2017 (5) TMI 365 - AT - Income Tax

Disallowance under the provisions of section 40A(3) - cash payment for purchase of land - Held that - In a particular case where there exist a business expediency and other relevant factors and also the payments are genuine, then the Acts provide for immunity from disallowance of expenditure, if the assessee proves to the satisfaction of the assessing officer that there exists a business expediency in making the cash payments. In this case, the assessee has filed necessary evidences to prove that the impugned land has been acquired as an investment and subsequently converted into stock in trade of his business. Therefore, we are of the view that the A.O. was erred in disallowing cash payments by invoking provisions of section 40A(3) of the Act. Hence, we direct the A.O. to delete additions made towards cash payments u/s 40A(3) of the Act. - Decided in favour of assessee.

Summary

Issues:
Application of section 40A(3) of the Income Tax Act on cash payments made for purchase of land.

Analysis:
The appellant, a proprietor of a business, filed his income tax return for the assessment year 2010-11, declaring total income. The Assessing Officer (A.O.) noticed cash payments made for the purchase of land and invoked section 40A(3) of the Act to disallow the expenditure. The appellant argued that the land was initially acquired as an investment but later converted into stock in trade, hence not subject to section 40A(3). The A.O. disallowed the amount under section 40A(3) due to lack of evidence supporting the claim that the land was initially intended for agricultural purposes. The CIT(A) upheld the A.O.'s decision, stating that the appellant treated the land as part of his business and not as an investment. The appellant contended that section 40A(3) does not apply when assets are acquired as investments. The Tribunal found that the A.O. erred in disallowing the cash payments, as the land was initially acquired as an investment and subsequently converted into stock in trade. The Tribunal emphasized that section 40A(3) does not apply to payments made for acquiring capital assets or investments, directing the A.O. to delete the additions made under section 40A(3).

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant and directing the A.O. to delete the disallowed cash payments under section 40A(3) of the Income Tax Act.