The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the Revenue cannot disallow the payment of cash for land purchase by assessee by invoking Section 40A(3) of the Income Tax Act, 1961 as the same was not claimed as business expenditure or treated as stock or capitalized the same in order to claim depreciation.
The assessee, Kalyan Constructions, Hyderabad purchased the land at Haripuri colony with the registered value of Rs. 58 lakhs, but, he has entered into the agreement of sale for Rs. 2.08 crores. The assessee paid the registered value by cheque and balance in cash. During the course of re-assessment, the AO disallowed the payment in cash under section 40A(3) in respect of the purchase of the business asset.
The assessee submitted that the said interest expenditure was not claimed in the P&L account as expenditure. According to them, the land was shown in the Balance sheet under “Fixed assets” but not shown in the books of accounts as ‘stock-in-trade’, hence the provisions of Section 40A(3) would not apply.
Allowing the contentions of the assessee, the bench held that section 40A(3) can be invoked only when the assessee claims the payment in cash as business expenditure or treated as stock or capitalized the same in order to claim depreciation in the future.
“The assessee has not capitalized the above cash payment in fixed assets. Therefore, assessee cannot claim any expenditure or even convert the same as business assets or stock in trade, the cash payment of Rs. 1.50 crores is not part of value of land. Hence, it cannot be a part of future business expenditure. Therefore, the contention of the revenue authorities is not correct to say that assessee has converted the land in the subsequent year amounts to claim of expenditure in the subsequent AY, as the value of Rs. 1.50 crore is not part of land in first place. Hence, the disallowance u/s 40A(3) is accordingly deleted,” the bench said.
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