MESERS CG HOUSING COMPANY, BHILAI V. INCOME TAX OFFICER, WARD 1(3), BHILAI

ITA 80/RPR/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3193 (ITAT-RAIPUR)
• Duration Of Justice: 3 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2015-2016
• Appeal Filed On: 21-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Search and seizure; Capital expenditure
• Section: 40A(3); 143(3)

Judgement Text

आयकर अपीलȣय अͬधकरण Ûयायपीठ रायप ु र मɅ। IN THE INCOME TAX APPELLATE TRIBUNAL, RAIPUR BENCH, RAIPUR BEFORE SHRI RAVISH SOOD, JUDICIAL MEMBER AND SHRI RATHOD KAMLESH JAYANTBHAI, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No. 80/RPR/2019 Ǔनधा[रण वष[ / Assessment Year : 2015-16 M/s. C G Housing Company 1 st Floor, G E Road, Supela, Bhilai (C.G.) PAN : AAJFC0814H .......अपीलाथȸ / Appellant बनाम / V/s. The Income Tax Officer-1(3), Bhilai (C.G.) ......Ĥ×यथȸ / Respondent Assessee by : Shri Nilesh Jain, AR Revenue by : Shri G.N Singh, Sr. DR स ु नवाई कȧ तारȣख / Date of Hearing :10.06.2022 घोषणा कȧ तारȣख / Date of Pronouncement : 26.07.2022 2 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 आदेश / ORDER PER RAVISH SOOD, JM: The present appeal filed by the assessee is directed against the order passed by the CIT (Appeals)-II, Raipur, dated 13.02.2019, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income-Tax Act, 1961 (for short ‘the Act’) dated 15.12.2017 for assessment year 2015-16. Before us the assessee has assailed the impugned order on the following grounds of appeal: “1. In the facts and circumstances of the case and in law, the learned Commissioner of income Tax (Appeals) has erred in confirming addition made by ld. Assessing Officer of Rs.24,75,000/- by way of disallowance u/s.40A(3) of the Income Tax Act, 1961, despite no such expenditure was debited to the profit & Loss A/c. 2. The appeal order is bad in law and in facts. 3. The appellant reserves the right to add, alter, amend and omit all or any of the grounds of appeal.” 2. Succinctly stated, the assessee firm which is engaged in the business of real estate builder and developer had e-filed its return of income for the assessment year 2015-16 on 30.09.2015, declaring an income of Rs.1,13,000/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s.143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that the assesee had during the year under consideration vide registered deeds 3 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 purchased certain land for a consideration of Rs. 3,70,90,190/- [Rs.3,46,00,000/- (purchase consideration) + registration expenses], as under: It was observed by the A.O that the assessee had shown the aforesaid land as a ‘fixed asset’ in its ‘balance sheet’. Considering the fact that the assessee was engaged in the business of a developer and builder, the A.O held a conviction that the aforesaid land was acquired by the assessee not as an investment but for the purpose of constructing a housing project on the same. Accordingly, the A.O was of the view that the purchase of the land in question though claimed by the assessee as a part of its ‘fixed asset’ was in fact the stock-in-trade of its business as that of a land developer/builder. In order to fortify his aforesaid conviction the AO took support of the fact that the assessee during the year under consideration had carried out construction activities on certain piece of land and had shown the same as work- in-progress in the balance sheet. Backed by the aforesaid facts, the A.O was of the view that as the assessee had made a cash payment of Rs.24.75 lac (out of Rs.3,70,78,202/-) therefore, its claim of deduction of the same was liable to be disallowed under section 40A(3) of the Act. Accordingly, the A.O on the basis of his S.No. Name of seller Date of registry Total amount Amount paid in cheque/DD Amount paid in cash 1. Mahadeo & Others, Sirsa Khrud 29.03.2015 4,75,000 - 4,75,000 2. Girija Bai, Choubey Coliny, Raipur 26.03.2015 57,75,000 57,75,000 - 3. Smt. Taramunni Kutela Bhata 30.12.2014 2,83,50,000 2,63,50,000 20,00,000 Total 3,46,00,000 3,21,25,000 24,75,000 4 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 aforesaid observations after disallowing the aforesaid amount of Rs. 24.75 lac u/s.40A(3) of the Act, vide his order passed u/s.143(3), dated 15.12.2017 assessed the income of the assessee at Rs.25.88 lac. 4. Aggrieved, the assessee carried the matter in appeal before the CIT(Appeals). However, the CIT(Appeals) not being persuaded to subscribe to the contentions advanced by the assessee upheld the disallowance made by A.O u/s.40A(3) of the Act, observing as under: “2.3 I have considered the grounds of appeal, gone through the submissions of the appellant and perused the assessment order. The AO has disallowed the cash of payment for purchase of land u/s. 40A(3) of the Act. The AO has held that the assessee is a builder and his explanation that land was purchased as investment and not as stock in trade cannot be accepted. Assessee is a builder. It uses the land as asset to be developed and sold. The land is consumable item for the assessee which is used in the making of final product which is houses or flats or even plots. Assessee is not a small investor who buys land for the purpose of appreciation and sell later on. Any appreciation in price of land is considered while selling the final product of houses and the income from the activity is offered as business income, not the capital gains. Thus, the land bought by the assessee has to be treated as stock in trade. Once the AO considers the land as stock in trade, the purchase transaction will be routed through the profit and loss account as purchases and in that case it the expenses made in cash will be duly disallowable u/s. 40A(3) of the Act. Therefore, the addition is hereby deleted.” 5. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter before us. 6. We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. AR in order to drive home his contentions. 5 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 7. As is discernible from the orders of the lower authorities, we find that it is a matter of fact borne from the record that the assessee had purchased the aforesaid land in question for a consideration of Rs.3,70,78,202/- (including registration charges) as a ‘fixed asset’ and had reflected the same as such in its balance sheet for the year under consideration. However, the A.O being of the view that as the assessee was engaged in the business as that of a real estate builder and developer, therefore, the land in question would have been acquired by him for developing a housing project and not as an investment. 8. Controversy involved in the present appeal finds its genesis in the assumption of the A.O, that the land in question was acquired/purchased by the assessee as a part of its stock-in-trade, and not as an investment as was projected in its balance sheet. Before proceeding any further, we shall deal with the scope and gamut of the Section 40A(3) of the Act which reads as under: “(3) where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees no deduction shall be allowed in respect of such expenditure.” On a perusal of the aforesaid statutory provision, we find that the same contemplates declining of the assessee’s claim for deduction of an expenditure, which is not found to be in conformity within the methodology therein contemplated, i.e., the expenditure in excess of an amount of Rs.20,000/- which is paid in a day otherwise 6 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 than by an account payee cheque or bank draft is to be disallowed while computing the income of the assessee under the head ‘profit and gains of business or profession’. Clearly, the aforesaid statutory provision had been tailor made to cater to a specific purpose, i.e, disallowing a claim for deduction of an expenditure, and thus, would not take within its sweep any such payment that had not been claimed by the assessee as an expenditure for the purpose of computing his income under the head “Profits and gains of business or profession”. In sum and substance, where the payment made by the assessee has not been claimed as an expenditure for the purpose of computing his income under the head “Profits and gains of business or profession”, then, de hors any such claim of deduction no question of disallowance of the same would arise at all. Our aforesaid conviction is fortified by the order of a co-ordinate Bench of the Tribunal, i.e, ITAT, Delhi Bench ‘D’ in the case of Jasmine Buildtech (P) Ltd. Vs. ACIT, ITA No.1767/Del/2013 dated 21.11.2017. It was observed by the Tribunal that when no payment was claimed by the assessee as an expense, then there could not be any question of disallowing the same by triggering the provisions of Sec. 40A(3) of the Act. For the sake of clarity the relevant observation of the Tribunal is culled out as under: “8. Now coming to the disallowance u/s 40(A)(3), similar pleas taken by the assessee to the effect that when no payments were claimed as expense the question of deduction does not arise and in the case of a group company namely Westland Developers P. Ltd. vs. ACIT, I.T.A .No. 1752/Del/2013 (Assessment Year-2006-07) a coordinate bench of this Tribunal held as follows: "10. We have also taken ourselves through the judgement of the Jurisdictional High Court in the case of CIT vs Industrial Engineering Projects 7 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 Pvt. Ltd. (cited supra) which has been relied upon before us for the proposition that reimbursement of expenses cannot be treated to be a Revenue receipt. How the judgement of the Apex Court in Tuticorin Alkali Chemicals & Fertilizers is applicable to the facts of the present case has not been set out in the order of the authorities nor has the Ld. DR been able to address the applicability of the said judgement to the issue at hand. We have taken ourselves through the said judgement and seen that it proceeds on entirety different facts and circumstances and has no applicability to the facts of the present case. Consequently, it is seen that from the ratio of the judgements relied upon before the CIT(A) and also before us which have been discussed in the earlier part of this order no arguments have been advanced by the Revenue so as to contend how they are not applicable to the case at hand, no distinguishing fact, circumstance or position of law has been relied upon so as to come to a contrary finding than the one arrived at. Accordingly on a consideration of the peculiar facts and circumstances of the case and the judgements relied upon considering the relevant provision of the Act namely Section 40A(3), we hold for the detailed reasons given hereinabove that Section 40A(3) of the Act has been wrongly invoked as admittedly no expenses relatable to the addition has been claimed and the assessee has successfully demonstrated that the payment were re- imbursement made by CWPPL." 9. We have perused the orders in the group company's cases and it is held in both M/s IAG Promoters and Developers Pvt. Ltd. and Westland Developers P. Ltd. that when the payments are not claimed as expense no disallowance arises. We, therefore, hold that disallowance u/s 40(A)(3) is not sustainable and the same has to be deleted. We direct the AO to do so. Grounds of appeal on this aspect are answered accordingly.” 