2016 (3) TMI 1304 - AT - Income Tax

ITAT Decision: Appeal allowed, cross-objection partly allowed based on precedents, business nature, genuineness.

M/s Shree B & B Paradise Land Versus The Income-tax Officer, Ward-6 (3), Nagpur and vice-versa

M/s Shree B & B Paradise Land Versus The Income-tax Officer, Ward-6 (3), Nagpur and vice-versa - TMI Issues Involved:1. Sustaining addition under Section 40A(3) for cash payment towards land purchase.2. Inclusion of land development expenditure in closing stock valuation.3. Deletion of disallowance under Section 40A(3) for petty cash payments.4. Deletion of additions for personal use expenses.5. Deletion of additions for traveling expenses.6. Deletion of entertainment expenses.7. Deletion of disallowance under Section 40A(2)(b) for commission payments to relatives.Issue-wise Detailed Analysis:1. Sustaining Addition under Section 40A(3) for Cash Payment towards Land Purchase:The assessee firm, engaged in land development and construction, was found to have made cash payments totaling Rs. 64,35,000/- for land purchases, which exceeded the limit prescribed under Section 40A(3). The assessee argued that payments were made to farmers who insisted on cash transactions, and the genuineness of the transactions was not in doubt. The ITAT referenced the case of ACIT vs. R.P. Real Estate Pvt. Ltd., where payments to illiterate villagers were considered admissible, and the invocation of Section 40A(3) was deemed unjust. Following this precedent, the ITAT reversed the authorities' findings and directed the deletion of the addition.2. Inclusion of Land Development Expenditure in Closing Stock Valuation:The AO questioned the difference in closing stock valuation, attributing it to unaccounted development expenses. The CIT(A) found that the assessee consistently valued stock at purchase price and changing the method would nullify the impact. The ITAT upheld the CIT(A)'s decision but modified it to recognize an admitted difference of Rs. 2,31,360/- in stock valuation, directing the AO to compute the addition accordingly.3. Deletion of Disallowance under Section 40A(3) for Petty Cash Payments:The AO disallowed Rs. 46,660/- for uniform and staff payments, citing unsupported vouchers. The CIT(A) found the payments petty and below Rs. 20,000/-, thus not invoking Section 40A(3). The ITAT agreed with the CIT(A) and dismissed the Revenue's ground.4. Deletion of Additions for Personal Use Expenses:The AO disallowed Rs. 39,915/- for expenses deemed personal. The CIT(A) recognized these as business-related, considering the nature and scale of the business. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's ground.5. Deletion of Additions for Traveling Expenses:The AO disallowed Rs. 89,700/- out of Rs. 1,64,871/- for traveling expenses, citing personal use. The CIT(A) allowed the claim, noting the necessity of travel in real estate. The ITAT partially upheld the addition to Rs. 25,000/-, approving the rest of the relief granted by CIT(A).6. Deletion of Entertainment Expenses:The AO disallowed Rs. 17,689/- out of Rs. 1,61,980/- for entertainment expenses, citing personal use. The CIT(A) allowed the claim, but the ITAT reversed this finding, confirming the AO's addition due to the personal element involved.7. Deletion of Disallowance under Section 40A(2)(b) for Commission Payments to Relatives:The AO disallowed Rs. 5,02,900/- in commission payments to relatives, arguing they were unjustified due to outstanding plot payments. The CIT(A) found no basis for invoking Section 40A(2)(b) without comparing fair market value. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's ground.Conclusion:The assessee's appeal was allowed, the Revenue's appeal was partly allowed, and the assessee's cross-objection was partly allowed. The ITAT's decisions were based on precedents, the nature of the business, and the genuineness of transactions, ensuring a fair and just outcome.