40A (3) Expenditure

[SURENDRA KUMAR ILLINDRA]

A company is involved in Real Estate Business and it purchases land on which constructions activity is carried out and is sold in the form of flats. Certain amount of cash in excess of Rs. 20000/- has been paid against purchase of land. Finally, the land will not be capitalised in the books of accounts. Further, Please advise whether the same will be disallowed u/s 40A(3) of the Income Tax Act, 1961 or not.

[RAJAT GOYAL]

See, the 40A(3) is specific for the expenditure for which we want deduction in income tax. and it seems that u will get deduction for the said land purchased. and obviouly it will come under preview of 40A(3). and the expenditure will be disallowed. now what u can do is u can break the cash paid in the installment less than  Rs.20000/-.  by doing this u can get deduction.

[SURENDRA KUMAR ILLINDRA]

it includes huge transactions in lacs, and that too, in the registered document, it was mentioned that, the amount was given on this day

[RAJAT GOYAL]

In this case u have two option...

 

Take cash back and streamlize the transaction through bank... you can give back date cheque.. and i assumed here that the mode of payment is not mentioned in registraton document...

 

another option u can show this as an assets.. provided have justification for having plot as an assets...

 

CA Rajat Goyal

[SURENDRA KUMAR ILLINDRA]

yeah... to our issue, the mode of payment was specifically mentioned in the document.. that is by way of cash..

Actually, the properties were located in the rural panchayats of the town.. But as per rule 6DD, :

No bank service rule 6DD - Where the payment is made in a village or town, which on the date
of such payment is not served by any bank,to any person who ordinarily resides, or is carrying
on any business, profession or vocation, in any such village or town.

 Can we have rely on this provision, that there are no banks in those panchayats...and by pass the transaction, saying that the entire transaction is according rule 6DD

[RAJAT GOYAL]

Yes, u can rely on the provision under rule 6DD... provided the person from whom u purchased did not have  bank account at the date of payment... and take it in writing from him... for the proof..

[SURENDRA KUMAR ILLINDRA]

first of all, I thank you very much, for your fast n prompt response / suggestions

[Amit Sharma]

As far as the Real Estate Business is concern purchase of land and development of residential and commercial flats or complexes, the entire expenses incurred should be debited in Work in Progress Account till the date of completion of such flats or complexes.

As far as section 40A(3)(a) is concern payment or aggregate of payments  exceeding Rs. 20,000 made to a person in a day otherwise than by an account payee cheque or bank draft, no deduction shall be allowed in respect of such payments of expenditure.

However there are some exceptions given in rule 6DD of Income Tax Rules, 1962. When we go through with such rule 6DD there is a clause (k) which produced hereunder:

"where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person."

Therefore you can appoint a person as agent by giving him power of attorney for the purpose of making such real estate payments.

AI Summary

Cash payment limitation under section 40A(3) can bar deduction for large land purchase payments absent rule 6DD exceptions. Cash payments for land acquisition in real estate are vulnerable to the cash-payment disallowance when paid otherwise than by account-payee cheque or bank draft; such payments recorded in registered documents may be disallowed unless exceptions apply. Key exceptions include absence of bank services at the place of payment with the payee lacking a bank account, supported by contemporaneous proof, and instances where payments are made by an authorised agent acting on behalf of the payer; proper documentation is essential to invoke these exceptions.