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TMI Blog2014 (12) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 - relying upon Commissioner Of Income-Tax Versus Industrial Engineering Projects Pvt. Limited [1992 (7) TMI 38 - DELHI High Court] – section 40A(3) of the Act has been wrongly invoked as admittedly no expenses relatable to the addition has been claimed and the assessee has successfully demonstrated that the payment were reimbursement made by CWPPL – Decided in favour of assessee. Additional payments made to recipients who were not the owners of land – Payment made in cash – Held that:- The expenditure was not claimed as an expense by the assessee and consequently has not been routed through its P&L A/c - the occasion to make an addition of the same by way of a disallowance in these peculiar facts and circumstances of the case does not arise - the entire amount is added u/s 37 as opposed to part of the expenditure disallowed u/s 40A(3) is not so material as the finding is arrived at taking cognizance of the material fact that also no such claim of expenditure has been made - The fact that the additional payments were warranted in order to avoid potential disputes amongst the claimants of the land holding which have been passed through to the land holders from generation to gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance could have been made in the hands of the appellant. 3.1. That without prejudice the CIT(A) erred in upholding the disallowance of Additional payments made to the recipients who were not the owners of land and to the payment made in cash. 3.2. That without prejudice the CIT(A) erred in not himself quantifying the addition to be made. 4. That on the facts and circumstances of the case and in law the CIT(A) erred in upholding the disallowance u/s 40A(3) in respect of which no deduction was claimed by the appellant. 4.1. That even on merits the disallowance was not justified. 5. That the orders passed by the Assessing Officer and Commissioner of Income Tax (Appeals)-XXXIII, New Delhi are bad in law and void ab-inito. 6. The appellant craves permission to add, amend, alter or vary all or any grounds of appeal on or before the date of hearing of the appeal. 2. At the outset Ld. AR submitted that he would not be pressing ground no. 1, the same accordingly is dismissed as not pressed. Ground 5 requires no specific separate adjudication as the same it is stated is adequately addressed in the remaining grounds. Ground No-6 it is seen is a general ground as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ached the Developer to carry out the development and construction works of the proposed township and the Developer has agreed to the same ..... 3.2. Further, on perusal of the details of payments made by the assessee company for acquiring the land from farmers/villagers, it has been noticed that the assessee has made part payment of total sale consideration in cash (out of total. sale consideration of ₹ 185,032,500/-, a sum of ₹ 865,800/- has been paid in cash) and thus has contravened the provisions of section 40A(3). Accordingly, the assessee vide order sheet entry dt. 17.11.2008, has been asked to explain as to why the provisions of section 40A(3) may not be applied to the expenditure incurred by it in cash for acquiring the land from the farmers/villagers and the same may not be disallowed to the extent of 20% as provided in the supra section. In response thereto, the assessee vide its reply dt.17-12- 2008 has referred to the terms and conditions of the Collaboration Agreement entered into between the assessee and CWPPL and submitted as under: Based on the aforesaid Agreement the assessee purchased land for which the(M/s Countrywide Promoters Pvt. Ltd.) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the land. Thus, in other words, the assessee has transferred the land to CWPPL at a premium of ₹ 35z000/- per acre to the purchase cost of the land. During the year under consideration, the assessee company did not carry any business other than that of acquiring land from villagers through registered sale deeds and transferring the land so acquired to CWPPL. It is pertinent to mention here that whatever business income was earned by the assessee has direct nexus with the land acquired and transferred by it. Had there been no acquisition of land by the assessee company there would not have been any business income. It shows that acquiring land from villagers and transferring the same to CWPPL is the main ingredients/components of the assessee s business. The same is also established from the opening lines of the Collaboration Agreement, as mentioned above. Further, in the case of trading business, a person make purchases, which is held by him as stockin- trade and when he sells that stock-in-trade i.e. when he parts with the possession of the same, he earns profit. In the case of assessee also whatever land was acquired by the assessee company constituted its stock in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sale consideration in cash clearly attracts the provisions of section 40A(3). Moreover, the said contravention of section 40A(3) is not covered by the exceptions referred to in Rule 6DD. Rule 6DD provides for an exhaustive list of cases and circumstances in which a payment in a sum exceeding ₹ 20,000/- may be made otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. It is not an inclusive list but an exhaustive list and the payments made by the assessee company for the purchase of land are not covered by the exception provided in Rule 6DD. It has been held by Kerala High Court in the case