2017 (9) TMI 1512 - AT - Income Tax

Disallowance u/s 40A(3) - Held that - Assessee had filed copies of sale deeds of the lands with the Assessing Officer and Ld. CIT(A) and authorities below did not find any discrepancies in the said sale deeds. The genuineness of the transactions was not doubted. The authorities below has not disbelieved the fact of payments having been made. The identity of the persons to whom payments has been made has been established as the sale deeds were registered with the Revenue authorities. In the case law of Attar Singh Gurmukh Singh vs. ITO (1991 (8) TMI 5 - SUPREME Court) the Hon ble Supreme Court of India has held that in respect of trading activities no disallowance u/s 40A(3) was warranted. CIT-A restricted disallowance u/s 40A(3) - disallowance of ₹ 1,22,23,250/- consisted of value of land to the tune of ₹ 1,16,02,500/- and the rest were on account of registration charges and other charges - Held that - We find that the difference of ₹ 1,22,23,250/- and ₹ 1,16,02,500/- is on account of costs of registration which included stamp charges and other miscellaneous expenses, which are specifically exempt u/s 6DDA(i). The Ld. CIT(A) has also noted that the costs of stamp was deposited in cash in State Bank of India, therefore, as per Rules 6DDA(i) such payments are exempted from the provisions of Sec.40A(3) of the Act. Moreover, he has made a finding of fact that out of other expenses non of the expenses exceeded Asst. Year 2009-10-14 ₹ 20,000/-. In view of the above, Ground No.2 of Revenue is appeal is also dismissed.

Summary

Issues Involved:
1. Legality of the disallowance of ?1,16,02,500.
2. Validity of the reference made under section 142(2) of the Income Tax Act.
3. Addition of ?1,16,02,500 without considering the nature of the transactions.
4. Deletion of ?85,50,009 out of total addition of ?2,33,16,310 by CIT(A).
5. Restriction of addition of ?1,22,23,250 to ?1,16,02,500 by CIT(A).

Detailed Analysis:

1. Legality of the Disallowance of ?1,16,02,500:
The assessee challenged the confirmation of the disallowance of ?1,16,02,500 made by the Assessing Officer (AO) for cash payments for land purchases. The Tribunal referred to the case of Sh. Gurdas Garg Vs. CIT, where the Punjab & Haryana High Court held that disallowance under Section 40A(3) is not warranted if the transactions are genuine and the identity of the payees is established. The Tribunal found that the assessee had filed copies of sale deeds, and the genuineness of the transactions was not doubted by the authorities. Therefore, the Tribunal concluded that disallowance under Section 40A(3) cannot be made in this case, allowing the assessee’s appeal on this ground.

2. Validity of the Reference Made Under Section 142(2):
The assessee argued that the CIT(A) erred in confirming the AO's action to make a reference under Section 142(2) of the Income Tax Act without any pendency and without examining the accounts to judge the complexity. However, the Tribunal did not find it necessary to delve into this issue as the assessee did not press this ground during the hearing. Thus, this ground was dismissed as not pressed.

3. Addition of ?1,16,02,500 Without Considering the Nature of the Transactions:
The assessee contended that the addition was made without appreciating that the payments were for capital assets converted into stock-in-trade and that the payments were made in circumstances where banking facilities were not available. The Tribunal, relying on the judgment in Sh. Gurdas Garg Vs. CIT, found that the transactions were genuine, and the payments were made under business expediency. Thus, the Tribunal allowed the assessee’s appeal on this ground.

4. Deletion of ?85,50,009 by CIT(A):
The Revenue challenged the deletion of ?85,50,009 out of the total addition of ?2,33,16,310 by CIT(A), arguing that the additional evidence was admitted without reasonable cause. The Tribunal found that the CIT(A) had verified the vouchers and concluded that the payments did not exceed ?20,000 individually. The Tribunal noted that the AO did not provide any contrary evidence and upheld the CIT(A)’s decision, dismissing the Revenue’s appeal on this ground.

5. Restriction of Addition of ?1,22,23,250 to ?1,16,02,500 by CIT(A):
The Revenue also challenged the restriction of the addition from ?1,22,23,250 to ?1,16,02,500 by CIT(A). The Tribunal found that the difference was due to registration charges and other expenses, which are exempt under Rule 6DD(a)(i) of the Income Tax Rules. The CIT(A) had verified that none of the individual payments exceeded ?20,000. Therefore, the Tribunal upheld the CIT(A)’s decision, dismissing the Revenue’s appeal on this ground.

Conclusion:
The Tribunal allowed the assessee’s appeal partly by deleting the disallowance of ?1,16,02,500 under Section 40A(3) and dismissed the Revenue’s appeal, upholding the CIT(A)’s deletion of ?85,50,009 and the restriction of addition to ?1,16,02,500. The Tribunal emphasized the genuineness of the transactions and the applicability of business expediency in making cash payments.