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2016 (8) TMI 642 - ITAT BANGALORE

2016 (8) TMI 642 - ITAT BANGALORE - TMI - Disallowance made under section 40A(3) - Held that:- Assessing Officer has observed that the assessee failed to produce any evidence in support of his claim however the recording of the expenses in the unaccounted cash book maintained in the laptop has not been disputed by the Assessing Officer. Further the Assessing Officer has not examined the correctness of the claim by verification of the entries maintained in the laptop as well as by examining the r .....

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tion 40A(3) of the Act then for making a disallowance of the said amount under Section 37(1) of the Act a detailed and proper enquiry is required to be conducted. Accordingly, we are of the view that this issue requires a proper enquiry and consequently set aside to the record of the Assessing Officer for proper enquiry and verification and then decide the same. We make it clear that so far as the disallowance made under Section 40A(3) of the Act the same is found to be proper and therefore issu .....

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the books of accounts whether this amount was paid by the assessee in the earlier year which was already accounted for in the books of accounts or not. Further it was also not verified whether while computing the profit the assessee has suppressed this amount on account of wrong claim or this amount was not part of the expenditure during the year under consideration. Accordingly in the facts and circumstances of the case, we set aside this issue to the record of the Assessing Officer to verify t .....

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er of Income Tax (Appeals)-VI, Bangalore for the assessment year 2007-2008. 2. The assessee has raised the following consolidated grounds of appeals: The order of the Assessing Officer is opposed to the law and facts of the case. 2. The Hon'ble Commissioner has erred in disallowing 20% of ₹ 90,00,000 under Section 40A(3) of the Act even though the expenditure is outside the books of accounts and also the expenditure has been proved as genuine. 3. The Hon'ble Commissioner has erred .....

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hearing proceedings, it is prayed that the Hon'ble Income Tax (Tribunal) may kindly delete the addition of ₹ 1,34,00,000 and drop the penalty proposed under Section 271(1)(c). OR allow any other relief as the Income Tax (Tribunal) may deem fit. 3. Ground number one is general in nature and does not require any specific adjudication. 4. Ground number 2 is regarding disallowance made under section 40A(3) of the act. The brief facts leading to the controversy, are that a search under sec .....

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06 and various documents pertaining to this case were also seized under section 132 of the Income Tax Act, 1961 (in short 'the Act'). During the course of consequential search, the assessee was confronted with the sale agreement and the sale deed seized from the business premises of M/s. Adarsh Developers marked as A/AD/06. In his statement recorded under section 132 (4) dated 15/12/2006, the assessee stated that he had entered into an agreement with Sri S. L. Natraj for sale of 9 acres .....

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um of ₹ 10.10 crores, comprising of ₹ 2.44 Crores through cheques and ₹ 7.56 Crores in cash from Sri S.L. Natraj. The assessee had admitted that he has accounted only cheque portion of ₹ 2.44 crores in his regular books of accounts and cash receipt of ₹ 7.56 crores was not accounted in the books of accounts. The assessee further stated that he bought the said land from Sri B.N. Byregowda for ₹ 5.99 crores which includes a cheque, payment of ₹ 1.49 crores .....

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s. Since this payment was claimed to have been made in cash, the AO invoked the provisions of section 40A(3) of the Act and disallowed 20% of this sum of ₹ 4.5 crores amounting to ₹ 90 Lacs. The assessee challenged the action of the AO before the CIT (appeals) but could not succeed as the CIT (appeal) not only confirmed the disallowance made by the AO under section 40A(3) but also enhanced assessment by disallowing the remaining 80% of the said amount under section 37(1) of the act. .....

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bmitted that the Tribunal in the said case has held that the payment was made by the assessee outside the books of accounts, therefore, the onus is on the assessee to prove the source of these expenses. When the assessee did not claim deduction of those expenses while computing the income from business, the provisions of section 40A (3) will not be applicable. 5.2 The next contention of the Learned AR is that the recipient of the said amount offered the same to tax. Therefore, it cannot be disal .....

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ct cannot be applied. He has referred the confirmation given by the recipient Mr. B.N. Byregowda that they have filed their return and offered the said amount of ₹ 4.5 Crores received in cash for taxation. The learned Authorised Representative has submitted that the CIT (Appeals) has reproduced the confirmation given by the recipient of the amount. He has relied upon the exception provided under Rule 6 DDJ of IT Rules and submitted that when the seller of the land demanded the amount in ca .....

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ness activity of real estate therefore the case of the assessee does not fall under any exception provided under Rule 6 DDJ of IT Rules. He has relied upon the orders of the authorities below. The learned Departmental Representative has also relied upon the judgment of Hon'ble Calcutta High Court in the case of Bagmari Tea Co. Ltd. Vs. CIT (251 ITR 640) and submitted that the Hon'ble High Court has held that when the payment is made in contravention of Section 40A(3) of the Act though th .....

