Shri G. Manjunatha, Accountant Member:-This appeal filed by the assessee is directed against order of the CIT(A), Guntur dated 13.5.2014 and it pertains to the assessment year 2010-11.
2. The brief facts of the case are that the assessee is a proprietor of M/s. Pragathi Enterprises engaged in the business of developments of sites and flats, filed his return of income for the assessment year 2010- 11 on 13.7.2010 declaring total income of Rs. 3,17,890/-. The case has been selected for scrutiny under manual selection of cases as per the guidelines issued by the Board and accordingly, notices u/s 143(2) & 142(1) of the Income Tax Act, 1961 (hereinafter called as 'the Act') were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the information as called for. During the course of assessment proceedings, the A.O. noticed that the assessee has debited an amount of Rs. 52,97,925/- towards purchase of sites and the payment for which has been paid in cash. Therefore, issued a show cause notice and asked to explain as to why the provisions of section 40A(3) of the Act should not be invoked to disallow expenditure incurred for purchase of land. In response to show cause notice, the assessee has submitted that he had purchased the impugned lands for the purpose of investment, however, finally it was converted as stock in trade in his business, therefore, 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 conversion of investment into stock in trade cannot be considered as purchases, thereby cash payments made for acquisition of capital asset cannot be disallowed 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 circumstances, he has made cash payments, therefore, his case do not come under 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 was carried nor intended to carry out any agricultural operations, which is proved from the conduct of the assessee that the land has been immediately converted into flats and sold to customers. The A.O. further observed that the insistence of sellers for cash payment is not a matter for consideration for allowing the expenditure. It was further observed 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 Rs. 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 assessee reiterated the submissions made before the A.O. The Ld. A.O. ought to have considered the fact that purchase of agricultural land is basically for investment for which provisions of section 40A(3) of the Act would not apply. It was further submitted that he had purchased the lands for the purpose of investment, but subsequently converted investment into stock in trade, therefore, the provisions of section 40A(3) of the Act cannot be invoked when the asset was acquired as an investment. The CIT(A) after considering the relevant submissions of the assessee, observed that the assessee has purchased impugned lands for the purpose of business and not as investment. The CIT(A) further observed that as pointed out by the assessing officer, the trading account reveals that the entire purchase of land formed part of either the sale proceeds or closing stock. Thus, the assessee himself has treated these purchases as part of his business of trading in land and the claim of the purchase was originally as an investment 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 appeal before us.
4. The Ld. A.R. submitted that the Ld. CIT(A) was not justified in confirming the disallowance of Rs. 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. 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 stock in trade, formed sites and sold to customers. It was further submitted that for application of the provisions of section 40A(3) of the Act, the date of purchase is important as per which the impugned asset 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 strongly supported order of the CIT(A).
5. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. invoked the provisions of section 40A(3) of the Act, and disallowed cash payments made towards purchase of land. The assessing officer was of the opinion that the assessee himself admitted in his financial statements that he had purchased the land as a stock in trade for the purpose of trading in his business. The A.O. further was of the opinion that though the assessee claims that the sellers have insisted for cash payments, failed to prove the same with necessary evidences and also opined that the insistence of seller for cash payment is not a matter for consideration for allowing the expenditure. Therefore, opined that the expenditure incurred for purchase of land is not allowable u/s 40A(3) of the Act. It is the contention of the assessee that he had purchased the impugned land as an investment for the purpose of carrying out agricultural operations, but under changed circumstances, the investment has been converted into stock in trade, formed sites and sold, therefore, the provisions of section 40A(3) of the Act has no application.
6. Having heard both the sides and considered material on record, we find that the A.O. disallowed cash payment for purchase 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 issue needs to be examined is whether on the facts and in the circumstances 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, provides for disallowance of expenditure, in respect of which any payment is made to any person in cash in excess of Rs. 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 profits & gains and business or profession under sub-section (3) of this sub section, where a payment or aggregate of payment made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds Rs. 20,000/-, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. A plain reading of provisions of section 40A(3), makes it clear that the said provision applicable where the assessee has made cash payments in excess of prescribed limits in the course of his business. The said provision does not apply when the payments are made for acquiring any capital assets or investment.
7. In this case, the assessee claims that he had purchased the impugned lands as agricultural lands for the purpose of investment, but under changed circumstances, converted his investment into stock in trade. The assessee further contended that because the two instances have occurred in the same financial year, the assessee has shown the conversion of investment into stock in trade as purchases in his financial statements, therefore, the provisions of section 40A(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 the reason that the provisions of section 40A(3) of the Act, does not apply to a case where the payment is made for acquisition of capital assets or investments. In this case the A.O. as well as the CIT(A) never disputed the fact that the assessee has purchased the impugned lands as investment and subsequently converted into stock in trade. The A.O. allegation is that since both the instances have occurred in the same financial year, the assessee failed to prove the lands were acquired for the purpose of investment. Therefore, were of the view that once the impugned lands were acquired as an investment and subsequently converted into stock in trade in the business, the provisions of section 40A(3) of the Act, cannot be invoked to disallow the cash payments. Moreover, the lower authorities did not dispute the genuineness of payments. Further, each and every payment in cash are not automatically get disallowed under section 40A(3) of the Act. In a particular case where there exist a business expediency and other relevant factors and also the payments are genuine, then the Acts provide for immunity from disallowance of expenditure, if the assessee proves to the satisfaction of the assessing officer that there exists a business expediency in making the cash payments. In this case, the assessee has filed necessary evidences to prove that the impugned land has been acquired as an investment and subsequently converted into stock in trade of his business. Therefore, we are of the view that the A.O. was erred in disallowing cash payments by invoking provisions of section 40A(3) of the Act. Hence, we direct the A.O. to delete additions made towards cash payments u/s 40A(3) of the Act.
8. In the result, the appeal filed by the assessee is allowed. The above order was pronounced in the open court on 5th May’17.