2016 (12) TMI 555 - AT - Income Tax

Disallowance made u/s 40A(3) - CIT(A) confirming the disallowance towards making cash payment for purchase of land as capital assets, holding the same as purchase of stock in trade - Held that - As perusuing the materials available on record it is noted from fixed assets chart of the company from audited accounts that as on 31st March 2012 assessee company has credited the tangible assets by an amount of ₹ 36,30,983/- which is shown as investment in the land. Also gone through the Memorandum and Articles of Association wherein the main objects to be pursued by the company on its incorporation to manage land buildings, to deal in real and personal property, to invest and deal with the money of the company not immediately required to in such a manner as the company may deem fit. It also includes acquire any movable and immovable property. The accounts of the assessee shows that the assessee has not claimed any such expenditure in its profit and loss account. Therefore, there cannot be any disallowance of such expenditure by invoking the provisions of Section 40A(3) of the Act - Decided in favour of assessee

Issues Involved:
1. Whether the land purchased by the assessee should be treated as stock in trade or as fixed assets.
2. Applicability of Section 40A(3) of the Income Tax Act, 1961, regarding disallowance of cash payments exceeding ?20,000.

Issue-wise Detailed Analysis:

1. Treatment of Land as Stock in Trade or Fixed Assets:
The primary contention revolved around whether the land purchased by the assessee should be classified as stock in trade or fixed assets. The assessee argued that although the main object of the company was real estate business, it had not commenced any business activity since incorporation. The lands purchased were shown as fixed assets in the audited balance sheet, and the intention was to hold these lands as investments, not for business purposes.

The Assessing Officer (AO) disagreed, noting that the company was formed with the main object of dealing in real estate, and had purchased land regularly, indicating business activity. The AO treated the land as stock in trade and applied the provisions of Section 40A(3) of the Income Tax Act, 1961.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the main object of the company was real estate business, and the purchase of land should be treated as stock in trade.

Upon appeal, the Appellate Tribunal (ITAT) examined the fixed assets chart and the Memorandum and Articles of Association. It was noted that the assessee had shown the land as tangible assets (investments) in the balance sheet and had not claimed any expenditure in the profit and loss account. The Tribunal concluded that the land was indeed held as fixed assets and not as stock in trade.

2. Applicability of Section 40A(3) of the Income Tax Act, 1961:
Section 40A(3) stipulates that any expenditure incurred in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by account payee cheque or bank draft, exceeding ?20,000, shall not be allowed as a deduction.

The AO invoked this section, disallowing ?37,00,000/- paid in cash for the purchase of land. The CIT(A) confirmed this disallowance, holding that the purchase was for stock in trade.

The ITAT, however, noted that Section 40A(3) applies to expenditure claimed in the profit and loss account. Since the assessee had not claimed the land purchase as an expenditure, the provisions of Section 40A(3) were not applicable. The Tribunal referred to a similar case (ACIT vs. M/s. Focal Point Builders & Promoters (P) Ltd.) where it was held that such cash payments for investment purposes do not attract the rigour of Section 40A(3).

The Tribunal concluded that the disallowance of ?37,00,000/- under Section 40A(3) was not justified, as the land was held as an investment and not as stock in trade. The appeal of the assessee was allowed, and the disallowance was deleted.

Conclusion:
The ITAT ruled in favor of the assessee, determining that the land purchased was to be treated as fixed assets and not as stock in trade. Consequently, the provisions of Section 40A(3) were not applicable, as the expenditure was not claimed in the profit and loss account. The appeal was allowed, and the disallowance of ?37,00,000/- was deleted.

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