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TMI Blog2014 (4) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... interest u/s. 234B of the Act and also initiation of penalty proceedings u/s. 271(1)(c) of the Act. 3. Brief facts of the case are that the assessee filed its return of income on 28.9.2008 disclosing a total income of Rs. 5,23,78,136. The said return was processed u/s. 143(1) of the Income-tax Act, 1961 on 10.02.2010 raising a demand of Rs. 54,82,650. An order u/s. 154 has been passed on 6.10.2010 reducing the demand to Rs. 24,20,030 by giving credit to advance tax. Subsequently, the case was taken up for scrutiny and assessment u/s. 143(3) of the Act was completed on 31.12.2010 at a total income of Rs. 24,43,37,350 by making the following additions: (i) Addition towards suppression of sale receipts from Ashoka Ala Mansion Project Rs. 15,22,10,300 (ii) Disallowance u/s. 40A(2)(b) Rs. 3,97,04,400 (iii) Preliminary expenses written off Rs. 44,514 Against these additions, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the addition made u/s. 40A(2)(b) of the Act. However, he deleted the other addition of Rs. 15,22,10,300 made towards suppressed sales. Against this, the Revenue is in appeal before us. 4. The learned DR submitted that addition of Rs. 15,22,10, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of proving understatement or concealment is on the Revenue; and the sub-section has no application in the case of a bona fide transaction where the consideration received by the assessee has been correctly declared, we are inclined to confirm the order of the CIT(A). The ground of the Revenue is dismissed. 8. Now coming to the assessee's appeal. Facts of the issue are that during the assessment proceedings, the AO noticed that the assessee-company has purchased some agricultural lands at survey No. 94, 95/2 at Malkaram village, Shamshabad Mandal, Ranga Reddy District from related parties at a consideration of Rs. 4,23,67,500 at an average rate per acre at Rs. 21,00,000 as against SRO value of Rs. 1,32,000 per acre. When questioned about the applicability of the provisions of section 40A(2)(b) the assessee has submitted that the land was not stock-in-trade.and the expenses were not booked to profit and loss account and also the transfer was not registered and hence, the SRO value does not apply. It was also submitted that only Rs. 1,00,000 was paid in cash and the balance was adjusted against the allotment of shares of the assessee company. The Assessing Officer has noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a specified person (relatives). (c) If in such circumstances, the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to fair market value of the goods, services or facilities for which payment is made or legitimate needs of assessee's business, excess expenditure can be disallowed under section 40(2)(b}. (d) In the process, the assessee should derive a benefit by way of reduction of profit. From the above, it would appear that the basic requirement is that the payment should be in the nature of a deductible expenditure which has the effect of reducing the taxable profit. The reduction of profit is the benefit derived by the assessee. In the case of CIT vs. A K Subbaraya Chetty & Sons 123 ITR 592, it was held that section 40A(2)(b} contemplates an assessee incurring any expenditure in respect of which payment has been or is to be made to any person referred to in cl.(b} of s. 40A(2}. If there were any such expenditure, and if the ITO was of opinion that such expenditure was excessive or unreasonable, then so much of the expenditure as was considered by him as excessive-or unreasonable was not to be allowed as deduction. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd a deductible expenditure introduces another fiction and amounts to rewriting the books in the absence of any specific provision. vii) In the light of the above basic provisions, it is immaterial whether the land is stock in trade or investment since the expenditure is not debited in the profit and loss account. AO's contention that the assessee is a builder is of little consequence. AO has cited certain projects where the assessee had claimed the expenses in various projects and included these as stock in trade. These projects were taken on development basis and the assessee was required to construct the houses on these plots belonging to land owners as a business activity. The assessee never had any interest in these lands. These cases are not comparable with purchase of land by the company from others. viii) It is submitted that the land belonged to joint owners and payments were made to them. Strictly speaking, joint owners do not come within the purview of section 40A(2)(b) as relative, for an BOI cannot be a relative in the context of section 40A. Hence, the transaction is not covered by section 40A. ix) Without prejudice to the claim that no addition is called for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has not mentioned anything about the ultimate purpose of the land which has been taken into its fixed assets schedule. It is not the case that the assessee has purchased the property at a very low price to keep it as an investment, in fact it has paid more than the market rate and SRO rate for keeping it as an agricultural asset which does not appear logical or reasonable. The Assessee's contention that the section 40A(2)(b) applies only in respect of excessive or unreasonable payment for goods, services or facilities and not for immovable property has no merit because the issue here is that the property in question being considered by the AO as stock- in-trade and not as an immovable property and this treatment as business expenditure is evident from the audit report itself and once the asset in question is treated as stock-in-trade it becomes goods in the hands of the assessee and therefore, the provisions of section 40A(2)(b) are rightly applied by the Assessing Officer. 