CH.Hanumantha Rao, Guntur V. THE ITO, WARD - 2(2), Guntur

ITA 458/VIZ/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8974 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 21-07-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MURTHY NAIK
• Keywords: Capital asset
• Section: 40A(3); 142(1)

Judgement Text

ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.458/VIZAG/2014 ( / ASSESSMENT YEAR: 2010-11) CH. HANUMANTHA RAO, GUNTUR ITO, WARD - 2(2), GUNTUR [PAN NO. ABMPC8579K ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI G.V.N. HARI, AR / RESPONDENT BY : SHRI MURTHY NAIK, DR / DATE OF HEARING : 18.04.2017 / DATE OF PRONOUNCEMENT : 05.05.2017 / O R D E R PER SHRI G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST ORDER OF THE CIT(A), GUNTUR DATED 13.5.2014 AND IT PERTAINS TO T HE ASSESSMENT YEAR 2010-11. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PROPRIETOR OF M/S. PRAGATHI ENTERPRISES ENGAGED IN THE BUSINESS O F DEVELOPMENTS OF ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 2 SITES AND FLATS, FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010- 11 ON 13.7.2010 DECLARING TOTAL INCOME OF ` 3,17,890/-. THE CASE HAS BEEN SELECTED FOR SCRUTINY UNDER MANUAL SELECTION O F CASES AS PER THE GUIDELINES ISSUED BY THE BOARD AND ACCORDINGLY, NOT ICES U/S 143(2) & 142(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CAL LED AS 'THE ACT') WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZE D REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISH ED THE INFORMATION AS CALLED FOR. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF ` 52,97,925/- TOWARDS PURCHASE OF SITES AND THE PAYMENT FOR WHICH HAS BEEN PAID IN CASH. THEREFORE, ISSUED A SHOW CAUSE NOTICE AND AS KED TO EXPLAIN AS TO WHY THE PROVISIONS OF SECTION 40A(3) OF THE ACT SHO ULD NOT BE INVOKED TO DISALLOW EXPENDITURE INCURRED FOR PURCHASE OF LAND. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE HAS SUBMITTED THAT HE HA D PURCHASED THE IMPUGNED LANDS FOR THE PURPOSE OF INVESTMENT, HOWEV ER, FINALLY IT WAS CONVERTED AS STOCK IN TRADE IN HIS BUSINESS, THEREF ORE, THE PROVISIONS OF SECTION 40A(3) OF THE ACT HAS NO APPLICATION. THE ASSESSEE FURTHER SUBMITTED THAT AT THE TIME OF PURCHASE, THE NATURE OF TRANSACTION IS INVESTMENT IN CAPITAL ASSET AND THE SUBSEQUENT CONV ERSION OF INVESTMENT INTO STOCK IN TRADE CANNOT BE CONSIDERED AS PURCHAS ES, THEREBY CASH PAYMENTS MADE FOR ACQUISITION OF CAPITAL ASSET CANN OT BE DISALLOWED ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 3 UNDER THE PROVISIONS OF SECTION 40A(3) OF THE ACT. THE ASSESSEE FURTHER SUBMITTED THAT HE HAD MADE CASH PAYMENTS AS PER THE INSTRUCTIONS OF THE SELLERS AND THE SELLERS ARE NOT READY TO ACCEPT THE PAYMENTS BY CHEQUE OR DRAFT, THEREFORE, UNDER COMPELLED CIRCUMS TANCES, HE HAS MADE CASH PAYMENTS, THEREFORE, HIS CASE DO NOT COME UNDE R THE PURVIEW OF THE PROVISIONS OF SECTION 