2017 (8) TMI 948 - AT - Income Tax

Disallowance u/s 40A(3) - cash purchases - stock in trade of land - business expediency - disallowing purchases on the one hand, addition into stock on the other hand - Held that - AO as well as Ld. CIT(A) has not denied the genuineness and bonafide transactions made by the assessee but has added the payment made for the purchase of the land to the income of the assessee which is not sustainable in the eyes of law. Further find that it was accepted by the authorities below that the purchases as appearing in the balance sheet as a closing stock and on the other hand addition of payment made for purchase of land is bad at law. The assessee has shown the short term loss in the computation of income which has been carried forward in the subsequent year. However authorities below failed to give the credit against income of the assessee neither they have carried forward the same in spite of full details on record and as well as the ITO called the information u/ s 131(6) from the respective companies, the act of the authorities below is erroneous and unwarranted and the credit of the short term loss against the income of the assessee need to be allowed.

Issues Involved:
1. Interpretation of Section 40A(3) of the Income Tax Act, 1961.
2. Addition of payment made for the purchase of land to the income of the assessee.
3. Disallowance of expenses for material purchase due to lack of verification.
4. Credit and carry forward of short-term loss.

Detailed Analysis:

1. Interpretation of Section 40A(3) of the Income Tax Act, 1961:
The primary issue revolves around the interpretation of Section 40A(3), which mandates disallowance of expenditure in excess of ?20,000 paid otherwise than by an account payee cheque or bank draft. The assessee argued that the authorities misinterpreted the provision by disregarding the term "business expediency" and that the transactions were genuine and bona fide. The Tribunal referred to several case laws, including the Supreme Court's decision in *Attar Singh Gurmukh Singh vs. ITO* (191 ITR 667), which clarified that genuine and bona fide transactions should not be disallowed under Section 40A(3). The Tribunal concluded that the authorities below had not denied the genuineness of the transactions, and therefore, the addition of ?6,00,000 under Section 40A(3) was not justified.

2. Addition of Payment Made for the Purchase of Land to the Income of the Assessee:
The AO added ?6,00,000 to the income of the assessee, stating it was a cash payment for the purchase of stock in trade of land. The Tribunal found that the authorities had accepted the purchases as appearing in the balance sheet as closing stock but still added the payment made for the purchase of land, which was deemed "bad at law." The Tribunal emphasized that the genuineness of the transactions was not disputed, and thus, the addition was not sustainable.

3. Disallowance of Expenses for Material Purchase Due to Lack of Verification:
The AO disallowed ?58,315 out of ?1,62,855 claimed for material purchase and labor expenses due to the non-production of bills for verification. The Tribunal did not specifically address this disallowance in detail, focusing more on the broader issue of Section 40A(3) and the short-term loss.

4. Credit and Carry Forward of Short-Term Loss:
The assessee claimed a short-term loss in the computation of income, which was carried forward to the subsequent year. The authorities failed to give credit against the income of the assessee and did not carry forward the loss despite having full details on record. The Tribunal found this act erroneous and unwarranted, directing that the credit of the short-term loss against the income of the assessee should be allowed.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the addition of ?6,00,000 made under Section 40A(3) and directing that the short-term loss should be credited against the income of the assessee. The Tribunal relied on various judicial precedents to conclude that the transactions were genuine and bona fide, and thus, the disallowance under Section 40A(3) was not applicable. The decision emphasized that the authorities should consider the genuineness of transactions and the business expediency before making such additions.

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