by the Assessing Officer without considering the submissions made. The assessee contended that the purchase transaction of land with one of its directors was at the correct value as per prevailing market conditions in the area, and the disallowance was unjustified. The company had developed the land and sold plots at higher rates than the government ready reckoner value and purchase value, but the authorities upheld the disallowance (para 2).

The Assessing Officer noted that the payment made by the assessee to the director for land purchase was in excess of the fair market value determined by the Government-approved Valuer, leading to the disallowance under section 40A(2)(b) of the Act. The assessee argued that the provisions did not cover transactions related to immovable property and that the valuation report was not acceptable. However, the Assessing Officer held that the excess payment was disallowable as the assessee failed to provide justification for it (para 3).

Before the CIT(A), the assessee explained its case through written submissions, but the order was upheld, leading to the appeal before the ITAT. The authorized representative for the assessee argued that the purchase consideration was as per market conditions and justified the payments made. The market value of the plots sold was significantly higher than the stamp duty valuation, supporting the contention that fair market value was higher (para 6).

The issue before the ITAT was the addition made under section 40A(2)(b) of the Act concerning the excessive payment for land purchase from a director. The ITAT analyzed the facts, emphasizing the development and sale of plots by the assessee at higher rates, indicating the fair market value was higher than stamp duty valuation. Considering the totality of facts, the ITAT found no merit in applying section 40A(2)(b) and deleted the addition, allowing the appeal raised by the assessee (para 8-10).

In conclusion, the ITAT allowed the appeal of the assessee, deleting the addition made under section 40A(2)(b) of the Act, as the excessive payment for land purchase from a director was found justified based on market conditions and business needs, and the fair market value was determined to be higher than the stamp duty valuation (para 11).