9. Also, a similar view had been taken by the Tribunal in the case of Kanshi Ram Madan Lal Vs. Income Tax Officer Vs. ITO, (1983) 3 ITD 0290 (Del). Referring to the purposive legislation behind the insertion of Sec. 40A(3) of the Act, vide the Finance Bill, 1968, it was observed by the Tribunal that the aforesaid statutory provision did not take within its sweep capital expenditure. On the basis of our aforesaid deliberations, we are of the considered view that the aforesaid statutory provision, i.e. sub-section (3) of Section 40A of the Act only contemplates disallowance of the assessee’s claim for deduction of an expenditure which is incurred in a manner otherwise than that therein provided. Our aforesaid conviction 8 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 is further fortified from a perusal of the budget speech of the Finance Minister on 29th May, 1968, wherein explaining the underlying reason for making available Sec. 40A(3) on the statute it was stated by him as under : “45. Tax liability is sometimes artificially reduced by diverting profits to relatives and associate concerns in the form of excessive payments for goods and services. Claims are also made for deduction of expenses in large amounts shown to have been paid in cash, often with a view to frustrating investigation as to the identity of the recipients and the genuineness of the claim. To plug these loopholes I propose to provide that payments made in business and professions to relatives or associate concerns will have to pass the test of reasonableness in order to qualify for deduction. Further, I propose to provide that payments made in amounts exceeding Rs. 2,500 after a date to be notified later, will be allowed as a deduction only if these are made by crossed cheques or by crossed bank drafts.” 10. Backed by our aforesaid observations that Sec.40A(3) of the Act would not take within its sweep a capital expenditure, we shall now deal with the sustainability of the disallowance of Rs.24.75 lac made by the A.O. As observed by us hereinabove, it is a matter of fact borne from the record that the purchase of the land in question for a consideration of Rs.3,70,78,202/- (supra) was shown by the assessee as an investment and formed part of its ‘fixed assets’ in the balance sheet for the year under consideration. Observation of the A.O that the assessee had purchased the land in question not as an investment, but as stock-in-trade of its business as that of a builder/developer is merely backed by his assumption that as the assessee was engaged in the business as that of a real estate builder and developer, therefore, the land in question in all probability would have been purchased for the said business purpose, i.e, developing of a housing project on the same. Undeniably, the dislodging of the assessee’s claim is only backed by an unsubstantiated assumption 9 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 of the AO, and is not supported by any material proving otherwise. We are afraid that the aforesaid observation of the A.O does not find favour with us, as the land in question, as claimed by the assessee was purchased as an investment and formed part of its ‘fixed asset’ in the balance sheet. Notwithstanding that the assessee had purchased the aforesaid property in question as a ‘fixed asset’, even if it is to be presumed that the same in the coming times is to be commercially exploited by it for constructing/developing a housing project, the same merely on the said basis would not trigger the applicability of sub-section (3) of Section 40A of the Act, as at the relevant point of time the assessee had made an investment towards purchase of a capital asset and not stock-in-trade. On a subsequent conversion or treatment by the assessee of the aforesaid capital asset as a stock-in-trade of its business of a real estate builder and developer, the provisions of sub-section (2) of Section 45 would though get triggered, but then such subsequent event would not lead to invocation of section 40A(3) of the Act. Be that as it may, as the assessee in the case before us had at the relevant point of time made the investment towards purchase of a capital asset, which falls beyond the realm of sub-section (3) of Sec.40A of the Act, therefore, as claimed by the Ld. AR, and rightly so, no disallowance under the said statutory provision was called for in its hands. We, thus, in terms of our aforesaid observations not finding favour with the view taken by the lower authorities set-aside the order of the CIT(Appeals) and vacate the disallowance of Rs.24.75 lac made by the AO. 10 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 11. In the result, appeal of the assessee is allowed in terms of our aforesaid observations. Order pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board. Sd/- Sd/- RATHOD KAMLESH JAYANTBHAI RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायप ु र/ RAIPUR ; Ǒदनांक / Dated : 26 th July, 2022 **SB आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of the Order forwarded to :- 1. अपीलाथȸ / The Appellant. 2. Ĥ×यथȸ / The Respondent. 3. The CIT(Appeals)-II, Raipur (C.G) 4. The Pr. CIT-II, Raipur (C.G) 5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण,रायप ु र बɅच, रायप ु र / DR, ITAT, Raipur Bench, Raipur. 6. गाड[ फ़ाइल / Guard File. आदेशान ु सार / BY ORDER, // True Copy // Ǔनजी सͬचव / Private Secretary आयकर अपीलȣय अͬधकरण, रायप ु र / ITAT, Raipur. 11 M/s. CG Housing Company Vs. ITO-1(3), Bhilai ITA No. 80/RPR/2019 Date 1 Draft dictated on 20.06.2022 Sr.PS/PS 2 Draft placed before author 20.06.2022 Sr.PS/PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS/PS Sr.PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order