Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 07.03.2019 passed by the Income Tax Appellate Tribunal in ITA No. 4430/Del/2016 for Assessment Year 2010–11.

The respondent assessee, Sanskar Homes Pvt. Ltd., entered into a collaboration agreement dated 18.03.2008 for construction of a property bearing No. F-60, Poorvi Marg, Vasant Vihar, New Delhi. Subsequently, the assessee entered into an agreement dated 14.02.2009 for purchase of the first and second floors of the said property from M/s Surya Realtech Pvt. Ltd. Part of the consideration was paid in cash.

The Assessing Officer disallowed cash payments amounting to ₹7,43,74,500 under Section 40A(3), treating the acquisition as purchase of stock-in-trade. The assessee contended that the property was acquired as an investment and that the amount spent was not claimed as expenditure in the profit and loss account.

The Commissioner of Income Tax (Appeals) partially allowed the assessee’s appeal and deleted the disallowance under Section 40A(3). The ITAT upheld the order of the CIT(A), leading to the present appeal by the Revenue.

Issues Involved

Whether disallowance under Section 40A(3) of the Income-tax Act can be made in respect of cash payments made for purchase of property when such property is treated as an investment and the amount spent is not claimed as an expenditure in the profit and loss account.

Appellant’s Arguments

The Revenue contended that the assessee had in substance treated the property as stock-in-trade and that the cash component of the purchase consideration attracted disallowance under Section 40A(3). It was argued that the CIT(A) and ITAT erred in holding the property to be an investment and in deleting the disallowance.

Respondent’s Arguments

The assessee submitted that the property was consistently reflected as an investment in the balance sheet prepared prior to the search, and that upon sale, the income was offered to tax as capital gains in subsequent assessment years. It was argued that since no expenditure was claimed in the profit and loss account, the question of disallowance under Section 40A(3) did not arise.

Court Order / Findings

The Delhi High Court noted that both the CIT(A) and the ITAT had returned concurrent findings that the first and second floors of the property were acquired as an investment and not as stock-in-trade. The Court observed that the balance sheet as on 31.03.2009, prepared well before the search, clearly reflected the property as an investment and that the Revenue failed to show any material indicating that the amount spent was debited to the profit and loss account.

The Court held that Section 40A(3) applies only where an assessee claims an expenditure. Since the assessee had not claimed the amount spent on acquiring the property as an expenditure, no disallowance could be made under Section 40A(3). The Court found no perversity or illegality in the findings of the appellate authorities.

Important Clarification

The Court clarified that Section 40A(3) operates only in respect of amounts claimed as expenditure. Where an assessee acquires a capital asset as an investment and does not debit the amount to the profit and loss account, disallowance under Section 40A(3) is not attracted merely because part of the consideration is paid in cash.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court answered the question of law in favour of the assessee and against the Revenue, upheld the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, and held that no disallowance under Section 40A(3) was permissible in the facts of the case.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686549_PR.COMMISSIONEROFINCOMETAXCENTRAL2VsSANSKARHOMESPVT.LTD..pdf

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