2021 (4) TMI 1352 - AT - Income Tax

Disallowance u/s 40A(3) - cash payments towards purchase of agricultural lands and vacant site - addition made as said payments are not covered by any exception laid down in rule 6DD - HELD THAT - From the facts narrated in the report of the ITI, it is clear that there is business expediency in the said cash payments and the sellers are agriculturists and have insisted on cash payments. As further mentioned in the remand report that the sellers have specifically stated that cheques are not reliable and that the reasons why they have insisted upon cash payments. Assessee could not have carried the business but or the cash payments for purchase of lands which were initially acquired as an investment and then after obtaining necessary land conversation , these lands were introduced as stock in trade and then put to sale. In the remand report, it was finally submitted that cash purchases are inevitable and thus prove the business expediency in this case. Thus addition as cash payment made towards purchase of agricultural lands, which was added by the AO u/sec. 40A(3) is liable to be set aside. Consequently, the addition stands deleted. Assessee has not insisted on the confirmation of addition qua cash payment made towards purchase of vacant site, hence the affirmation of the said disallowance by the Ld. CIT(A) does not warrant any interference. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Affirmation of partly disallowance of Rs. 28,61,410/- under section 40A(3) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Affirmation of partly disallowance of Rs. 28,61,410/- under section 40A(3) of the Income Tax Act, 1961:

The Assessee, engaged in the business of real estate, purchased agricultural lands on a cash basis, developed them into plots, converted them into stock-in-trade, and sold them, admitting profit on the sale. The Assessee argued that the provisions of section 40A(3) were not applicable. However, the Assessing Officer (AO) disallowed Rs. 1,35,87,225/- under section 40A(3) of the Act.

Upon appeal, the Assessee provided additional evidence, including confirmation letters from sellers, asserting that the sellers insisted on cash payments due to the absence of bank accounts. The AO, in the remand report, confirmed the identity of the sellers and acknowledged the business expediency of cash payments, stating it was a general practice among agriculturists who lack literacy and distrust cheques.

The Commissioner of Income Tax (Appeals) [CIT(A)] relied on the remand report and deleted the disallowance of Rs. 1,08,09,000/- for five transactions, as the sellers resided in a village without banking facilities, thus falling under the exception in Rule 6DD(g) of the Income Tax Rules. However, the CIT(A) sustained the disallowance of Rs. 24,70,000/- for the remaining transactions and Rs. 3,91,410/- for the purchase of a vacant site, as these payments did not meet any exceptions under Rule 6DD.

The Tribunal reviewed the remand report and found no contrary evidence against the AO’s admission regarding business expediency and the necessity of cash payments. The Tribunal cited a similar case (ITO Vs. Smt. Jalumuri Rama Lakshmi) where disallowance under section 40A(3) was not warranted when the transaction was genuine, and the identity of the payer and payee was not in doubt.

Conclusion:
The Tribunal set aside the CIT(A)'s decision regarding the disallowance of Rs. 24,70,000/-, deleting this addition, but upheld the disallowance of Rs. 3,91,410/- for the purchase of a vacant site, as the Assessee did not contest this amount. Thus, the appeal was partly allowed.