2011 (8) TMI 1157 - AT - Income Tax

Tribunal rules in favor of assessee, no disallowance under Section 40A(3) as no claimed expenditure.

The Tribunal allowed the assessee's appeal, ruling that no disallowance under Section 40A(3) could be made as no expenditure was claimed in the Profit ... Addition u/s 40A - Held that:- Payments were made in villages and amount of payment was genuine. Since both these issues have already been decided by the Tribunal in above stated cases, therefore, on account of payment made to villagers in the villages, provisions of section 40A(3) are not applicable as held by the Tribunal above. Since we have allowed the issue toto in favour of the assessee by holding that no expenditure can be disallowed under section 40A(3) as assessee has not claimed any expenditure in its Profit & Loss account, therefore, we hold that even part disallowance cannot be made on account of payment made to the parties residing in Jaipur. Accordingly we delete the entire disallowance sustained by ld. CIT (A). Issues Involved:1. Applicability of Section 40A(3) of the Income Tax Act on cash payments for the purchase of agricultural land treated as stock-in-trade.2. Whether the payments made fall under the exceptions provided in Rule 6DD.3. Whether the disallowance under Section 40A(3) can be made if no expenditure is claimed in the Profit & Loss account.Issue-wise Detailed Analysis:1. Applicability of Section 40A(3) on Cash Payments:The primary issue was whether the provisions of Section 40A(3) of the Income Tax Act, which disallows deductions for cash payments exceeding Rs. 20,000, apply to the purchase of agricultural land treated as stock-in-trade. The Assessing Officer (AO) invoked Section 40A(3), disallowing 20% of the cash payments made for land purchases, totaling Rs. 1,89,21,509, and further enhanced the disallowance to Rs. 53,85,000 for additional cash payments noticed during the appeal, aggregating to Rs. 2,69,28,859.The assessee contended that the land was a fixed asset, not an expenditure debited in the Profit & Loss account, and thus Section 40A(3) should not apply. The AO, however, treated the land as stock-in-trade, considering the payments as expenditure under Section 40A(3), supported by the Supreme Court decision in Attar Singh Gurmukh Singh vs. ITO (1991) 191 ITR 667, which held that expenditure on stock-in-trade falls within the purview of Section 40A(3).2. Exceptions under Rule 6DD:The assessee argued that payments were made to farmers in villages without banking facilities, falling under the exceptions in Rule 6DD. The AO and CIT (A) rejected this argument, noting that some sellers resided in Jaipur and received part payments through cheques or drafts, indicating the availability of banking facilities. The CIT (A) found no evidence of sellers insisting on cash payments and concluded that the case did not fit within Rule 6DD exceptions.3. Disallowance without Claimed Expenditure:The Tribunal focused on whether disallowance under Section 40A(3) is valid if no expenditure is claimed in the Profit & Loss account. The Tribunal noted that the assessee did not claim any expenditure for land purchases in the Profit & Loss account, showing the land as stock-in-trade on the asset side of the balance sheet. The Tribunal referenced the Supreme Court in Jute Corporation of India, emphasizing that book entries do not determine the nature of claimed expenditure.The Tribunal cited the Karnataka High Court decision in CIT vs. Balaji Engineering and Construction Works, 323 ITR 351, which held that payments not claimed as expenditure in the Profit & Loss account do not attract Section 40A(3). The Tribunal concluded that since the assessee did not claim any expenditure, no disallowance could be made under Section 40A(3).Conclusion:The Tribunal allowed the assessee's appeal, holding that no disallowance under Section 40A(3) could be made as no expenditure was claimed in the Profit & Loss account. Additionally, the Tribunal accepted the assessee's alternate contention that payments to farmers in villages without banking facilities fall under Rule 6DD exceptions, except for payments to certain parties in Jaipur. The Tribunal deleted the entire disallowance sustained by the CIT (A).Order Pronounced:The appeal of the assessee was allowed, and the order was pronounced in the open court on 12.8.2011.