Expenditure incurred in cash for Stock-in-trade not routed through P&L Account shall not be disallowed u/s 40A(3) of Income Tax Act, 1961

Facts of the Case:

The Assessee is a company, engaged in the business of land dealing and development. The Assessee filed its return of income for the Assessment Year 2012-13 reporting total income amounting to Rs. 3,16,20,860/-.
During the course of assessment proceeding, the Assessing Officer (“AO”) made addition pursuant to section 40A(3) of the Act and assessed the income of the Assessee at Rs. 3,22,91,187. During the year under consideration the Assessee purchased certain lands/plots and the payment of same was made in cash amounting to Rs. 3,50,000/-.
The AO disallowed the said sum u/s 40A(3) of the Act, since, amount of consideration was released in cash. Aggrieved by the order of AO Assessee preferred the appeal before CIT(A) and thereafter at ITAT.

Contention of the Assessee:

The Assessee contended that the payment in cash was made due to exceptional circumstances to meet business exigency and to grab the business opportunity earlier than the competitors.
Also, the cash payment made by the Assessee are genuine which is evident from the fact that the payments are duly acknowledged by the recipients of payment.
Further, the said lands/plots are kept as the closing stock in the books of the Assessee, hence, no deduction was claimed by the Assessee in its Return of Income. Accordingly, disallowance under section 40A(3) of the Act shall not be attracted since the purpose of the section is to restrict the deduction of the expense in the return of income.

Contention of the Revenue:

The revenue relying on the judgement of the Hon’ble High Court in the case of Madhav Govind Dulshete v. ITO [2018] 99 taxmann.com 56/259Taxman 149 (Bom.) stated that, the fact that the payment made by the Assessee are genuine transactions is irrelevant for the considering the applicability of the section 40A(3) of the Act. Which means even the genuine transaction, if made in cash, shall be squarely covered by the provision laid under section 40A(3) of the Act.
Further Revenue also claimed that since the Assessee does not fall under the provision of rule 6DD, he cannot escape from the disallowance under section 40A(3) of the Act.

Decision of the ITAT:

The Hon’ble ITAT while framing their decision disregarded the claim of the Revenue, stating that, facts of the present case is different from the facts of the case referred by the revenue i.e., Madhav Govind Dulshete v. ITO, in such case the expense was debited to the Profit and Loss Account and thereafter claimed by the Assessee but in the present case the expense was not claimed by the Assessee, however, the same was mentioned as the closing stock as on reporting date. Therefore, when the expense is not claimed by the Assessee as a deduction question for disallowance of same shall not arise. Hence Appeal of the Assessee was allowed in its favour.

Case Law: Vikrant Happy Homes (P.) Ltd. v. DCIT [2022] 138 taxmann.com 559 (Pune – Trib.)

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