2018 (10) TMI 1340 - AT - Income Tax

Addition u/s 40A - cash payment exceeding permissible limits - whether payment do fall under the exception provided under Rule 6DD of the IT Rules? - Held that - No doubt the AO called the sale deeds and other details and assessment is completed under section 143(3) of the Act. When assessee has purchased the property in the name of M/s.Sritanuja Builders & Developers for total consideration of Rs. 59, 10, 000/-when assessee has paid Rs. 42, 10, 000/- in cash AO ought to have been called the details and examined the issue whether section 40A(3) shall attracts or not. AO simply passed the assessment order in mechanical manner without examining the details of the property and the another property purchased by the assessee subsequently within 20 days the assessment is completed. In our opinion the order passed by AO is erroneous and also prejudicial to the interests of the Revenue. Therefore Commissioner has rightly appreciated the facts of the case and considered all the issues after calling the explanation from the assessee by considering the same he passed the order and directed the AO to disallow the expenditure being a cash payment made to the land owners is in violation of the provisions of section 40A(3) as the said payment do not fall under the exception provided under Rule 6DD of the IT Rules - Decided against assessee.

Summary

Issues Involved:
1. Whether the Assessing Officer's (AO) assessment was erroneous and prejudicial to the interests of the Revenue.
2. Applicability of Section 40A(3) of the Income Tax Act, 1961 regarding cash payments exceeding Rs. 20,000.
3. Validity of the Principal Commissioner of Income Tax's (CIT) exercise of revisionary powers under Section 263 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Erroneous and Prejudicial Assessment
The assessee filed a return declaring an income of Rs. 12,89,020, which was later assessed at Rs. 14,92,992 under Section 143(3) of the Income Tax Act. The CIT found that the AO allowed the entire expenditure of Rs. 59,10,000 for the purchase of a property without scrutinizing the cash payments of Rs. 42,10,000. The CIT deemed this oversight as erroneous and prejudicial to the interests of the Revenue, warranting revision under Section 263.

Issue 2: Applicability of Section 40A(3)
The CIT observed that the assessee, engaged in construction and sale of flats, purchased a property for Rs. 59,10,000, with Rs. 42,10,000 paid in cash. According to Section 40A(3), any expenditure in cash exceeding Rs. 20,000 should be disallowed unless it falls under exceptions in Rule 6DD. The CIT noted that the AO failed to verify the cash payments against these provisions, thereby allowing the expenditure erroneously.

Issue 3: Validity of Revisionary Powers under Section 263
The CIT exercised revisionary powers under Section 263, issuing a show-cause notice to the assessee due to the AO's failure to scrutinize the cash payments. The assessee contended that the property was initially intended as a capital asset and later converted to stock-in-trade. However, the CIT concluded that the property was acquired as stock-in-trade from the outset, given the business nature of M/s. Sritanuja Builders & Developers and the immediate subsequent purchase of an adjacent plot. The CIT directed the AO to disallow the cash expenditure of Rs. 42,10,000, as it did not meet the exceptions under Rule 6DD.

Tribunal's Findings:
The Tribunal upheld the CIT's decision, agreeing that the AO's assessment was both erroneous and prejudicial to the Revenue. It emphasized that the AO should have scrutinized the cash payments under Section 40A(3). The Tribunal rejected the assessee's argument of initial capital asset intention, noting the quick succession of property purchases indicative of business intent. The Tribunal found the CIT's exercise of revisionary powers under Section 263 justified and dismissed the assessee's appeal.

Conclusion:
The Tribunal confirmed the CIT's revision of the AO's assessment, validating the disallowance of Rs. 42,10,000 in cash payments under Section 40A(3). The appeal by the assessee was dismissed, affirming the CIT's order as within legal bounds and necessary to correct the erroneous and prejudicial assessment.