TaxTMI 
TaxTMI 
2017 (11) TMI 520
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....le Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO?" 3. The assessee is engaged in the business of purchase/sale and development of land and colonies. Servey u/s 133A of the Act was carried out at the assessee's premises on 24.08.2006, during which it was revealed that the assessee has purchased land from various persons for which it has paid consideration in cash also and the said purchase was shown as expenditure being stock in trade of the assessee. The Assessing Officer accordingly disallowed an amount of Rs. 1,89,21,509/- under Section 40A (3) of the Act, which provides for disallowance of 20% for the expenditure exceeding Rs. 20,000/- if incurred in cash. 4. The CIT(A) confirmed the same order, observing as under:- "4.2 The submission of A.R. has already been considered by the undersigned as discussed in earlier paragraphs and it has been held that payment made by the appellant in cash in excess of Rs. 20,000/- attracts the provisions of Section 40A(3) and the case of the appellant is not covered in the exception provided in rule 6DD in view of the facts and circumstances of the case and the legal position on the issue under consideration. Considering that....
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....s received on account of booking of plot that was shown in liability side. Copy of balance sheet was filed before AO as well as before ld. CIT (A) and it was clearly mentioned that assessee has not claimed any expenditure on account of purchase of land. The ld. CIT (A) has also observed in his order that assessee has not prepared any trading account and, therefore, he has not shown the expenditure claimed but has shown the land in stock-intrade and in view of principles of accountancy any purchases of stock-in-trade has to be treated as claimed in the trading account. In our view these observations of ld. CIT (A) are not correct as assessee has not claimed any expenditure. Since entire land was shown in asset side in the Balance Sheet and advance received was shown in liability side as advance, therefore, in our view there was no trading during the year under cosideration. 11.1 It is also a well settled proposition in law that the entries in the books of account are not determined in nature to hold that any expenditure has been claimed or not as held by Hon'ble Supreme Court in case of Jute Corporation of India. Therefore, merely on the basis of entries in the books of account i....
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.... above facts and circumstances, we hold that since assessee has not claimed any expenditure, therefore, no disallowance can be made during the year under consideration. 17. Even on alternate contention of assessee that payments were made to various farmers in villages where no bank facilities were available, we find that assessee deserves to succeed on this alternate contention in part. Except payments to three parties i.e. Shri Vedvrat Sharma at Rs. 2,21,20,000/-, Mehla Real Estate Pvt. Ltd. At Rs. 3,57,13,900/-, and to Shri Chordia at Rs. 2,85,00/- which has been made in cash. They are residents of Jaipur. Therefore, provisions of section 40A(3) can be applied on these payments. However, in case of other parties, provisions of sections 40A(3) cannot be applied as they are residing in villages where no banking facilities were available. 18. Similar issue came up before the Tribunal in case of M/s Rishabhdev Township & Developers P. Ltd. The Tribunal while deciding the appeal of the department in ITA No. 181/JP/2010 vide its order dated 29.4.2011 has held as under:- "7. After considering the submissions and perusing the material on record, we find no infirmity in the findi....
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....the place of their residence for the simple reason that they would like to avoid the risk of receiving cash at the town where the sale is to be registered and which may be far away from the village and such csh has to be carried back by them to the village. It is common knowledge that the seller has to confirm before the Sub-Registrar that full payment has been received by him. At the same time, the Sub-Registrar satisfies himself about the identify of the seller to ensure that the payment has been made to the right person. Fort the sake of convenience, in the receipt the place is mentioned as the town where the document is registered. The AO has not made any effort to examine any of the sellers to verify as to whether the payments were received at the villages or at the town. Considering the entire facts the proposition that the payments were made at villages where banking facilities did not exist is accepted. Even if it is assumed that payments were made at a town where banking facilities were available, the case of the appellant-company would still fall under the exception of r.6DD. Rule 6DD(h) has to be interpreted liberally so as not to frustrate the object of the legislature.....
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....ibunal has taken into consideration the genuineness of the payment made by assessee that even on account of genuineness of he payment disallowance should not be made under Section 40(A) (3). The Id.CIT(A) has rejected both the contentions of assessee 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 id. CIT(A)." 6. Counsel for the respondent has relied upon the following decisions:- 1. Attar Singh Gurmukh Singh vs. ITO - [1991] ITR 667 (SC) observed as under : "The terms of section 40A(3) are not absolute . Consideration of business expedi....
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....ng into business of assessee and also nature of items purchased, it could not be disputed that assessee had to make payments in cash under unavoidable and exceptional circumstances, Tribunal was justified in deleting disallowance under section 40A(3). 6. Harshila Chordia vs. CIT [2008] 298 ITR 349 (Raj) observed as under: Where genuineness of transaction and identity of payee were established and explanation of assessee for making cash remittances was acceptable in the light of modus operandi of assessee's business, payments in cash could not be disallowed. 7. Sri Laxmi Satyanarayana Oil Mill v. CIT observed as under: "Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3). 8. Gurdas Garg v. CIT [2015] 63 taxman.com 289 (Punjab & Haryana) observed as under: "Section 40A(3) of the Income Tax Act, 1961, read with rule 6DD of the Income Tax Rule, 1962 - Business disallowance - Cash payment exceeding prescribed limits (genuineness of transactions) - During assessment proceedings Assessing Officer....
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....de to the sub-contractor pursuant to an agreement. Held that, both the authorities, on facts, had held that as the assessee being a principal contractor had passed on the amount to the sub-contractor, such amount, could not be treated as an expenditure. Thus, section 40A(3) could not be said to be attracted to such payment in cash." 7. The transactions which has taken place are stock in trade and villagers paid the amount in cash. Such transaction may not be allowed but nevertheless discussed by the Gujrat High Court (supra) which was followed by Tribunal in case of PACL India Ltd., 38 DTR 1 (JP) in Para 19, reads as under :- "19. Similar view has been expressed by the Tribunal in case of PACL India, Ltd., 38 DTR 1 (JP) also wherein it has been held as under : " Clause (h) of r.6DD takes out of the purview of s. 40A(3) such case payment which is made in a village or town which I snot served by any bank to any person who ordinarily resides or is carrying on any business in such village or town. There is no dispute that the sellers or the land are villagers engaged in farming activities and are residing at places and are carrying on farming activities at places which are not s....