2018 (8) TMI 194 - AT - Income Tax

Addition u/s 40A(3) - cash payment against purchase of land - assessee has converted the land in the subsequent year - Held that - The land was shown in the Balance sheet under Fixed assets but not shown in the books of accounts as stock-in-trade , hence the provisions of Section 40A(3) would not apply - Held that - The assessee has not claimed the payment of ₹ 1.50 crores as expenditure or capitalized the same in the value of the land. The assessee has submitted copy of the ledger land at Saroor Nagar , as per which, assessee has debited the value as per registered document and further development expenditure in that project. It has not charged the cash payment of ₹ 1.50 crores to the said land at Saroor Nagar. This fact was also confirmed by the AO in his submission which was submitted by ld. DR before us. It clearly shows that assessee has not capitalized the above cash payment in fixed assets. Therefore, assessee cannot claim any expenditure or even convert the same as business assets or stock in trade, the cash payment of ₹ 1.50 crores is not part of value of land. Hence, it cannot be a part of future business expenditure. Therefore, the contention of the revenue authorities is not correct to say that assessee has converted the land in the subsequent year amounts to claim of expenditure in the subsequent AY, as the value of ₹ 1.50 crore is not part of land in first place. Hence, the disallowance u/s 40A(3) is accordingly deleted.

Issues Involved:
1. Applicability of Section 40A(3) of the Income Tax Act.
2. Treatment of land as a capital asset versus stock-in-trade.
3. Disallowance of cash payments.
4. Charging of interest under Sections 234B and 234C.

Detailed Analysis:

1. Applicability of Section 40A(3) of the Income Tax Act:
The primary issue revolves around whether the provisions of Section 40A(3) apply to the cash payments made by the assessee for the purchase of land. The Assessing Officer (AO) contended that since the land was a business asset and later developed into a residential complex, the cash payments of ?1,50,00,000 violated Section 40A(3), which restricts cash payments exceeding ?20,000 for business expenses. The AO disallowed these cash payments as they were not made through account payee cheques or drafts.

2. Treatment of Land as a Capital Asset versus Stock-in-Trade:
The assessee argued that the land was treated as a capital asset and not as stock-in-trade, and therefore, the provisions of Section 40A(3) should not apply. The land was shown in the balance sheet under "Fixed Assets" and not in the Profit and Loss (P&L) account. The AO, however, concluded that the land was converted into stock-in-trade for development purposes, indicating that the initial classification as a fixed asset was a manipulation to circumvent the provisions of the law.

3. Disallowance of Cash Payments:
The AO disallowed the cash payments on the grounds that they were made for business transactions and thus attracted the provisions of Section 40A(3). The assessee contended that the cash payments were not claimed as an expenditure in the P&L account and were shown as secured loans in the balance sheet. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee failed to provide a valid explanation for the cash payments and did not demonstrate any compelling business exigencies for making such payments.

4. Charging of Interest under Sections 234B and 234C:
The assessee also contested the charging of interest under Sections 234B and 234C. The interest charges are consequential in nature, and the AO was directed to adjust them accordingly based on the final assessment.

Judgment Summary:

Applicability of Section 40A(3):
The Tribunal observed that Section 40A(3) applies only when the assessee claims the cash payments as business expenditure or capitalizes them to claim future depreciation. Since the assessee did not claim the ?1.50 crores as expenditure or capitalize it in the value of the land, Section 40A(3) was deemed inapplicable. The assessee had only debited the registered value of the land and development expenditure, not the cash payment.

Treatment of Land:
The Tribunal found that the land was not treated as stock-in-trade in the initial assessment year and that the cash payment was not part of the land's value. Therefore, the AO's contention that the land was converted into stock-in-trade in subsequent years was incorrect.

Disallowance of Cash Payments:
The Tribunal concluded that since the cash payment was not part of the land's value and was not claimed as an expenditure, the disallowance under Section 40A(3) was not justified. The addition made by the AO was deleted.

Charging of Interest:
The Tribunal directed that the charging of interest under Sections 234B and 234C should be consequentially adjusted based on the revised assessment.

Conclusion:
The appeal of the assessee was allowed, and the disallowance of ?1.50 crores under Section 40A(3) was deleted. The interest charges under Sections 234B and 234C were to be adjusted accordingly. The judgment emphasized that Section 40A(3) applies only to claimed business expenditures or capitalized amounts, which was not the case here.

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