2022 (1) TMI 651 - AT - Income Tax

Disallowance u/s. 40A(3) - assessee purchased certain lands/plots and made cash payments - contention of the ld. AR is that the assessee did not claim the deduction and the provisions u/s. 40A(3) cannot be held to be invoked against such payments exceeding the limit ₹ 20,000/- - HELD THAT - The sellers from whom the assessee purchased lands were identified the transaction and also acknowledged the cash payments, thereby, it shows the transaction is genuine, as discussed in the foregoing paragraphs that the assessee treated the said lands as stock-in-trade and no deduction claimed. The ratio laid down in the case of Madhav Govind Dulshete 2018 (10) TMI 869 - BOMBAY HIGH COURT as to whether the disallowance is maintainable even the transaction is genuine, in our opinion, is not applicable to the facts on hand. However, we find merit in the alternative contention of the assessee that the expenditure incurred in cash forming part of the closing stock which means this has not been claimed as deduction while computing the income under the business head, therefore, the question of disallowance u/s. 40A(3) does not arise. Thus, the grounds raised by the assessee in this regard are allowed.

Summary

Issues:
Whether the CIT(A) was justified in confirming the addition made on account of disallowance u/s. 40A(3) of the Act in the facts and circumstances of the case.

Analysis:

Issue 1: Disallowance u/s. 40A(3) of the Act
The appeal was against the order passed by the Commissioner of Income Tax (Appeals) confirming an addition made under section 40A(3) of the Act for the assessment year 2012-13. The assessee, a company engaged in land dealing and development, made cash payments exceeding the specified limit under exceptional circumstances. The contention was whether the CIT(A) was justified in confirming this disallowance.

Issue 1 Analysis:
The assessee argued that as no deduction was claimed for the cash payments made for land purchases, section 40A(3) should not apply. The appellant emphasized that the cash payments were genuine and made to finalize deals promptly due to business exigencies. However, the Departmental Representative supported the authorities' decisions, citing a similar case precedent. The Tribunal noted that while no deduction was claimed, the expenditure was debited to the profit and loss account. The CIT(A) had relied on Rule 6DD and held that the assessee did not fall under any exception. The Tribunal also considered the business exigency argument raised by the appellant.

Issue 1 Conclusion:
After examining various High Court decisions, the Tribunal found that the disallowance under section 40A(3) depends on the specific circumstances of each case. Referring to a relevant case, the Tribunal concluded that the disallowance was not applicable in this instance. The Tribunal accepted the alternative argument that the cash expenditure was part of the closing stock and not claimed as a deduction, thus disallowance under section 40A(3) was not warranted. Consequently, the appeal of the assessee was allowed.

In summary, the judgment focused on the issue of disallowance under section 40A(3) of the Act, where the Tribunal ultimately ruled in favor of the assessee based on the specific circumstances and arguments presented, allowing the appeal against the CIT(A)'s decision.