PCIT Vs Sanskar Homes Pvt. Ltd. (Delhi High Court)
Summary: In the case of PCIT Vs Sanskar Homes Pvt. Ltd., the Delhi High Court examined the applicability of Section 40A(3) of the Income Tax Act concerning cash payments made for acquiring property. The assessee, M/s. Sanskar Homes Pvt. Ltd., had entered into agreements to purchase two floors of a property, treating them as investments rather than stock-in-trade. The Assessing Officer disallowed cash payments amounting to ₹7.43 crore, arguing that they attracted disallowance under Section 40A(3). However, the assessee contended that these amounts were not claimed as expenses in the Profit & Loss Account, making Section 40A(3) irrelevant. Both the CIT(A) and the ITAT ruled in favor of the assessee, stating that the property was classified as an investment in balance sheets filed before search proceedings. Subsequent capital gains recorded during the sale of the property further corroborated this classification. The High Court upheld these findings, emphasizing that Section 40A(3) applies exclusively to revenue expenditures claimed as deductions and not to capital investments. With no evidence from the Revenue showing the amounts were debited as expenses or treated as stock-in-trade, the appeal was dismissed. This case underscores the principle that Section 40A(3) disallowances are limited to expenses reflected in the Profit & Loss Account.
Brief Facts:
The Assessee, M/s. Sanskar Homes Pvt. Ltd., entered into:
A collaboration agreement dated 18.03.2008 for construction of the subject property.
A subsequent agreement dated 14.02.2009 to purchase the first and second floors of the property.
A portion of the consideration was paid in cash.
The Assessing Officer (AO) disallowed cash payments of ₹2,74,00,000/- (first floor) and ₹4,69,74,500/- (second floor) under Section 40A(3) of the Income Tax Act, arguing they were expenses attracting disallowance.
ASSESSEE’S CLAIM:
The property was held as an investment, not as stock-in-trade.
Since the amounts were not debited to the Profit & Loss Account, and no expenditure was claimed, Section 40A(3) was not applicable.
CIT(A) FINDINGS:
Accepted Assessee’s position that the property was an investment, supported by balance sheets showing the assets under “Investments”.
As no expense was claimed, disallowance under Section 40A(3) was not applicable.
ITAT OBSERVATIONS & DECISION:
ITAT upheld CIT(A)’s findings:
Balance sheets as of 31.03.2009, filed prior to search proceedings, classified the property as investment, not stock-in-trade.
Subsequent capital gains on sale in AY 2011-12 and AY 2013-14 further validated the investment nature.
ITAT concluded:
Section 40A(3) applies only to revenue expenditure claimed as a deduction, not to capital investments.
Assessee did not claim the purchase amount as expenditure in the P&L Account.
Appeal dismissed.
HELD BY DELHI HIGH COURT:
Confirmed ITAT’s decision.
No evidence from Revenue that:
The amounts were debited to the P&L Account, or
The properties were treated as stock-in-trade in final accounts.
No disallowance under Section 40A(3) can be made as the amounts were not claimed as expenditure.
Appeal dismissed.
LEGAL PRINCIPLE ESTABLISHED:
Section 40A(3) applies to revenue expenditure, not to capital investments.
If no expenditure is claimed in the P&L Account, disallowance under Section 40A(3) does not arise
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [the Act], inter alia, impugning an order dated 07.03.2019 passed by the learned Income Tax Appellate Tribunal [ITAT] in ITA No.4430/DEL/2016 in respect of the assessment year (AY) 2010-11.
2. The said appeal was preferred by the Revenue impugning an order dated 23.05.2016 passed by the learned Commissioner of Income Tax (Appeals) [CIT (A)] in Appeal No.67/2013-14, whereby the appeal preferred by the Assessee against the assessment order dated 26.03.2013 was partially allowed.
3. On 28.02.2024, this court had admitted this appeal on the following question of law:
“A. Whether the ITAT on the facts and in the circumstances of the case and in law, has erred in deleting the disallowance of Rs.7,73,74,500/-made by the Assessing Officer on account of violation of Section 40A(3) of the Act?”
4. The controversy in the present case arises in respect of the disallowance of an amount of ₹7,43,74,500/- which is the amount paid by the respondent (Assessee) for purchase of the first and second floors of the property bearing No. F-60, Poorvi Marg, Vasant Vihar, New Delhi [the subject property] to M/s.Surya Realtech Private Limited.
