2021 (7) TMI 1188 - AT - Income Tax

Disallowance u/s. 40A 3 - disallowance of cash payment made by assessee to various vendors for purchase of land - payments made by the appellant as the agent of housing society for purchase of lands on which residential sites were to be formed for the members of the housing society - assessee is a developer and agreed to sell residential sites to society for which it acquired lands - HELD THAT - The necessity shown by assessee to make the payment in cash is that the vendors insisted at the last moment in certain cases. It is also noted that the said monies paid in cash to various vendors are out of drawings made from bank accounts and therefore exigency in making the such payment in cash cannot be suspected. In the present facts of the case the reason for making the payments in cash to certain vendors by the assessee has not been found to be incorrect by any of the authorities below. There is no iota of evidence that is brought on record which could cast doubt on the reason for which the payment has been made in cash by assessee. Further it is also not the case of Ld. AO that the transaction entered into between assessee and the Vendors towards purchase of the land is bogus. Admittedly payments made by the assessee by cheque has been accepted by the Ld. AO. As decided in M.K. Agrotech Pvt. Ltd 2019 (1) TMI 37 - KARNATAKA HIGH COURT once the payee admits the acceptance of the monies in cash and has been credited into their respective accounts the object with which section 40(A)(3) was promulgated stands satisfied. We note that in the present facts of the case the monies received in cash has been recorded in the agreements entered into between the assessee and various vendors. There is no denial of having received the monies in cash by the vendors - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of cash payments made by the appellant under section 40(A)(3) of the Income Tax Act.
2. Interpretation of the appellant's role as an agent of the housing society in land transactions.

Analysis:

Issue 1: Disallowance of cash payments under section 40(A)(3)
The appellant contested the disallowance of cash payments amounting to ?1,41,03,750 made for the purchase of land, arguing that the payments were made as an agent of the housing society and fell under an exception provided in Rule 6DD(k) of the Income Tax Rules. The Assessing Officer (AO) disallowed the cash payments under section 40(A)(3) as they were made in the name of a different entity, Laughter Yoga International Foundation, and not directly to the vendors. The AO concluded that the appellant was not acting as an agent but as a purchaser and seller of the land. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the appellant was engaged in real estate business and not acting as an agent of the society. However, the appellant argued that the cash payments were made due to certain vendors' insistence and were duly recorded in the books of account. The Tribunal noted that there was no evidence to doubt the necessity of cash payments and reversed the CIT(A)'s decision, allowing the appellant's appeal.

Issue 2: Interpretation of the appellant's role as an agent
The appellant asserted that it acted as an agent of the housing society in acquiring land for residential sites. The AO disagreed, treating the appellant as a principal in the land transactions. The CIT(A) concurred with the AO's view, emphasizing that the appellant was involved in developing and selling sites to the society, indicating a principal-principal relationship. The appellant, however, maintained that it was acting as an agent and had agreements with the vendors, including minors represented by legal guardians, for land purchase. The Tribunal considered the agreements, the necessity of cash payments, and the absence of evidence to question the transactions, ultimately ruling in favor of the appellant and allowing the appeal.

In conclusion, the Tribunal overturned the CIT(A)'s decision, allowing the appellant's appeal and emphasizing the validity of the cash payments made for land purchase as an agent of the housing society.