of Kamath Marbles Vs ITO 260 ITR 470 that the continuing exceptions under Rule 6DD like exceptions for transaction in place where there is no banking facility or where purchase is of agricultural or forest produce is sufficient. However, in the present case, payments were being made to the same parties both in cash and cheque, which is clearly in violation of the provisions of section 4OA(3). Hence, a sum equal to 20% of the amount paid in cash (Rs.865,800/-) in contravention of the provisions of section 40A(3) is disallowed. This works out to ₹ 173,160/- and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided among various claimants. However, no partition of land is generally recorded. We had to enter into agreements with each individual separately whereby we purchase land from him. However, other family members at time raises disputes on account of non partition of land. Even as on today number of such disputes related to BPTP associates companies are pending in various Courts. At times instead of going for long drawn Court disputes, we had to agree for some payments to these members so that we can get timely/peaceful possession of the property. b) Quite often the agreed price is paid by issuing post dated cheques. When the time comes for encashment of the cheque in many cases there is considerable escalation in the price of land in the meanwhile. The seller, therefore, raises a claim for compensation for the delay in payment. The difference between ruling price and the price shown in the sale deed is demanded as compensation. c) In many cases it is claimed by the seller that the price agreed was for land and- the company had to wait to allow farmer till cutting of standing crops etc. is completed. The seller also wishes for additional payment towards tubewell installed, sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said additional payment is disallowed. 4.3. At this point, it is not out of place to mention that a Search Operation was carried upon the BPTP Ltd. and its group companies on 15-11-2007. The assessee company also happens to be one of the group company of BPTP Ltd. but in its case no search warrant was conducted. During the course of search operation on BPTP Ltd. and other group companies various documents pertaining to the companies of BPTP Ltd. group including the assessee company were found and seized. On critical analysis of the seized material, it has been noticed that there are large number of documents which are undated blank receipts duly signed or having the thumb impression of the sellers. The blank receipts are an acknowledgment for receiving an (indefinite) blank amount of sum and some of such receipt have been used by the group companies as proof for additional payments. During the post search investigation, summons u/s 131 were issued to large number of farmers from whom the lands were purchased in Faridabad and additional payments were alleged to have been made to them. In response to those summons, some farmers appeared and their statements were recorded. In these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale consideration as described in the sale deed and on which no stamp duty has been paid to the Government. As per section 24 of the Indian Stamps Act, 1899 stamp duty should have been paid on the additional payment made for the land and as per section 35 of that Act, any instrument on which proper stamp duty has not been paid is an inadmissible evidence. As per' Indian Stamps Act, prosecution proceedings can be initiated for this violation. Hence, these additional payments cannot be allowed as an expenditure to the assessee company as per the explanation to section 37 which clearly states as under:- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (iii) Thus, it is clear that these additional payments have been made in clear cut violations and contraventions to the Government Acts, Rules and Regulations for which even prosecution proceedings can be initiated against the assessee company. Hence it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts in the assessment order to this extent it was submitted are correct. However the attempt of the AO to rope in section 40A(3) on facts it was submitted is not justified. While questioning the said stand it was submitted that the AO again takes the facts correctly to the extent it is held by him that the assessee continues to be the owner of the land and the fact that the land has not been purchased by the assessee as stock-in-trade . However after duly referring to the agreement entered into by the assessee with M/s Countrywide promoters Pvt. Ltd., it was submitted he proceeds to disallow the expenditure relying on section 40A(3) ignoring the material fact that no expenditure for the cost of land has been claimed by the assessee which fact relying upon decisions was consistently argued before him. It was submitted that in order to justify its stand the AO makes an elaborate discussion that since the land acquired and transferred by him had a direct nexus accordingly though it is earlier held by him that it was not stock-in-trade now becomes the stock-in-trade of the assessee on account of convulated confused reasoning. Resorting to such incorrect convulated reasoning it was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was his submission that no income was to be received by the assessee after the land had been transferred for development. The assessee, it was submitted continues to remain the owner of the said land and since the assessee lacked the necessary knowledge and financial capability for undertaking developmental works its active role