2022 (11) TMI 572 - AT - Income Tax

Disallowance u/s. 40A(3) - expenses made in cash - assessee had purchased the aforesaid land in question for a consideration (including registration charges) as a fixed asset and had reflected the same as such in its balance sheet for the year under consideration - assumption of the A.O, that the land in question was acquired/purchased by the assessee as a part of its stock-in-trade, and not as an investment as was projected in its balance sheet - HELD THAT - Observation of the A.O that the assessee had purchased the land in question not as an investment, but as stock-in-trade of its business as that of a builder/developer is merely backed by his assumption that as the assessee was engaged in the business as that of a real estate builder and developer, therefore, the land in question in all probability would have been purchased for the said business purpose, i.e, developing of a housing project on the same. Undeniably, the dislodging of the assessee s claim is only backed by an unsubstantiated assumption of the AO, and is not supported by any material proving otherwise. We are afraid that the aforesaid observation of the A.O does not find favour with us, as the land in question, as claimed by the assessee was purchased as an investment and formed part of its fixed asset in the balance sheet. Notwithstanding that the assessee had purchased the aforesaid property in question as a fixed asset , even if it is to be presumed that the same in the coming times is to be commercially exploited by it for constructing/developing a housing project, the same merely on the said basis would not trigger the applicability of sub-section (3) of Section 40A of the Act, as at the relevant point of time the assessee had made an investment towards purchase of a capital asset and not stock-in-trade. On a subsequent conversion or treatment by the assessee of the aforesaid capital asset as a stock-in-trade of its business of a real estate builder and developer, the provisions of sub-section (2) of Section 45 would though get triggered, but then such subsequent event would not lead to invocation of section 40A(3) of the Act. As the assessee in the case before us had at the relevant point of time made the investment towards purchase of a capital asset, which falls beyond the realm of sub-section (3) of Sec.40A of the Act, therefore, as claimed by the Ld. AR, and rightly so, no disallowance under the said statutory provision was called for in its hands. We, thus, in terms of our aforesaid observations not finding favour with the view taken by the lower authorities set-aside the order of the CIT(Appeals) and vacate the disallowance.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961.
2. Classification of land purchase as a fixed asset or stock-in-trade.
3. Applicability of Section 40A(3) to capital expenditure.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act, 1961:
The primary issue revolves around whether the cash payment of Rs. 24.75 lakhs made by the assessee for purchasing land should be disallowed under Section 40A(3) of the Income Tax Act, 1961. Section 40A(3) stipulates that any expenditure exceeding Rs. 20,000 paid otherwise than by an account payee cheque or bank draft shall not be allowed as a deduction. The AO disallowed the amount, asserting that the payment was made in cash and should be disallowed under this section. However, the Tribunal observed that Section 40A(3) is designed to disallow claims for deductions of expenditures not conforming to the prescribed payment methods. Since the assessee did not claim the payment as an expenditure for computing income under "Profits and gains of business or profession," the disallowance under Section 40A(3) was deemed inapplicable.

2. Classification of Land Purchase as a Fixed Asset or Stock-in-Trade:
The AO contended that the land purchased by the assessee, a real estate developer, should be treated as stock-in-trade and not as a fixed asset, given the nature of their business. The assessee, however, had recorded the land as a fixed asset in their balance sheet. The Tribunal found that the AO's assumption was not substantiated by any concrete evidence. The land was shown as an investment in the balance sheet, and even if it were to be used for future development, it would not change its classification at the time of purchase. The Tribunal emphasized that the AO's observation was based on an unsubstantiated assumption rather than concrete evidence.

3. Applicability of Section 40A(3) to Capital Expenditure:
The Tribunal elucidated that Section 40A(3) does not apply to capital expenditures. The provision is intended to disallow deductions for revenue expenditures paid in cash exceeding the specified limit. The Tribunal referred to judicial precedents and legislative intent to support this interpretation. Since the land purchase was treated as a capital asset and not an expenditure claimed under "Profits and gains of business or profession," Section 40A(3) was not applicable. The Tribunal cited previous cases, such as Jasmine Buildtech (P) Ltd. Vs. ACIT and Kanshi Ram Madan Lal Vs. ITO, which supported the view that capital expenditures do not fall within the purview of Section 40A(3).

Conclusion:
The Tribunal concluded that the disallowance of Rs. 24.75 lakhs under Section 40A(3) was unwarranted, as the payment was for a capital asset and not claimed as an expenditure. The order of the CIT(Appeals) was set aside, and the disallowance made by the AO was vacated. The appeal of the assessee was allowed, reinforcing that Section 40A(3) does not apply to capital expenditures, and the classification of assets must be based on concrete evidence rather than assumptions.