2025 (6) TMI 1391 - AT - Income Tax

Addition on account of cash payment made towards purchase of plot u/s 40A(3) - expense so disallowed relates purchase of land the assessee being a Private Limited Company engaged in the business of construction of buildings for residential purpose - HELD THAT - The first and primary rule of interpretation is that words in a statute should be given their ordinary grammatical or natural meaning unless there is an intention to the contrary. The plain language of a statute must override any supposed intendment of the legislature and cannot be amended or stretched by court. The Hon ble apex court in the case of Padmasundara Rao (DECD) And Others vs State of Tamil Nadu and Others 2002 (3) TMI 44 - SUPREME COURT laid down that the first and primary rule of construction is that the intention of the legislature must be found in the words used by legislature itself. That courts cannot read anything into a statutory provision which is plain and unambiguous. Statute is the edict of legislature. The language employed in a statute is the determinative factor of legislative intent. Even otherwise the intent of the section cannot be to exclude genuine transactions since Section 40(A)(3) of the Act operates on the premise that the transaction otherwise is genuine. And this is for the reason that if the expense were not genuine it would attract disallowance u/s 37 of the Act or any other provision of law. Section 40A(3) is triggered only when an otherwise genuine transaction /expense is incurred in cash beyond limit specified in the section. Reliance placed by assessee on the decision of Achal Alloy (P) Ltd. 1995 (11) TMI 65 - MADHYA PRADESH HIGH COURT is completely misplaced. The Hon ble Court in the said case noted not only genuineness of the transaction but also existence of business exigency for making the payment in cash when it found that the insistence on making the cash payment was founded on the fulcrum that the payees did not have any bank account and that being illiterates required payment in cash. Therefore the said decision is of no assistance to the assessee. Therefore the argument of assessee that the transactions being genuine would not attract Section 40A(3) of the Act is we hold without any substance and is dismissed. Argument of the Ld. Counsel of no expenditure having been incurred rests on the fact that the land purchased in cash remained in the closing stock of the assessee and therefore in effect no expenditure in relation to the same could be said to be incurred by the assessee. There is we hold absolutely no merit in the argument of the Ld. Counsel for the assessee. The fact remains that the assessee purchased the impugned lands during the year and debited the purchases to its Profit and Loss account. This is sufficient for the said transaction to qualify as expenditure. The fact that it was treated as closing stock does not take away the fact that expenditure by way of purchases was incurred in relation to the said transaction of land. Disallowance of expenses u/s 40A(3) upheld - Decided in favour of revenue.

Summary

The core legal question considered in this appeal is whether the disallowance of expenses under Section 40A(3) of the Income Tax Act, 1961, is justified on account of cash payment exceeding the prescribed limit for the purchase of land by the assessee, a Private Limited Company engaged in construction business. The key issues revolve around the applicability of Section 40A(3) to the impugned cash transactions, the genuineness of the transactions, the relevance of business exigency, and whether the impugned land forming part of closing stock negates the disallowance.

The principal issue is the interpretation and application of Section 40A(3) of the Act, which mandates disallowance of expenditure incurred in cash beyond specified limits, subject to exceptions under the proviso read with Rule 6DD of the Income Tax Rules, 1962. The question arises whether the genuine nature of the transaction or its treatment as closing stock exempts the assessee from disallowance.

Regarding the first issue, the legal framework comprises Section 40A(3) of the Act and Rule 6DD of the Income Tax Rules, which specify conditions under which cash payments beyond the prescribed limit may be exempted from disallowance. The Court also referred to binding precedents, including the Apex Court's decision in Attar Singh Gurmukh Singh vs. ITO, which clarified that Section 40A(3) applies to all business transactions with relief only under Rule 6DD. The assessee's reliance on decisions favoring a purposive interpretation to exclude genuine transactions was considered but rejected based on the principle that statutory provisions must be interpreted according to their plain and ordinary meaning, as emphasized in Padmasundara Rao (DECD) vs. State of Tamil Nadu.

The Court examined the assessee's contention that the transaction was genuine and recorded in registered sale deeds, arguing that the purpose of Section 40A(3) is to curb tax evasion and not to disallow genuine transactions. However, the Court held that Section 40A(3) is triggered precisely when a genuine transaction is effected in cash beyond the prescribed limit, and such genuineness does not exempt the transaction from disallowance. The Court noted that if the transaction were not genuine, other provisions such as Section 37 would apply. The proviso to Section 40A(3) and Rule 6DD provide specific exceptions, none of which were demonstrated by the assessee.

In addressing the argument based on business exigency, the Court observed that the assessee failed to establish any such exigency or satisfy conditions under Rule 6DD that would justify cash payments exceeding the limit. The reliance on the Achal Alloys (P) Ltd. case was distinguished on the ground that in that case, the payment in cash was necessitated by the payees' inability to receive bank payments, a fact absent here.

The second issue concerned the assessee's claim that since the land purchased in cash was part of its closing stock, no expenditure was incurred, and thus Section 40A(3) should not apply. The Court rejected this argument, reasoning that the purchase of land debited to the Profit and Loss account as purchases constitutes expenditure in accounting parlance, regardless of its classification as closing stock. Therefore, the transaction qualifies as expenditure attracting Section 40A(3).

The Court also considered the procedural history, including the initial assessment under Section 143(3), the revision order under Section 263 setting aside the assessment for re-examination of the cash payment issue, and the subsequent confirmation of disallowance by the CIT(A). The Court found no infirmity in the authorities' application of Section 40A(3) and their rejection of the assessee's contentions.

In conclusion, the Court upheld the disallowance of Rs. 37,15,000/- under Section 40A(3) of the Income Tax Act, 1961, affirming that the provisions apply to all business transactions where cash payments exceed prescribed limits unless specific exceptions under Rule 6DD are met. The genuineness of the transaction or its treatment as closing stock does not exempt the assessee from disallowance. The appeal was dismissed accordingly.

Significant holdings include the following verbatim excerpts encapsulating the Court's reasoning:

"The first and primary rule of interpretation is that words in a statute should be given their ordinary grammatical or natural meaning unless there is an intention to the contrary. The plain language of a statute must override any supposed intendment of the legislature and cannot be amended or stretched by court."

"Section 40A(3) is triggered only when an otherwise genuine transaction/expense is incurred in cash beyond limit specified in the section."

"The fact remains that the assessee purchased the impugned lands during the year and debited the purchases to its Profit and Loss account. This is sufficient for the said transaction to qualify as expenditure."

Core principles established are that Section 40A(3) applies strictly to cash payments exceeding prescribed limits in business transactions, regardless of genuineness, unless conditions under Rule 6DD are fulfilled. The Court reaffirmed the primacy of the statutory language over purposive interpretation where the language is clear. The decision clarifies that classification of an asset as closing stock does not negate the incurrence of expenditure attracting Section 40A(3).

Final determinations:

• The disallowance under Section 40A(3) of Rs. 37,15,000/- on account of cash payment for land purchase is upheld.
• The genuineness of the transaction does not exempt it from disallowance under Section 40A(3) if cash payment exceeds limits and no exception under Rule 6DD applies.
• The contention that no expenditure was incurred as the land formed part of closing stock is rejected.
• The appeal filed by the assessee is dismissed.