AI Drafter 
TaxTMI 
TaxTMI 
2014 (2) TMI 1334
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....t can be reasonably construed that the assessee lent the moneyes for benefits which can only be called personal and the want of funds for business due to such adhoc lending, has obviously been met out of interest being loans (Over Drafts) which were utilized even during the period the same funds were lent out of the cash kitty of the business of the assessee. 2. The CIT(A) erred both in law and facts in deleting the disallowance u/s 40A(3) made at Rs. 33,71,275/- by failing to appreciate that the assessee had made payment of Rs. 33,71,275/- in cash for purchase of property which was his stock in trade, and was thus struck by the provisions of section 40A(3) of the Act and that the assessee cannot take shelter of the proviso to section 40A(3) which provides that no disallowance is to be made where the expenditure has been under "considerations of business expediency and other relevant factors.." by mis-interpreting the provisions of section 40A(3) in so far as it mandates that it is not that any "business expediency" would be sufficient to circumvent the rigors of section 40A(3) as only the prescribed cases and circumstances were to be treated as "business expediency" as ma....
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....en decided by banking upon the verdict of Hon'ble Supreme Court in the case of S.A. Builders vs. CIT and another (SC) [2007] 288 ITR 1 wherein it was held that interest on borrowed capital can be proportionately disallowed in case interest free loans are given to the persons without commercial expediency . The APEX court has made a reference of the case of Madhav Parsad Jantia vs. CIT UP reported in AIR 1979 SC 1291 where it was held that the expression " for the purpose of business" occurring under the provision is wider in scope than the expression " for the purpose of earning income, profits or gains, And this has been the consistent view of the court. It is, therefore, extremely important that the borrowed amount is advanced to any person including a sister concern for the purpose of business. Further, the Court has held that the element of commercial expediency is of paramount importance and if there is no business connection or no transactional connection with the person to whom the loan has been advanced without charging any interest, it cannot be said that the assessee has used the borrowed funds for the purpose of business. The interest paid to the person from whom the loa....
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....unt of Rs. 7,76,043/- has been disallowed as expenditure. The working of interest @ 15.75% on the loans given without any commercial expediency is given below. The interest rate has been calculated at the minimum rate of interest paid to the banking institutions on the loans advanced in the interest of natural justice.: S.No. Name of the person Date Debit balance Date of credit Credit amount Interest @ 15.875% 1. Sh.Sunil Kumar Bansal S/o Sh. Girdhari Lal Bhatinda 3.12.2008 18,00,000 24.3.2009 1,800,000 212.625 04.12.2008 27,00,000 24.3.2009 2,700,00 2. Sh.Subhash Goyal C/o M/s. Subhash Auto Home, Bathinda 05.09.2008 1,100,000 10.03.2009 1,00,000 97,694 3. M/s. Neha Enterprises Prop. Sh Tirlochan Kumar S/o Sh. Rai Kumar Bathinda 01.04.2008 500,000 16.04.2008 500,000 3.281 4. Smt. Seema Mittal 500.000 1.094 5. Smt. Anu 179.200 28.224 6. M/s. Saree Palace 01.04.2008 3,000,000 06.03.2009 3,00,000 433.133 ....
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....s to use black money for business transactions . In Mudiam oil Company vs. ITO (1973) 92 ITR 519 A.P. If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute the Court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restrain intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business." The closing stock of properties has been shown as stock in trade as is evident from balance sheet which has duly been attested by the Chartered Accountant The opportunity of being heard was afforded to the assessee vide letter dated 13.09.2011. 4. The assessee submitted the reply which is available at pages 8 to 14 of AO's order. The AO considered the reply of the assessee and submitted that it is correct that payment of Rs. 1,78,150/- has been made to the government on account of purchase of stamp papers for registration of such title deeds of t....
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.... in this case. Hence, the expenditure made by way of cash payment in purchase of stock in trade was disallowed and addition of Rs. 33,71,275/- (Rs.35,49,425/- minus Rs. 1,78,150/-) was made on this account. 5. The Ld. CIT(A) accepted the explanation of the assessee and deleted both the additions made by the AO vide order dated 19.03.2013. 6. The Ld. DR argued that the AO found that while the assessee was paying interest to banks and some other parties, no interest had been charged by him on loans to some persons. Relying on the ratio of the judgment of the jurisdictional High Court in the case of Abhishek Industries 286 ITR 1 he disallowed the claim of interest expenses proportionately at Rs. 7,76,043/-. Also reliance was placed on the judgment of Apex Court in the case of S.A. Builders 288 ITR 1, in so far as it is clear that the advances were not made in "commercial expediency". The Ld. CIT(A) noted that though the assessee had foregone interest on some of the interest free advances he had made to some persons, he had also not paid interest to many of the persons from whom he had availed of interest free loans. Thus, he was having enough of interest free borrowings at its d....
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....eived in cash. The AO has to find out whether the transaction is genuine or not, and if he finds that the transaction is genuine, he should allow the deduction. He has also held that "In the present case the identity of the payee is proved, the genuineness of the transaction is duly documented by the sale deed instrument and the amount of transaction is also certified by the Stamp Registration Authority by way of Circle Rates etc. Thus, all the three ingredients of the genuineness and correctness of the transaction and also the identity of the payee are established. In such circumstances, the provisions of section 40A(3) are not attracted. The CIT(A) has got the interpretation of the said proviso to sec. 40A(3) all wrong. It is not that the any "business expediency" would be sufficient to circumvent the rigors of section 40A(3). Only the prescribed cases and circumstances were to be treated as "business expediency" by the AO. And the prescribed "cases" and "circumstances" are mandated only in Rule 6DD(a) to 6DD(I) of the I.T. Rules, 1962. Moreover, sec. 40A(3) has got hardly anything to do with the three ingredients of the genuineness and correctness of the transaction and also the....
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....ot a cheque. The provisions of section 40A(3) are quasi penal in nature. They are not directly related to computation of the total income of an assessee. They have been mandated only and only to be in the nature of persuasion so that old habits about cash transactions are gradually changed, in the interest of creation of a more transparent commercial regime, so that the widespread prevalence of unaccounted black money is checked. It would be against the spirit of law if a very strict interpretation were not adopted of this sub-section, on any grounds, including equity. Once it is seen from the facts of the case that a violation in terms of section 40A(3) is made out, which is not carved out in the exceptions as in Rule 6DD, there is no scope for any allowance to the assessee, on any grounds, including the grounds of genuineness of transaction. However, genuine the transaction may be, once it is struck by the provisions of section 40A(3), the same has to be disallowed and no relief can therefore, be granted to the assessee on this account either. 7. The Ld. counsel for the assessee, relied upon the submissions made before the AO and the ld. CIT(A) and argued that the assessee was....
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....ed in deleting the disallowance made by the A.O. Accordingly, the order of the Ld. CIT(A) is reversed and the order of the AO on the issue is restored. Thus, ground No.1 of the Revenue is allowed. 9. As regards ground No.2, there is no dispute that in trading of propertes, the cash has been paid and the provisions of section 40A(3) are attracted. The explanation of the assessee in this regard is that the assessee were stranger to each other and there was boom in the prices of immovable properties during the period when the impugned properties had been purchased and for expeditious settlement of deals, the sellers of impugned properties insisted for quick and cash payment and deals could not be postponed in the interest of business and the assessee had to yield before the terms and conditions of the sellers. The amendment by the Finance Act,2008 in section 40A(3) w.e.f. 1.4.2009 by insertion of the proviso was relied upon which reads as under: "Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person ....