40A(3) OF THE ACT. THE A .O. AFTER CONSIDERING THE EXPLANATIONS OF THE ASSESSEE HELD THAT THE LAND IN QUESTION IS NOT AN AGRICULTURAL LAND AND NO AGRICULTURAL OPERATIONS WA S CARRIED NOR INTENDED TO CARRY OUT ANY AGRICULTURAL OPERATIONS, WHICH IS PROVED FROM THE CONDUCT OF THE ASSESSEE THAT THE LAND HAS BEEN IMME DIATELY CONVERTED INTO FLATS AND SOLD TO CUSTOMERS. THE A.O. FURTHER OBSERVED THAT THE INSISTENCE OF SELLERS FOR CASH PAYMENT IS NOT A MAT TER FOR CONSIDERATION FOR ALLOWING THE EXPENDITURE. IT WAS FURTHER OBSER VED THAT THOUGH THE ASSESSEE CLAIMS THAT THE SELLERS INSISTED FOR CASH PAYMENTS, FAILED TO FILE NECESSARY EVIDENCES TO PROVE THE SAME. THEREFORE, DISALLOWED AN AMOUNT OF ` 52,37,250/- UNDER THE PROVISIONS OF SECTION 40A(3) OF THE ACT. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE A.O. THE LD. A.O. OUGHT TO HAVE CONSIDERED THE FACT THAT PURCHASE OF AGRICULTURAL L AND IS BASICALLY FOR ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 4 INVESTMENT FOR WHICH PROVISIONS OF SECTION 40A(3) O F THE ACT WOULD NOT APPLY. IT WAS FURTHER SUBMITTED THAT HE HAD PURCHA SED THE LANDS FOR THE PURPOSE OF INVESTMENT, BUT SUBSEQUENTLY CONVERTED I NVESTMENT INTO STOCK IN TRADE, THEREFORE, THE PROVISIONS OF SECTIO N 40A(3) OF THE ACT CANNOT BE INVOKED WHEN THE ASSET WAS ACQUIRED AS AN INVESTMENT. THE CIT(A) AFTER CONSIDERING THE RELEVANT SUBMISSIONS O F THE ASSESSEE, OBSERVED THAT THE ASSESSEE HAS PURCHASED IMPUGNED L ANDS FOR THE PURPOSE OF BUSINESS AND NOT AS INVESTMENT. THE CIT (A) FURTHER OBSERVED THAT AS POINTED OUT BY THE ASSESSING OFFIC ER, THE TRADING ACCOUNT REVEALS THAT THE ENTIRE PURCHASE OF LAND FO RMED PART OF EITHER THE SALE PROCEEDS OR CLOSING STOCK. THUS, THE ASSE SSEE HIMSELF HAS TREATED THESE PURCHASES AS PART OF HIS BUSINESS OF TRADING IN LAND AND THE CLAIM OF THE PURCHASE WAS ORIGINALLY AS AN INVE STMENT IS AN AFTER THOUGHT AND NOT BORNE OUT BY THE FACTS OF THE CASE. WITH THESE OBSERVATIONS, UPHELD ADDITIONS MADE BY THE A.O. U/S 40A(3) OF THE ACT. AGGRIEVED BY THE CIT(A) ORDER, THE ASSESSEE IS IN A PPEAL BEFORE US. 4. THE LD. A.R. SUBMITTED THAT THE LD. CIT(A) WAS N OT JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF ` 52,37,250/- MADE BY THE A.O. U/S 40A(3) OF THE ACT. THE A.R. FURTHER SUBMITTED THAT THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE PROVISIONS OF SECTION 40A(3) OF THE ACT, ARE NOT APPLICABLE WHEN THE ASSET IS PURCHASED AS AN INVESTMENT. ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 5 THE ASSESSEE HAS PURCHASED THE IMPUGNED LAND AS AN AGRICULTURIST, FOR THE PURPOSE OF HOLDING IT AS AN INVESTMENT, HOWEVER , BECAUSE OF CHANGED CIRCUMSTANCES CONVERTED INVESTMENT INTO STO CK IN TRADE, FORMED SITES AND SOLD TO CUSTOMERS. IT WAS FURTHER SUBMIT TED THAT FOR APPLICATION OF THE PROVISIONS OF SECTION 40A(3) OF THE ACT, THE DATE OF PURCHASE IS IMPORTANT AS PER WHICH THE IMPUGNED ASS ET IS AN INVESTMENT AND