ended at that stage. It was his submission that this is the manner in which almost all the development in and around NCR has taken place as the nature of expertise require to interact with the farmers and small land holders in order to purchase land for development requires negotiation skills, assistance of people who can interact with these small land holders and inspire faith in them and the land can only be purchased after the land is identified and bargained for and the price settled with the land holders who at times consist of lands transferred to them through generations wherein at times there are through unwritten informal agreements of ownership and title and at times there is confusion on actual claimants at times on account of which different developers need to resort to land consolidators who at times start out with the intention of acquiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the agreement entered into by the assessee with CWPPL has not been held to be either wrong i.e. against the law and nor has it been doubted or challenged or disputed as contrary to law. Receiving fees it was submitted is not profit. The issue it was submitted is well settled by the latest judgement of the Delhi High Court in CIT vs Industrial Engineering Projects (P.) Ltd. (cited supra) wherein it has been held that reimbursement is not a trading receipt. Copy of the said judgement relied upon before the CIT(A) quoted by him in his order and still not dealt with by him, it was submitted is available at pages 60 to 61 of the Paper Book which would show that the Hon ble Delhi High Court followed the principle laid down by the Apex Court in the case of CIT vs Tejaji Farasram Kharawalla Ltd. (cited supra). Referring to the impugned order it was his submission that the judgement of the Apex Count in the case of Tuticorin Alkalies Chemicals and Fertilizers Ltd. vs CIT (1997) 227 ITR 0172 does not apply to the facts of the present case and reliance placed by the Ao thereon is completely misplaced. 7.5. Reverting back to the proposition that no disallowance of expenditure no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant company can be safely termed as engaged in the business of development of real estate. What he receives i.e. cost of land and ₹ 35,000/- per acre in (is) receipt in its hand for the transfer of development right and the payment for purchase of land is its expenditure. On these facts, in my opinion the payment made to land owner is expense in appellants hand and entire receipts including cost of land plus ₹ 35000/- per acre is revenue receipt in its hand. As cost of land is an expenditure in appellant s hand, section 40A(3) is applicable, as the expenditure has been incurred. (ii) Reliance is placed on the judgment of Supreme Court in case of Tuticorin Alkali Chemicals Fertilizers vs. CIT, 277 ITR 172 (SC). 7.7. The following submissions challenging the action of the CIT(A) have been placed on record by way of the written synopsis:- SUBMISSIONS 3. The findings given by CIT(A) are challenged, both on facts and in law, for more than one reason, as stated hereinafter. 3.1 Before adverting to our precise submissions, it is relevant to refer to the following settled propositions on the interpretation of agreement: On Interpretation of Agreement i) K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee as is clear from the fact that by reason thereof the appellant was to indemnity the cooperative society against all losses, claims, damages, actions and costs which may be suffered by it. The document does not contain the usual words found in a bank guarantee furnished by a bank as, for example, unequivocal condition the cooperative society would be entitled to claim the damages without any delay demur or the guarantee was unconditional and absolute as was held by the Hon ble High Court. The High Court thus, misread and misinterpreted the document as on scrutiny thereof, it had opined that it was a contract of guarantee and not a contract of indemnity. v) It is judicially settled principle that if a transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used i.e. the Court has to look to the terms of the contract between the parties as to what is the true nature and effect of the terms embodied in an agreement between the parties. Under section 91 and 92 of the Evidence Act, no oral evidence may be admitted by the court which is contrary to the averments contained in a written document and that written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in the business of development of real estate. (b) The CIT(A) is wrong in stating that the receipts towards cost of land from CWPP are revenue receipts in the hand of the assessee. The CIT(A) has ignored the fact that receipts from CWPP towards the cost of land were not trading receipts of the assessee but were reimbursement of cost incurred by the assessee with respect to the acquisition of the said land as per para 3(b) of the agreement. To say that it is the trading receipt again amounts to rewriting the agreement between the assessee and CWPP. As stated, the courts, including the apex court, have frowned upon the attempt of taxing authorities to rewrite the agreement in the garb of interpreting the same. (c) The CIT(A) has also erred in ignoring the settled legal position that under no circumstances can be regarded as revenue receipt as held in CIT vs. Tejaji Farsram Kharawala 67 ITR 95 (SC) and followed by the jurisdictional High Court in CIT vs. Industrial Engineering Projects Pvt. Ltd. 202 ITR 1014 (Del.). These judgments were referred to, but the CIT(A) skirted to deal with them. More