The Karnataka High Court upheld the order of the Tribunal disallowing the expenditure under Section 40A(3) of the Income Tax Act, 1961 in respect of cash payments made by the assessee to the agriculturists/farmers for the purchase of land.
The assessee, M/s Nam Estates Pvt. Ltd. is a private limited company registered under the Companies Act, 1956 engaged in the business of real estate development. The assessee filed its return of income declaring an income of Rs.3,48,240.
A survey was conducted under Section 133A of the Act on the business premises of the assessee. The case of the assessee was selected for scrutiny and an order of assessment under Section 143(3) of the Act was passed by which the Assessing Officer disallowed business expenditure to the tune of Rs.17,52,527 holding that the payment towards purchase of land during the assessment year was hit by Section 40A(3).
The assessee filed an appeal before the CIT(A), who by an order confirmed the order of the Assessing Officer with regard to the disallowance of business expenditure of the assessee. The assessee filed its cross objections against the order in the appeal preferred by the Revenue before the Income Tax Appellate Tribunal. The tribunal by its order affirmed the order of the CIT(A) with regard to the disallowance of business expenditure.
The assessee submitted that the purpose and intent of Section 40A(3) is to curb tax evasion by establishing the identity of the parties and the genuineness of the transaction. It is further submitted that the Tribunal has erroneously invoked the provisions of Section 40A(3) when the identity of the parties and the genuineness of the transaction were not in question.
However, the revenue has submitted that Section 40A(3) provides for disallowance of cash expenditure incurred in excess of Rs.20,000 and that the provision cannot be made applicable only if the case of the assessee falls within the exceptions provided under Rule 6DD of the Income Tax Rules.
The division bench of Justice Ashok Aradhe and Justice H.T. Narendra Prasad noted that the assessee in his written submission had disclosed the reason for payment in cash on the ground that the payments were made at a place which was not served with any banking facility.
However, the assessing officer has found that the place at which the payment was made had a banking facility and therefore, the court has held that the assessee failed to prove that it was covered in the exception clause as provided under Section 40A(3) read with Rule 6DD.
Therefore, the court while dismissing the assessee’s contention affirmed the findings of the CIT(A).
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