HENCE, DISALLOWANCE PROVIDED U/S 40A(3) OF THE ACT HAS NO APPLICATION. THE LD. D.R. ON THE OTHER HAND STRONG LY SUPPORTED ORDER OF THE CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. INVOKED THE PROVISIONS OF SECTION 40A(3) OF TH E ACT, AND DISALLOWED CASH PAYMENTS MADE TOWARDS PURCHASE OF LAND. THE A SSESSING OFFICER WAS OF THE OPINION THAT THE ASSESSEE HIMSELF ADMITT ED IN HIS FINANCIAL STATEMENTS THAT HE HAD PURCHASED THE LAND AS A STOC K IN TRADE FOR THE PURPOSE OF TRADING IN HIS BUSINESS. THE A.O. FURTH ER WAS OF THE OPINION THAT THOUGH THE ASSESSEE CLAIMS THAT THE SELLERS HA VE INSISTED FOR CASH PAYMENTS, FAILED TO PROVE THE SAME WITH NECESSARY E VIDENCES AND ALSO OPINED THAT THE INSISTENCE OF SELLER FOR CASH PAYME NT IS NOT A MATTER FOR CONSIDERATION FOR ALLOWING THE EXPENDITURE. THEREF ORE, OPINED THAT THE EXPENDITURE INCURRED FOR PURCHASE OF LAND IS NOT AL LOWABLE U/S 40A(3) OF ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 6 THE ACT. IT IS THE CONTENTION OF THE ASSESSEE THAT HE HAD PURCHASED THE IMPUGNED LAND AS AN INVESTMENT FOR THE PURPOSE OF C ARRYING OUT AGRICULTURAL OPERATIONS, BUT UNDER CHANGED CIRCUMST ANCES, THE INVESTMENT HAS BEEN CONVERTED INTO STOCK IN TRADE, FORMED SITES AND SOLD, THEREFORE, THE PROVISIONS OF SECTION 40A(3) O F THE ACT HAS NO APPLICATION. 6. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATER IAL ON RECORD, WE FIND THAT THE A.O. DISALLOWED CASH PAYMENT FOR P URCHASE OF LAND ON THE SOLE GROUND THAT IMPUGNED PAYMENT IS IN EXCESS OF PRESCRIBED LIMIT PROVIDED U/S 40A(3) OF THE ACT. THEREFORE, THE ISS UE NEEDS TO BE EXAMINED IS WHETHER ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE, THE IMPUGNED PAYMENTS MADE FOR PURCHASE OF LANDS IS ALLOWABLE U/S 40A(3) OF THE ACT. SECTION 40A(3) OF THE ACT, PROV IDES FOR DISALLOWANCE OF EXPENDITURE, IN RESPECT OF WHICH ANY PAYMENT IS MADE TO ANY PERSON IN CASH IN EXCESS OF ` 20,000/- IN A SINGLE DAY. SIMILARLY, THE PROVISO PROVIDED TO SECTION 40A(3) OF THE ACT, PROVIDES FOR NO DISALLOWANCE SHALL BE MADE AND NO PAYMENTS SHALL BE DEEMED TO BE THE P ROFITS & GAINS AND BUSINESS OR PROFESSION UNDER SUB-SECTION (3) OF THIS SUB SECTION, WHERE A PAYMENT OR AGGREGATE OF PAYMENT MADE TO A P ERSON IN A DAY, OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE DRAWN ON A BANK OR ACCOUNT PAYEE BANK DRAFT EXCEEDS ` 20,000/-, IN SUCH CASES AND UNDER SUCH ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 7 CIRCUMSTANCES AS MAY BE PRESCRIBED, HAVING REGARD T O THE NATURE AND EXTENT OF BANKING FACILITIES AVAILABLE, CONSIDERATI ON OF BUSINESS EXPEDIENCY AND OTHER RELEVANT FACTORS. A PLAIN REA DING OF PROVISIONS OF SECTION 40A(3), MAKES IT CLEAR THAT THE SAID PROVIS ION APPLICABLE WHERE THE ASSESSEE HAS MADE CASH PAYMENTS IN EXCESS OF PR ESCRIBED LIMITS IN THE COURSE OF HIS BUSINESS. THE SAID PROVISION DOE S NOT APPLY WHEN THE PAYMENTS ARE MADE FOR ACQUIRING ANY CAPITAL ASSETS OR INVESTMENT. 