recently Hon ble Bombay High Court in DI(International Taxation) vs. Krupp U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pick out words or sentences from the judgment, divorced from the context of the questions under considerations by the Court, to support their proceedings. The judgment in the case of Tuticorin Alkali Chemicals Fertilizers (supra) is of no help. The question in that case was whether interest derived from borrowed funds invested in short term deposit with bank would be chargeable to tax under the head Income from other sources or would be capitalized after the commencement of commercial production. The court held that interest was chargeable as income from other sources. The finding was based on the provisions of Income Tax Act on the accrual of income. The court did not reject the accounts maintained and confined the decision to the provisions of the Act on the chargeability of income. In the present case, the CIT(A) has challenged the accounts and has in effect rewritten them himself by casting a trading and profit and loss account and in doing so seeks support from the judgment of Tuticorin Alkali Chemicals Fertilizers (supra). This is not the ratio of the judgment of Tuticorin Alkali Chemicals Fertilizers (supra). (iv) The action of the CIT(A) as stated supra i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant company would acquire the land and transfer 100% of its development right to M/s CWPPL. The appellant company is shown as owner of the land. In lieu of transferring the development right, the appellant company gets cost of land plus ₹ 35,000 per acre for CWPPL. This being the case, what is transferred is the development right, the ownership remains with appellant. Therefore, it is difficult to accept the Ld. AR s contention that the cost of land is reimbursed by CWPPL. IF the land would have been sold to CWPPL, view might have been that the appellant is only working as an agent of CWPPL and expenditure pertains to CWPPL and the appellant is only receiving the cost of land as reimbursement of expenditure. I agree with the finding of A.O. that ownership continues with the appellant and only developmental right is transferred to CWPPL. In that scenario, the appellant company can be safely termed as engaged in the business of development of real estate. What he receives i.e. cost of land and ₹ 35,000 per acre in receipt in its hand for the transfer of development right and the payment made to land owner is expense in appellants hand and entire receipts including cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation of income under the head profits and gains of business or profession . Sub-section (3) of section 40A is an exception to the deductibility of expenditure under the computation provisions of profits and gains of business or profession . Thus consequently what does not fall within the computation of income will not attract the provisions of section 40A(3). 10.2. In the facts of the present case it is necessary to first refer to how the issue has been addressed before the AO. A perusal of reply dated 17.12.2008 which has been extracted by the AO shows that the assessee claimed relying upon the agreement entered into with M/s Countrywide promoters Pvt. Ltd. that the assessee had acquired various lands through farmers/villagers and after acquiring the same handed over to the developer for development of an integrated township project and in terms of the collaboration agreement the assessee received a consolidated fee of ₹ 35,000/-. The opening paras of the agreement entered into by the assessee with the developer are extracted in un-numbered pages 2 of the assessment order and the same are reproduced hereunder once again for ready-reference:- WHEREAS the Ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance. 10.5. A reading of the order shows that the AO however subsequently proceeds to hold the land as stock-in-trade of the assessee and invokes section 40A(3) relying upon on Attar Singh Gurmukh Singh Vs ITO (cited supra). The CIT(A), it is seen though reproduces the judgements relied upon by the assessee in para 4.4 to para 4.6 however upholds the action of the AO without caring to address how the specific judgements relied upon by the assessee to contend that re-imbursement of expenses cannot be treated as income of the assessee were not applicable. Nor has he cared to consider the ratio decidendi of the judgements which unambiguously holds that where the expenditure has not been incurred by the assessee consequently claim not having been made the occasion to make an addition by way of a disallowance does not arise. Admittedly it is a fact on record that the expenditure is not claimed in the P L A/c of the assessee and the payment is squared up. In these afore-mentioned peculiar facts and circumstances, we find ourselves unable to concur with the reasoning and finding arrived at in the impugned order as the judgement of the Hon ble Rajasthan High Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely gone on the presumption that the books of account have been manipulated. The Assessing Officer has also not given a finding that the sum in question was actually revenue expenditure which were claimed as deduction in profit and loss account. 