2021 (2) TMI 677 - AT - Income Tax

Disallowance u/s.40A(3) - assessee was engaged in the land plotting business and had purchased the plots as stock-in-trade paying in cash - cash purchases, ex-facie, violated the provisions of section 40A(3) - diversified decisions - HELD THAT - As found as an admitted position that the assessee as well as the seller of the plots had bank accounts at the material time and still the transaction was carried out in violation of section 40A(3) without bringing the case in any of the specific clauses of Rule 6DD. On an overview of the view canvassed by various Hon ble High Courts on the point - some deleting the disallowance on the basis of the genuineness of the transactions while others sustaining the disallowance - what matters for the Tribunal is to follow the binding precedent, being, the judgment of Hon ble jurisdictional High Court. That being the position, the Pune Tribunal is bound by the judgment of the Hon ble jurisdictional High Court in Madhav Govind Dulshete 2018 (10) TMI 869 - BOMBAY HIGH COURT sustaining the disallowance in case of cash payments exceeding the stipulated limit notwithstanding the fact that the transactions were genuine and the parties were identifiable. Respectfully following the judgment, we uphold the disallowance sustained in the first appeal. This ground fails. Addition u/s 14A read with Rule 8D - Interest disallowance - HELD THAT - Authorities below did not accept the contention, in principle, by opining that interest free funds available with the assessee could not be deemed to have been utilised for making investments in sources yielding exempt income. In this regard, it is noticed that the Hon ble Supreme Court in CIT (LTU) Vs. Reliance Industries Limited 2019 (1) TMI 757 - SUPREME COURT has approved the view that where interest free funds available with the assessee were sufficient to meet its investment and at the same time loan was raised, it can be presumed that the investments were made from interest free funds and hence, no disallowance of interest should be made to that extent. It is appropriate to send the matter back to the file of AO for examining the assessee s contention about the availability of interest free funds available with him and then decide the amount of interest disallowable u/s.14A. Appeal is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income-tax Act, 1961.
2. Disallowance under Section 14A read with Rule 8D.

Detailed Analysis:

1. Disallowance under Section 40A(3):

Facts and Background:
The assessee, engaged in the business of land plotting, purchased plots for ?9,52,000 in cash. The Assessing Officer (AO) disallowed this expenditure under Section 40A(3) of the Income-tax Act, 1961, which mandates that payments exceeding ?10,000 should be made through an account payee cheque or bank draft. The assessee contended that the payment was made in cash at the insistence of the seller, a senior citizen, and provided an affidavit from the seller. However, the AO and the CIT(A) did not accept this explanation as the seller had multiple bank accounts and frequently used banking facilities.

Judgment:
The Tribunal upheld the disallowance, stating that the assessee violated Section 40A(3) by making cash payments exceeding ?10,000. The Tribunal noted that the exceptions under Rule 6DD, which allow cash payments in specific circumstances, did not apply to the assessee's case. The Tribunal emphasized that the genuineness of the transaction does not exempt the assessee from the provisions of Section 40A(3). The Tribunal followed the judgment of the jurisdictional High Court in Madhav Govind Dulshete, which sustained disallowance for cash payments exceeding the stipulated limit, irrespective of the transaction's genuineness.

Key Points:
- The assessee's transaction did not fall under any exceptions provided in Rule 6DD.
- The Tribunal emphasized adherence to the binding precedent of the jurisdictional High Court.
- The genuineness of the transaction does not negate the applicability of Section 40A(3).

2. Disallowance under Section 14A read with Rule 8D:

Facts and Background:
The assessee earned exempt income from profit shares and dividends but did not offer any disallowance under Section 14A. The AO computed a disallowance of ?7,36,934, which included ?6,45,536 as interest and ?91,398 as half percent of average investments. The CIT(A) upheld this disallowance.

Judgment:
The Tribunal partially accepted the assessee's contention that sufficient interest-free funds were available to cover the investments yielding exempt income. The Tribunal referred to the Supreme Court's decision in Reliance Industries Limited, which allows the presumption that investments were made from interest-free funds if such funds are sufficient. The Tribunal remanded the matter back to the AO to verify the availability of interest-free funds and determine the appropriate amount of interest disallowable under Section 14A. The disallowance of ?91,398, being half percent of average investments, was upheld.

Key Points:
- The Tribunal directed the AO to verify the availability of interest-free funds before making a disallowance.
- The presumption that investments are made from interest-free funds if sufficient, as per the Supreme Court's decision in Reliance Industries Limited.
- The disallowance of ?91,398 was upheld.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the disallowance under Section 40A(3) and remanding the disallowance under Section 14A back to the AO for further verification. The judgment emphasized strict adherence to statutory provisions and binding precedents.