2025 (3) TMI 1122 - HC - Income Tax

Property Treated as Investment, Not Stock-in-Trade; Section 40A(3) Disallowance Inapplicable, Revenue's Appeal Dismissed.

The HC upheld the ITAT's decision, confirming that the property in question was treated as an investment by the Assessee and not as stock-in-trade. ... Disallowance u/s 40A (3) - amount paid by the respondent (Assessee) for purchase of the first and second floors of the property - HELD THAT:- Undisputedly, the balance sheet reflects the assets in question (first and second floors of the subject property) as an investment. Revenue is unable to draw the attention of this court to any material which would suggest that the amount spent by the Assessee was debited to its P&L Account or that the final accounts of the company for the relevant financial years reflect the first and second floors of the subject property as stock-in-trade and not as an investment. We find no grounds to fault the decision of the ITAT in upholding the CIT(A)’s decision that no disallowance u/s 40A (3) is admissible as the Assessee had not claimed the amount spent on purchasing the first and second floors of the subject property as expenditure. Since the amount is not claimed as an expenditure, the question of disallowance of the same does not arise. - Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe primary legal issue considered in this judgment is whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the disallowance of Rs. 7,73,74,500/- made by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act, 1961, on account of the alleged violation related to the purchase of property by the Assessee.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 40A(3) of the Income Tax Act, 1961, pertains to the disallowance of certain expenses or payments made in cash, exceeding a specified limit, to ensure transparency and curb tax evasion. The provision is applicable if the expenditure is claimed as a deduction in the profit and loss account.Court's Interpretation and ReasoningThe Court examined whether the Assessee treated the purchase of the property (first and second floors of F-60, Poorvi Marg, Vasant Vihar, New Delhi) as an investment or as stock-in-trade. The distinction is crucial because Section 40A(3) applies to expenses claimed in the profit and loss account, which would occur if the property was held as stock-in-trade.Key Evidence and FindingsThe ITAT and CIT(A) found that the Assessee treated the property as an investment, not as stock-in-trade. This conclusion was supported by the Assessee's balance sheet as of 31.03.2009, which listed the property as an investment. This balance sheet was prepared well before any search or assessment action, indicating the Assessee's consistent treatment of the property as an investment. Additionally, the property was sold in subsequent assessment years, with the income treated as short-term capital gains, further supporting the investment classification.Application of Law to FactsSince the Assessee did not claim the expenditure on the property purchase as a deduction in the profit and loss account, Section 40A(3) was deemed inapplicable. The Court noted that the Revenue failed to provide evidence showing the property was treated as stock-in-trade or that the expenditure was debited in the profit and loss account.Treatment of Competing ArgumentsThe Revenue argued that the property should be considered stock-in-trade, implying the Assessee's intention to trade the property. However, the Court found no evidence supporting this claim, as the Assessee consistently treated the property as an investment in its financial statements. The Revenue could not substantiate its position with documentation showing the property as stock-in-trade in the Assessee's accounts.ConclusionsThe Court concluded that the ITAT and CIT(A) correctly determined that the property was an investment, not stock-in-trade. Consequently, the disallowance under Section 40A(3) was unwarranted, as the Assessee did not claim the expenditure as a deduction.SIGNIFICANT HOLDINGSCore Principles EstablishedThe judgment reinforces the principle that Section 40A(3) applies only to expenses claimed as deductions in the profit and loss account. If a property is treated as an investment, and the expenditure is not claimed as a deduction, Section 40A(3) disallowance does not apply.Final Determinations on Each IssueThe Court upheld the ITAT's decision, finding no error in its conclusion that the property was an investment. The question of law was answered in favor of the Assessee, and the Revenue's appeal was dismissed.