7. In view of the above finding of facts, the Tribunal has rightly concluded that the payment in question were made on account of capital account, therefore, provisions of section 40A(3) of the Act were not attracted. Thus, we do not find any merit in this appeal and no substantial question of law arises for determination of this Court. Hence this appeal is dismissed. (emphasis provided by the Bench) 10.7. It is seen that similar view has been held by the Allahabad High Court in the case of CIT vs Banwari Lal Bansidhar [1998] 229 ITR 229 (All.) which is relied upon in the present proceedings in support of the conclusion drawn. For ready-reference, we extract from the said judgement:- All the three questions, referred to this court, revolve round the same controversy. The question for consideration is when no deduction was sought and allowed under section 40A(3), was there any need to go into section 40A(3) and Rule 6DD(j). We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count and hence the Assessing Officer was not justified in disallowing the same. 10.9. It is also seen from a perusal of the copy of the ledger account of the collaborator that these were re-imbursement to the assessee for payments to specific land holders. Copy of this is available at pages 65-66 of the paper book. 10.10. We have also taken ourselves through the judgement of the Jurisdictional High Court in the case of CIT vs Industrial Engineering Projects Pvt. Ltd. (cited supra) which has been relied upon before us for the proposition that reimbursement of expenses cannot be treated to be a Revenue receipt. How the judgement of the Apex Court in Tuticorin Alkali Chemicals Fertilizers is applicable to the facts of the present case has not been set out in the order of the authorities nor has the Ld. DR been able to address the applicability of the said judgement to the issue at hand. We have taken ourselves through the said judgement and seen that it proceeds on entirety different facts and circumstances and has no applicability to the facts of the present case. Consequently, it is seen that from the ratio of the judgements relied upon before the CIT(A) and also before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts which were not relatable to the assessee. Addressing these facts Ld. AR submitted the arguments herein also remain the same as these were payments for the purchase of land and have not been claimed as an expenditure by the assessee as these were reimbursed to the assessee. The argument herein also remains the same that since no claim of expenditure has been incurred by the assessee as the payment was made as they were paid on behalf of CWPPL to settle the claims of the various claimants for the lands sold where potential disputes, claims and counter claims of the land holders had to be paid for peaceful litigation free possession of the land holding. It was reiterated by the Ld. AR that the AO has recorded certain findings in paras 4 to 4.6 of the assessment order to search on BPTP It was contended and he gave no indication in the course of the hearing that he would be referring to the facts pertaining to the search on BPTP. It was his submission that it is a matter of record that no search operation took place on the assessee and this fact has been noted by the AO himself. In this background it was contended that the CIT(A) wrongly in paras 5 to 5.3.8 has incorporated certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the hands of the assessee as no expenditure has been claimed by the assessee. Apart from this similarity of facts qua the arguments for Ground No-3 with Ground No.-4, it was submitted that the assessee has specifically challenged vide Ground No-2 the action of the CIT(A) who no doubt was dealing with multiple cases of search and has virtually cut and pasted in his order facts which are not even emerging from the assessment order as such keeping in mind the fact that AO never gave any hint during the hearing that he would refer to BPTP Ltd. group cases which were searched where assessee admittedly was not searched and the CIT(A) has made observation on the facts which are not on facts of the case. Since herein also the issue is addressed in the synopsis filed by the assessee, we extract para 7 from the same:- 7. Ground No.2 While the disallowance of additional payment is challenged for the reasons stated in para 6.1 6.2 above, we support the same by the objections taken in ground No.2 for following reasons:- (i) Search u/s 132 was carried out on 15.11.2007 on M/s BPTP Ltd and its group companies. Although assessee is a group company no search was carried on it. It is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has misread this judgment. There is no quarrel on the proposition as laid down in that case, that where search and seizure were in contravention of the provisions of section 132, material seized would be liable to be used. But what has been held in this judgment is that such material would be liable to be used, subject to law, against the person from whose custody it was seized. This is what was stated by the court in this regard:- In that view, even assuming, as was done by the High Court, that the search and seizure were in contravention of the provisions of section 132 of the Income Tax Act, still the material seized was liable to be used subject to law before the income tax authorities against the person from whose custody it was seized. (Copy of order being furnished.) The CIT(A) is plainly wrong and incorrect in extending the scope of the judgment by saying that such material can be used in an assessment u/s 143(3) in the hands of a totally different person i.e. a person from whose custody it was not seized or to whom it did not belong to. 7.2 In view of above, the orders passed by the AO and the CIT(A), in so far as they are based on the utilization of alien seize ..... X X X X Extracts X X X X X X X X Extracts X X X X
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