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other provisions of the Act same would be disallowed under this section to the extent of 20%. If a claim is otherwise not allowable under the provisions of Section 28 to 37 of the Act then the question of applying this section does not arise. The provisions of Section 40A(3) of the Act are attracted when the claim of expenditure is otherwise allowable as per the other provisions of the Act but because the payment is made in violation of said provisions of Section 40A(3) of the Act 20% of the sa .....

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the assessee who has made the payment on the contravention of Section 40A(3) of the Act. The decisions relied upon by the assessee cannot be applied in the facts of the case as the same were delivered in a different context and facts. The Hon ble Calcutta High Court in the case of Bagmari Tea Co. Ltd. (supra) has held in para 5 as under : 5. With respect we are of the view that when the payment is made in contravention of s. 40A(3) though the payment is genuine that cannot be allowed, because t .....

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able circumstances in payment by cheque or bank draft. When there was no compelling circumstances or the assessee was not compelled to make payment in cash, in such circumstances we find no infirmity in the order of Tribunal. When there is no unavoidable circumstances for payment by cheque or bank draft then the payment made in cash in violation of Section 40A(3) of the Act cannot be allowed. In the case on hand it is admitted fact that this payment was made by the assessee out of books of accou .....

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that when this transaction is not recorded in the books of accounts then it cannot be disallowed under Section 40A(3) of the Act is not accepted because of the fact that in the computation of income the assessee explained this amount as an expenditure for earning the business income from purchase and sale of land in question. Therefore once the assessee has claimed this amount of ₹ 4.5 Crores as an expenditure laid out for earning the business income then the contention of the assessee tha .....

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CIT (Appeals) on account of the additional compensation of ₹ 68.80 lakhs on account of the additional compensation paid by the assessee in cash. On appeal, the CIT (Appeals) proposed to enhance the disallowance by issuing the show cause notice that the entire amount is not allowable under Section 37(1) of the Act. The CIT (Appeals) was of the view that the payment was not made wholly and exclusively for the business of the assessee. 6.1 Before us, the learned Authorised Representative of t .....

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e learned Authorised Representative has contended that when the payment was not in dispute and it was made to the seller of the land then no other purpose can be attributed to this payment other than the purchase consideration in cash. 6.2 On the other hand, the learned Departmental Representative has submitted that this claim of the assessee is after thought as the assessee did not disclose this payment in the statement recorded during the search and seizure action. No supporting evidence has b .....

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wance of full amount therefore the additional issues raised by the assessee is not a fresh plea before us but the issue is arising from the impugned order of the CIT (Appeals) therefore we admit the additional ground for deciding on merits. 6.4 The Assessing Officer has recorded in para 9.02 of the assessment order that in the statement recorded under Section 131 of the Act the assessee stated that he has incurred the expenses of ₹ 68,8 lakhs and all the expenses relating to the developmen .....

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nt of the said amount. Since the corresponding addition has been made by the Assessing Officer in respect of on money received by the assessee then the claim of on money payments by the assessee also required to be examined by considering the fact whether the recipient has accepted this amount and offered the same as income for tax. Accordingly, in the facts and circumstances of the case when the Assessing Officer prima facie accepted the payment while making the disallowance under Section 40A(3 .....

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cement for the balance amount made by the CIT (Appeals) is set aside to the record of the Assessing Officer. Ground No.3 is regarding addition of ₹ 28 lakhs. 7. At the time of hearing, the learned Authorised Representative of the assessee has submitted that the assessee does not press this ground and the same may be dismissed. The learned Departmental Representative has rasied no objection if the Ground No.3 is dismissed as not pressed. Accordingly, Ground No.3 of the assessee s appeal is .....

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Byregowda. It was noted that the payment to Sri Pillappa is also shown as paid for purchase of land however the said payment for purchase of land was made in respect of different land and not in respect of the transaction with Sri Byregowda. Thus the CIT (Appeals) was of the view that the assessee has concealed the income from the transaction by claiming the additional compensation where as no such compensation was paid. Accordingly, the income assessed by the Assessing Officer was enhanced by & .....

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ed by cheque. In fact the payment so made to Sri Pillappa neither relate to the land sold during the year ending 31.3.2007 relevant to the Assessment Year 2007-08. The payment to Sri Pillappa was in respect of land transaction during the previous year ending 31.3.2006 relevant to the Assessment Year 2006-07. The payment was accounted in the F.Y. 2005-06. Hence the said payment does not form part of purchase consideration of the land sold at Puttenahalli. Thus the land transaction of Sri Pillappa .....

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counted in the books of accounts. He has referred the profit and loss account as well as the details of the payment made to Sri Pillappa and submitted that the expenditure claimed during the year does not include this amount of ₹ 16 lakhs. 10. On the other hand, the learned Departmental Representative has relied upon the impugned order of the CIT (Appeals) and submitted that the CIT (Appeals) has found from the reply of the assessee that the assessee has computed the profits on the transac .....

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