5. The Assessee entered into a collaboration agreement dated 18.03.2008 for the construction of the subject property. However, thereafter, the Assessee had entered into another agreement dated 14.02.2009 for purchase of the first and second floor of the subject property. A part of the said consideration was paid in cash. According to the Assessee, the amount spent is required to be treated as an investment and, therefore, there could be no disallowance. Accordingly, the Assessing Officer (AO) has disallowed the said expenditure (₹2,74,00,000/-) in respect of the first floor of the subject property and (₹4,69,74,500/-) in respect of the second floor of the subject property, under Section 40A(3) of the Act.
6. The Assessee had appealed the said decision before the CIT(A), inter alia, claiming that it did not hold the said property as stock-in-trade. Thus, the amount spent for acquiring the first and the second floors of the subject property were not debited to the profit and loss account. Since, the Assessee had not claimed any expense on the aforesaid count, there could be no disallowance under Section 40A(3) of the Act in respect of the amount spent for purchasing the two floors (first and second) of the subject property.
7. Aggrieved by the said decision, the Revenue had preferred the aforementioned appeal [ITA No.4430/DEL/2016] before the learned ITAT.
8. The learned ITAT found no fault with the decision of the CIT(A) in finding that the acquisition of the two floors of the subject property was in the nature of investment and not in the nature of stock-in-trade. The relevant extract of the decision of the learned ITAT is set out below: –
“9. We have gone through the record in the light of the submissions made on either side. It could be seen from the record that the disallowance was made by the learned AO u/s 40A(3) in respect of the cash component of the advance amount paid for purchase of the property. According to the assessee, the nature of the property was an investment whereas according to the revenue, the assessee held it as stock-in-trade and thereby Section 40A(3) is attracted. Learned CIT(A) rightly observed that the books of account of the assessee were not rejected and the addition appears to balance on the only fulcrum of assessee’s intention. Basing on the record, learned CIT(A) rejected the conclusion that it was in the nature of investment [sic rect. Stock-in-trade] and Section 40A(3) is not applicable.
10. Assessee produced the balance sheet as on 31.3.2009 with its entire schedule before the Id. AO showing the investments and schedule ‘G’ clearly shows the first and Second Floor of F-60, Poorvi Marg, New Delhi as investment in property. This balance sheet was prepared as on 31.3.2009 and the date of balance sheet was 10.7.2009 much prior to the search that took place on 7.8.2010. It could further be seen that the said property was sold in the AY 2011-12 and 2013-14 and the computation of income clearly shows the claim of short term capital gain and the assessment years for those year unmistakably establish the said fact. Assessment order for the AY 2011-12 is at page no.244 and the computation of income is at page no.249 of the paper book so also in respect of the AY 2013-14, assessment order is at page 269b and computation of income is at page 271 of the paper book. Balance sheet dated 10.7.2009 for the year ending 31.3.2009 is at page no.17 whereas Schedule ‘G’ showing the property now under consideration is at page no.22. These documents clearly establish that it is not an afterthought for the assessee to show that relevant property was acquired not as stock in trade but as an investment. The balance sheet prepared more than one year prior to the search is clearly establishing the same.
11. In the light of the evidence above, we do not find any reason to hold that the impugned order suffers any illegality or irregularity. We uphold the same and find the appeal of the assessee as devoid of merits. Appeal is accordingly dismissed.”
9. It is the Revenue’s case that the finding of the learned CIT(A) and the learned ITAT are erroneous in as much as the Assessee has in fact reflected the assets purchased being first and second floors of the subject property, as stock-in-trade and the amount was also debited in its P & L Account.
10. In view of the above, this court had passed an order dated 28.02.2024 directing the Assessee to file the relevant documents. In compliance with the said order dated 28.02.2024, the Assessee had filed the affidavit annexing therewith the balance sheet for the financial year ending 31.03.2010.
11. Undisputedly, the balance sheet reflects the assets in question (first and second floors of the subject property) as an investment. The learned counsel for the Revenue is unable to draw the attention of this court to any material which would suggest that the amount spent by the Assessee was debited to its P&L Account or that the final accounts of the company for the relevant financial years reflect the first and second floors of the subject property as stock-in-trade and not as an investment.
12. In view of the above, we find no grounds to fault the decision of the learned ITAT in upholding the learned CIT(A)’s decision that no disallowance under Section 40A(3) of the Act is admissible as the Assessee had not claimed the amount spent on purchasing the first and second floors of the subject property as expenditure. Since the amount is not claimed as an expenditure, the question of disallowance of the same does not arise.
13. In view of the above, the question of law as framed is answered in the negative; that is, in favour of the Assessee and against the Revenue.
14. The appeal is, accordingly, dismissed.