Spilt of consideration below Rs. 20,000/- would not save the assessee from the rigorous provision of Sec- 40A (3) in absence of business expediency

IN THE ITAT JODHPUR BENCH

Vaishali Builders & Colonizers

vs.

Additional Commissioner of Income-tax, Range-1, Jodhpu

Facts: The assessee is dealing in Real Estate and land purchased is stock in trade - the assessee has purchased chunk of land from parties mentioned above and it is only the payment, which has been staggered over a period of time. Thus, the land is stock in trade of the business of the assessee and was not merely an asset. 

Contention of the assessee: The assessee pleaded before the authorities below that the parties insisted for cash payment, therefore, the cash payment is made on different dates, but the plea taken before the authorities below have not been established by any evidence or material on record or confirmation from the parties- the assessee challenged the disallowance u/s. 40A(3) of the IT Act. 

Contention of the A.O.: during the assessment proceeding, the assessee submitted that there have been purchases of Rs. 5,37,57,500/- and the assessee has made sales amounting to Rs. 5,84,30,300/-. 

Vide note sheet entry dated 5-10-2010, the assessee was asked to furnish mode of payment to parties to whom payments for purchase have been made. The assessee furnished the details of purchases vide letter dated 23-11-2010 wherein the mode of payment was mentioned. the assessee was asked as to why payment for purchase of land has been made in cash. The first reply of the assessee was that the persons receiving the money insisted for payment through cash only- the assessee was asked to explain why the expenditure made in cash for purchase of land should not be disallowed u/s 40A(3).

Submission of the assessee: relied on the provision of Section- 40A (3) and Rule 6DD.

" The condition when an assessee can claim exemption is given in Rule 6DD of the Income Tax Rules. However, the assessee has not cited any provision of this Rule and the only explanation of the assessee that the payment has been made within the limit of Rs. 20,000/- specified by the Act. The idea behind the introduction of such provision was to curb the transaction in cash. However, a limit was specified so that small traders/businessmen do not fell the pinch of the provision and their small day to day activities are not affected. The explanation of the assessee may be applied to a case where each bill is less than Rs. 20,000/- and the payment for such bills is being made in cash.

The assessee before Ld. CIT(A) has submitted in its submission dated 7-12-2010 that the payment made for purchase of land and the assessee had not made any violation of the provision of Section 40A(3) of the I.T. Act, 1961 during the year under consideration, the account copies of the parties to whom the payments made toward the purchase of land was enclosed. In this regard, it is submitted that the payment for purchases are made otherwise than by an account payee cheque within the limits specified under the provision of law. Further the assessee submitted that the payment was made for purchase of agricultural land which cannot be regarded as expenditure within the meaning of Sec. 40A(3) until the land is converted according to prevailing law. It is further submitted that the payment made toward purchase of agriculture land is an asset until the same is sold. The unsold land cannot be regarded as expenditure but the same will have to be shown as an asset in the balance sheet. Therefore, until the sale deed is executed and registered the amount paid toward purchases of the land cannot be regarded as an expenditure referred to in Section 40A(3). In this regard, the assessee has relied the decision of Hon'ble ITAT Delhi in the case ofKanshi Ram Madan Lal v. ITO [1983] 3 ITD 290 in which it has been held that the Sec.40A(3) is not attracted in the case of capital expenditure. The assessee has further submitted that apart from the non availability of the banking facility the consideration of the business expediency and other relevant factors are also applicable for deciding the applicability or non-applicability of Sec.40A(3). The assessee has further stated that it is engaged in the business of purchase and sale of land and real estate. It is impossible to carry on the aforesaid business of the real estate without at least occasionally receiving/paying money in cash in relation to transaction of the land. Such payments are not only necessary in the interest of the business expediency but it becomes a business necessity in relation to some transactions. Further, the assessee has stated that the said second proviso also recognizes other relevant factors. The other relevant factors will surely include cases where it is impracticable or impossible to make cash payment relating to purchase/sale of the land or other immovable property. In this regard the assessee has relied various decisions. Further, the assessee has stated that disallowance of the cash payment made for purchase of land by invoking Sec.40A(3) will result in levy up tax on gross sale value of the land and not on the real income derived by way of profit on sale of land and this will clearly violate the concept of the levy of tax on real and actual income and not on gross receipt. Therefore, the disallowance u/s 40A(3) in respect of the cash payment made on account of business expediency and business necessity are therefore, clearly covered by the exceptional provided in second proviso to Sec.40A(3). In this regard, the appellant has relied the decision of Hon'ble MP High Court in the case of CIT v. Balchand Ajit Kumar [2003] 263 ITR 610/[2004] 135 Taxman 180 (MP) and CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 (Guj)."

