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June 14, 2022

Section 40A(3) does not apply to cash payments for stock-in-trade purchases.

by CA Shivam Jaiswal in Income Tax

Section 40A(3) does not apply to cash payments for stock-in-trade purchases.

Facts and Issue of the case

This appeal by the assessee against the order dated 01-09-2016 passed by the Commissioner of Income Tax (Appeals)-1, Nashik [„CIT(A)‟] for assessment year 2012-13. The assessee raised as many as four grounds amongst which the only issue emanates for our consideration is as to whether the CIT(A) justified in confirming the addition made on account of disallowance u/s. 40A(3) of the Act in the facts and circumstances of the case.

The issue are that the assessee is a company engaged in the business of land dealing and development. The assessee conducts its business under the name and style as Vikrant Happy Homes Pvt. Ltd. The assessee filed return of income declaring a total income of Rs.3,16,20,860/- and the AO completed the  assessment  by  determining the total income at Rs.3,22,91,187/- inter alia making addition u/s. 40A(3) of the Act. The CIT(A) confirmed the same. Aggrieved by which, the assessee is before us by raising above mentioned grounds.

Observation of the court

Heard both the parties and perused the material available on record. As noted above the contention of the ld.  AR  is  that  the  assessee  did  not claim the deduction and the provisions u/s. 40A(3) cannot be held to be invoked against such payments exceeding the limit Rs.20,000/-.  He  also placed on record Agreements at Page Nos. 1 to 20 which are true English translation of Agreements between the assessee and respective payees  to show that the payments exceeding  Rs.20,000/-  totaling  to  Rs.3,50,000/- were incurred for genuine transaction, the transaction  of  which  identified and acknowledged by the payees. We note that it is settled law as rightly pointed by the ld. AR when there is no deduction no disallowance  would follow but however, in the present case, the  CIT(A)  by  placing  reliance  on the Rule 6DD held the assessee does not fall under any of the exception provided therein. The CIT(A) also affirmed the view of the AO that though non-claiming of deduction the assessee debited  the  said  expenditure involving cash payments exceeding Rs.20,000/- to  the  profit  and  loss account, which, in our opinion, the provisions under section could be invoked. Another aspect  as  raised  by  the  ld.  AR  is  that  the  said expenditure were incurred  for  the  business  exigency  though  the expenditure debited to profit and loss account which is neutralized  by showing the purchase of  lands  as  stock  in  trade  as  on  31-03-2012  on credit side. According to him the provisions u/s. 40A(3) is not applicable.

Court notes that the certain High Courts including the Hon‟ble High Court of Gujarat in the case of Anupam Tele Services Vs. ITO reported in (2014) 366 ITR 122 (Guj.) and the Hon‟ble High Court of Rajasthan in the case of Harshila Chordia Vs. ITO reported in (2008) 298 ITR 349 (Raj.) have deleted the disallowance in the cases of genuine business transactions and certain other Hon‟ble High Courts including the Hon‟ble High Court of Bombay in the case of Madhav Govind Dulshete Vs. ITO reported in (2018) 259 Taxman 949 (Bom.), the Hon‟ble High Court of Madras in the case of Vaduganathan Talkies and others Vs. ITO reported in (2020) 428 ITR 224 (Mad.), the Hon‟ble High Court of Karnataka in the  case of Nam  Estates Pvt. Ltd. Vs. ITO reported in (2020) 428 ITR 186 (Kar.) and the Hon‟ble High Court of Calcutta in the case of Bagmari Tea Company Ltd. Vs. CIT reported in (2001) 251 ITR 640 (Cal.) have confirmed the disallowance where the payment was made in cash exceeding the stipulated amount notwithstanding the genuineness of the transaction. Coming to the facts on hands in the present case the fact remains admitted that the sellers from whom the assessee purchased lands were identified the transaction and also acknowledged the cash payments, thereby, it shows the transaction is genuine, as discussed in the foregoing paragraphs that the assessee treated the said lands as  stock-in-trade and no deduction claimed. The ratio laid down of the Hon‟ble High Court of Bombay in the case of Madhav Govind Dulshete (supra) as to whether the disallowance is maintainable even the transaction is genuine, in our opinion, is not applicable to the facts on hand. However, we find merit in the alternative contention of the assessee that the expenditure incurred in cash forming part of the closing stock which means this has not been claimed as deduction while computing the income under the  business head, therefore, the question of disallowance u/s. 40A(3) does not arise. Thus, the grounds raised by the assessee in this regard are allowed.


The appeal of assessee was  allowed by the court


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