2019 (5) TMI 195 - HC - Income Tax

Disallowance u/s 40A(3) - cash expenditure incurred for purchase of lands - applicability of Section 40A(3) if the lands in question were purchased by him for personal purpose as Capital Assets - no separate deduction in respect of the purchase of two lands in question was claimed in the computation of total income - no enquiry by AO with regard to the applicability of Rule 6DD - HELD THAT - Merely because the lands in question were purchased as Goods or Stock-in-Trade during the course of business is not sold during the year itself and is included in the closing stock, such contingency does not take it out from the definition of expenditure incurred by the Assessee, as employed u/s 40A(3). Therefore, the said submission raised by the Assessee does not hold any water which is liable to be rejected and the same is accordingly rejected. No discussion by any of the authorities neither the detailed circumstances in which such cash payment was made by the Assessee who wanted to produce the confirmation letters from the dealers of the lands and for the reasons not known to them it was not allowed to do so nor the finding of the Appellate Authority, showing non application of mind to the exceptional circumstances of Rule 6DD and why the same do not apply to the transaction of the purchase of lands in question. Apparently there was no reason for the Assessing Authority for not affording an opportunity to the Assessee to produce not only the confirmation letter from the sellers but also to examine the sellers themselves, by which the Assessee could have established the exemptions of Rule 6DD. Miscarriage of justice might have resulted in cutting short of the assessment procedures by the Assessing Authority. Appellate Authority have just put their imprimatur without discussing any details. Such lack of diligent assessment exercise by the fact finding bodies opens all the doors for the flow of the work in the constitutional Courts, which is not desirable. It is settled legal position that the fact finding arrived at by the final fact finding body is binding on the High Court, while considering the Substantial Questions of Law u/s 260A. Appeal filed by the Assessee is allowed for statistical purposes, without answering the Substantial Questions of Law raised by remanding the case back to the Assessing Authority to examine the issue of applicability of Rule 6DD in the facts and circumstances of the present case.

Summary

Issues:
- Application of Section 40A(3) of the Income Tax Act, 1961 to the purchase of lands by the Assessee.
- Disallowance of cash expenditure over a specified limit under Rule 6DD of the Income Tax Rules 1962.
- Lack of detailed discussion on the applicability of Rule 6DD by the authorities.
- Need for a fair and diligent assessment exercise by the fact-finding bodies.
- Decision on remanding the case back to the Assessing Authority.

Issue 1: Application of Section 40A(3) of the Income Tax Act:
The Assessee filed an appeal challenging the disallowance of cash payments made for the purchase of lands under Section 40A(3) of the Income Tax Act. The Tribunal upheld the disallowance, stating that the Assessee failed to prove exceptional circumstances under Rule 6DD justifying the cash payments. The High Court found Section 40A(3) applicable as the lands were considered stock-in-trade for the Real Estate business. The Assessee's argument that the lands were personal capital assets was rejected.

Issue 2: Disallowance of cash expenditure under Rule 6DD:
The Assessee argued that the Assessing Authority did not allow an opportunity to prove the genuineness of the transactions under Rule 6DD. The High Court noted the lack of detailed discussion by the authorities on the applicability of Rule 6DD to the land purchases. It emphasized that the burden of proof lies on the Assessee to establish exceptional circumstances for cash payments exceeding the limit. The Court highlighted the necessity for a thorough assessment exercise to ensure fairness and transparency.

Issue 3: Lack of detailed discussion on Rule 6DD by authorities:
The High Court pointed out the absence of a comprehensive examination of the circumstances surrounding the cash payments by the Assessee. It noted that the Assessing Authority did not provide an opportunity for the Assessee to present confirmation letters from the sellers or explain the exceptional circumstances under Rule 6DD. The Court highlighted the importance of diligent fact-finding to prevent miscarriages of justice.

Issue 4: Need for a fair and diligent assessment exercise:
The judgment emphasized the critical role of fact-finding bodies in conducting a thorough assessment to ensure a just outcome. It criticized the lack of detailed analysis by the authorities and stressed the importance of transparent and reasonable decision-making processes. The Court highlighted the necessity for a diligent exercise under the provisions of the Act and Rules to uphold the integrity of the assessment process.

Issue 5: Decision on remanding the case to the Assessing Authority:
In light of the deficiencies in the assessment process, the High Court decided to remand the case back to the Assessing Authority for a reevaluation of the applicability of Rule 6DD to the transactions. The Court directed the Assessing Authority to provide a reasonable opportunity to the Assessee to present evidence and examine the issue thoroughly within a specified timeline. The decision to remand the case aimed to ensure a fair and comprehensive assessment in line with legal requirements.

This detailed analysis of the judgment highlights the key issues surrounding the application of Section 40A(3) and Rule 6DD in the context of the Assessee's case, emphasizing the importance of a diligent assessment process and the need for transparency and fairness in decision-making.