Hon'ble ITAT held,

"the appellant also stated regarding other relevant factors that it will surely include cases where it is impracticable or impossible to make cash payment relating to purchase/sale of land or other immovable properties, therefore, all the judgments on old rule 6DDJ prior its omission where cash payment were made on account of impracticability or impossibility of payment by cheque and other compelling reasons still continued to be valid justification in view of the exemption so carved out in second proviso of section 40A(3). 

In this regard, it is observed that provision of 6DD(J) was omitted by the Finance Act, 1995 w.e.f. 1.4.1996. First proviso to Sec. 40A(3) provides that no disallowance shall be made u/s 40A(3), where any payment in sum exceeding Rs. 20,000/- is made other than a account payee cheque drawn on a bank in such cases and such circumstances as may be prescribed having regard to the nature and extent of banking facility available, consideration of business expediency and other relevant factors. The appellant has not mentioned impracticability or impossibility of payment by cheque and other compelling reasons which enable it to make payment in cash. It is also not acceptable because appellant's has not specified Rule 6DD(J) under which the appellant's case falls. Therefore, under this situation, applicability of the cases relied by the appellant cannot be liked to the facts of the present case and the argument in this regard is rejected. Further, I also rely the decision of Hon'ble Rajasthan High Court, in the case of Nahgi Lal vs. CIT, reported in 167 ITR 139 (Raj) where on the issue of disallowance u/s 40A(3) under Rule 6DD(J), it is held that it is not sufficient for the assessee merely to establish that the purchases were genuine and the payments were identifiable. 

The assessee is further required to prove that due to exception and unavoidable circumstances, or because payment by cheques was not practicable, cash payments were made. Further, the Hon'ble Gujarat High Court in the case of Associated Engineering Enterprises. vs. CIT, reported in 216 ITR 366 (Guj.) held on the issue of disallowance u/s 40A(3) regarding exception and unavoidable circumstances that certificate given by the payee does not even remotely indicate any genuine difficulty faced by parties necessitating cash payments. It cannot be said that cash payments were made by the assessee due to any exceptional or unavoidable circumstances as envisaged by cl(j) of Rule 6DD, It is also held that it is not merely the genuineness of the transaction but also the existence of the circumstances warranting payments by cash which is required to be proved.

Regarding the business expediency, the assessee has not filed any evidence before the authorities below and nothing is clarified as to what were the other relevant factors, for which the cash payment has been made and no specific Rule has been explained u/r 6DD, which is applicable to the case of the assessee. The ld. counsel for the assessee argued that for purchase of agricultural land and payment made to the villagers, the provisions of section 40A(3) may not be applied as provided in exception to Rule 6DD. We have gone through the Rule 6DD applicable now and prior to amendment also, in which none of the exception has been provided for making payment in cash for purchase of land. It is, however, provided that above rule can be avoided if payment is made for purchase of agricultural produce which is not the case of the assessee at all. 

The assessee is dealing in real estate and in land and as such, it was for the assessee to establish that the cash payments have been made for business exigencies, which the assessee has failed to prove in this case. Further Rule 6DD(j) would not apply in this case because the assessee failed to prove that on the date of payment whether banks were closed either on account of holiday or strike. The ld. CIT(A), therefore, rightly noted in his finding that the assessee has not satisfied as to under which Rule, the assessee's case would fall. In the case of Trivedi Corporation Pvt. Ltd. (supra), ITAT Ahmedabad Bench considered the issue of disallowance u/s. 40A(3) in respect of cash payment made to Gujrat State Electricity Board, which was considered as one of the undertaking of the State Government. Therefore, it was considered to be a payment made to Government Body and was falling in exception. The case law cited by the ld. counsel for assessee would not support the case of the assessee because they are based on their own facts and that the theory of real income would not apply for dealing with the issue of section 40A(3) of the IT Act. 

Considering the facts and circumstances and above discussion, it is very clear that the assessee consciously split up the payments in whole of the year, which is impracticable, illogical as noted above and it was done just to circumvent the provisions of law. There was no justification for the assessee to split up the transactions of crores of rupees in small payments of Rs. 15,000/- to Rs. 20,000/- everyday. Whatever plea was taken before the authorities below was not supported by any evidence. Therefore, the assessee failed to prove any business expediency or other facts for making staggered payments in cash. The case of the assessee would not fall in any exception to Rule. The assessee deliberately and consciously split up the payments in part so as to circumvent the provisions of law. 

We, therefore, do not find any justification to interfere with the orders of the authorities below. There is no merit in these grounds of appeal by the assessee. 

Same are accordingly dismissed."