11. The CIT(A) observed that the balance sheet does not show any other immovable property as investment / fixed asset. It may be noted that in respect of the earlier ground the assessee contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and Loss A/c. Further, the payment is not made to any specific persons/relatives. According to the AR it cannot be held as an expenditure and it cannot be said that it is excessive or unreasonable having regard to fair market value of the goods, service or facilities for which payment is made or legitimate needs of assessee's business so as to disallow the expenditure in terms of section 40A(2)(b). Further he submitted that expenditure incurred for the purpose of purchase of agricultural land which is shown as capital asset in the Balance Sheet cannot be said incurring of expenditure in connection with the services or facilities. Further he submitted that there is no evidence that the assessee derived any benefit by way of deduction of profit. The act of the assessee has not resulted in any reduction of property. He relied on the following judgements: (a) CIT v. NEPC India Ltd. (303 ITR 271) (b) CIT VS. Jain Cables Pvt. Ltd. (252 ITR 785) 14. Further he submitted the following facts: i) Section 40A appears in Chapter-lV-computation of business income of an assessee. ii) Section 28 refers to profits and gains of business. Section 29 stipulates that the profit and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a part of these expressions. v) Section 40(A)(2) was introduced to the effect that expenditure incurred in a business for which payment has been made to assessee's relatives is liable to be disallowed to-the extent the expenditure is considered to be excessive or unreasonable. The reasonableness of the expenditure is required to be judged with reference to the benefit derived by the assessee by paying excess amount and claiming the same as expenditure in the profit and loss account. In the background of the intention of the legislature, it is required to be judged whether the assessee has derived any benefit by claiming excess expenditure in the profit and loss account. Since no claim has been made in the profit and loss account, there was never any attempt to reduce tax. Hence the provisions of section 40(A)(2) are not applicable. vi) In the light of the above stipulations of the section that the disallowance should be limited to expenditure claimed, it is immaterial whether the amount of payment is an investment or stock in trade as the assessee has not claimed the investment as a revenue expenditure. Law is well settled as a principle that 'if words of statute fails, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h increased the basic values of the lands from time to time for stamp duty purpose in the last four years. Thus, as the assessee got the .land transferred through Sale cum GPA and in view of the prevailing market value at that point of time, the assessee and the owners of the land after negotiations arrived at the rate as mentioned in the document. x) In view of the above facts, it is submitted that: a) The assessee acquired 40% of (unidentified) agriculture land situated at Malkaram Village, Shamshabad Mandal, R R Dist from the owners of the land. b) The assessee acquired the same for holding as a long term asset and therefore reflected the same in the balance sheet. The same continued to be asset even in the balance sheet as on 31.03.2011. c) The assessee never treated it as a commercial asset and the same is being continued as a fixed asset even as on today. d) The value adopted for acquisition of the land was basing on the prevailing market rates e) The assessee did not make any payments to the vendees except Rs. l lakh. Remaining consideration was considered as share capital contributed by the respective owners. f) The assessee did not claim the payments as expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to have continued the addition as the AO has adopted the rate of 10% as net profit which is comparable with similar assessee of the business. 18. Facts relating to the issue are that the AO estimated income of the assessee at 10% of sales clear of depreciation on the reason that on random verification of vouchers for items claimed by the assessee, it was supported by self-made vouchers and payment is made by cash only. Further most of the vouchers relating to purchase of sand, bricks, labour, earthwork, etc., are supported by self-made vouchers only. The assessee carried the matter in appeal to the CIT(A) . The CIT(A) observed that rejection of books of account is unwarranted. He deleted the addition made by the AO at Rs. 1,01,47,413. Against this the Revenue is in appeal before us. 19. We have heard both the parties and perused the material on record. In this case it is an admitted fact that assessee's books of account are not verifiable. Certain payments are made by self-made vouchers only and there is every chance of inflating the expenditure. Considering the facts and circumstances of the case, we are inclined to direct the AO to disallow 5% of cash payments supported ..... X X X X Extracts X X X X X X X X Extracts X X X X
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