7. IN THIS CASE, THE ASSESSEE CLAIMS THAT HE HAD PU RCHASED THE IMPUGNED LANDS AS AGRICULTURAL LANDS FOR THE PURPOS E OF INVESTMENT, BUT UNDER CHANGED CIRCUMSTANCES, CONVERTED HIS INVESTME NT INTO STOCK IN TRADE. THE ASSESSEE FURTHER CONTENDED THAT BECAUSE THE TWO INSTANCES HAVE OCCURRED IN THE SAME FINANCIAL YEAR, THE ASSES SEE HAS SHOWN THE CONVERSION OF INVESTMENT INTO STOCK IN TRADE AS PUR CHASES IN HIS FINANCIAL STATEMENTS, THEREFORE, THE PROVISIONS OF SECTION 40 A(3) OF THE ACT CANNOT BE INVOKED TO DISALLOW THE EXPENDITURE INCURRED FOR PURCHASE OF LANDS. WE FIND FORCE IN THE ARGUMENTS OF THE ASSESSEE FOR T HE REASON THAT THE PROVISIONS OF SECTION 40A(3) OF THE ACT, DOES NOT A PPLY TO A CASE WHERE THE PAYMENT IS MADE FOR ACQUISITION OF CAPITAL ASSE TS OR INVESTMENTS. IN THIS CASE THE A.O. AS WELL AS THE CIT(A) NEVER DISP UTED THE FACT THAT THE ASSESSEE HAS PURCHASED THE IMPUGNED LANDS AS INVEST MENT AND SUBSEQUENTLY CONVERTED INTO STOCK IN TRADE. THE A. O. ALLEGATION IS THAT ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 8 SINCE BOTH THE INSTANCES HAVE OCCURRED IN THE SAME FINANCIAL YEAR, THE ASSESSEE FAILED TO PROVE THE LANDS WERE ACQUIRED FO R THE PURPOSE OF INVESTMENT. THEREFORE, WERE OF THE VIEW THAT ONCE THE IMPUGNED LANDS WERE ACQUIRED AS AN INVESTMENT AND SUBSEQUENTLY CON VERTED INTO STOCK IN TRADE IN THE BUSINESS, THE PROVISIONS OF SECTION 40A(3) OF THE ACT, CANNOT BE INVOKED TO DISALLOW THE CASH PAYMENTS. M OREOVER, THE LOWER AUTHORITIES DID NOT DISPUTE THE GENUINENESS OF PAYM ENTS. FURTHER, EACH AND EVERY PAYMENT IN CASH ARE NOT AUTOMATICALLY GET DISALLOWED UNDER SECTION 40A(3) OF THE ACT. IN A PARTICULAR CASE WH ERE THERE EXIST A BUSINESS EXPEDIENCY AND OTHER RELEVANT FACTORS AND ALSO THE PAYMENTS ARE GENUINE, THEN THE ACTS PROVIDE FOR IMMUNITY FRO M DISALLOWANCE OF EXPENDITURE, IF THE ASSESSEE PROVES TO THE SATISFAC TION OF THE ASSESSING OFFICER THAT THERE EXISTS A BUSINESS EXPEDIENCY IN MAKING THE CASH PAYMENTS. IN THIS CASE, THE ASSESSEE HAS FILED NEC ESSARY EVIDENCES TO PROVE THAT THE IMPUGNED LAND HAS BEEN ACQUIRED AS A N INVESTMENT AND SUBSEQUENTLY CONVERTED INTO STOCK IN TRADE OF HIS B USINESS. THEREFORE, WE ARE OF THE VIEW THAT THE A.O. WAS ERRED IN DISAL LOWING CASH PAYMENTS BY INVOKING PROVISIONS OF SECTION 40A(3) OF THE ACT . HENCE, WE DIRECT THE A.O. TO DELETE ADDITIONS MADE TOWARDS CASH PAYM ENTS U/S 40A(3) OF THE ACT. ITA NO.458/VIZAG/2014 CH. HANUMANTHA RAO, GUNTUR 9 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 5 TH MAY17. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 05.05.2017 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT CH. HANUMANTHA RAO, PROP: M/S. P RAGATHI ENTERPRISES, OPP. B.ED. COLLEGE, S.K.T. SOCIETY BUILDING, GUNTUR . 2. / THE RESPONDENT THE ITO, WARD-2(2), GUNTUR 3. + / THE CIT, GUNTUR 4. + ( ) / THE CIT (A), GUNTUR 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM