Income Tax Appellate Tribunal - Chennai
Madathil Brothers, Chennai vs Department Of Income Tax on 26 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER]
I.T.A.No.1144 & 1147/Mds/2010
Assessment years : 2007-08 and 2006-07
The Asstt. Commissioner vs M/s Madathil Brothers
of Income-tax 158, Arcot Road
Circle IV Vadapalani
Chennai Chennai 600 026
[PAN AAAFM 6807 D ]
(Appellant) (Respondent)
Appellant by : Dr. S. Moharana, CIT/DR
Respondent by : Shri D. Anand, Advocate
Date of Hearing : 26-02-2013
Date of Pronouncement : 01-03-2013
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
These are the appeals filed by the Revenue against separate orders of the CIT(A)-VIII, Chennai, dated 26.4.2010, passed for assessment years 2007-08 and 2006-07.
2. In Ground No.2 of the appeal in assessment year 2007-08 is directed against the order of the CIT(A) directing the Assessing Officer to treat the loss of ` 40,99,350/- as business loss as against the :- 2 -: I.T.A.No.1144 & 1147/10 decision taken by the Assessing Officer to assess the same as speculation loss.
3. The brief facts of the case are that the Assessing Officer observed that the assessee claimed to have suffered a loss of ` 40.99 lakhs in share trading through M/s IL&FS InvestSmart Securities Ltd. Form 10DB regarding transaction through M/s IL&FS InvestSmart Securities Ltd was not furnished. No Demat account of the assessee was produced to show that the share transactions were delivery based transactions. Statement of accounts and ledger of the assessee, M/s M/s Madathil Brothers, in the books of M/s IL&FS InvestSmart Securities Ltd showed that the major part of the assessee's capital was involved in share trading business. Since no evidence of delivery based transactions could be furnished, the Assessing Officer treated the loss as speculative in nature and allowed the same to be carried forward to future years.
4. Before the CIT(A), the assessee submitted that the assessee was dealing in shares and holds trading account with M/s Cholamandalam and IL&FS. The assessee was not a day trader and deals with shares on delivery basis and the same was reflected in the contract notes provided by the brokers. The assessee was questioned :- 3 -: I.T.A.No.1144 & 1147/10 about the nature of share transaction by the Assessing Officer during the assessment and also wanted the assessee to produce the demat account. The assessee explained that the demat account was not immediately available but the same contract note clearly explained that the shares were on delivery basis. The Assessing Officer failed to appreciate the fact that Form 10DB which was duly enclosed alongwith the return of income clearly states that all the transactions are on delivery basis and not speculative. The assessee was enclosing copies of demat account statement alongwith Form 10DB of IL&FS evidencing that the assessee takes shares on delivery and was not a day trader. Since the assessee was not a day trader and deals with shares on the basis of actual delivery of shares the assessee prayed that the loss on account of share transaction with IL&FS may be allowed as business loss and should not be treated as speculative loss. It was further submitted that section 43(5) of the Act defines speculative transaction to mean a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. In the case of the assessee, the assessee has taken the delivery of shares and then sold the shares and therefore, the transactions were not speculative in nature which was evident :- 4 -: I.T.A.No.1144 & 1147/10 from the contract notes and Form 10DB. The assessee relied on the following decisions in support of his submission:
92 ITD 400 (Cal) Jayasree Chowdhury vs ACIT 43 TTJ 119 (Jp) ITO vs Mangaldas Banwarlal 255 ITR 329 (Raj) CIT vs Mangal Chand
5. The CIT(A), after considering the submissions of the assessee, directed the Assessing Officer to allow the loss on share transaction claimed by the assessee and held that the loss was not arising out of speculative share transactions, by observing as under:
5 3 I have carefully considered the submission. It is seen from the assessment order that, the appellant did not produce the D-mat account before the AO due to dearth in time, however the appellant had produced contract notes at the time of scrutiny assessment, evidencing that the shares have been dealt on delivery basis which all states that the shares were dealt on actual basis. Accordingly, the AO treated it as a speculative transaction and, therefore, no business loss was allowed to the extent of Rs. 40,99,350. Further, the AR of the appellant has drawn my attention to sec. 43(5) of the Act which is as under:
"Sec 43(5) : 'Speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips; Provided that for the purposes of this clause -
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him ; or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or :- 5 -: I.T.A.No.1144 & 1147/10 © a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his. business as such member, (or)
(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of sec 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recognized' stock exchange shall not be deemed to be a speculative transaction.
(Explanation :- For the purposes of this clause, the expressions -
(i) "eligible transaction" means any transaction, - (A) carried out electronically on screen based systems through a stock broker or sub broker or such other intermediary registered u/s 12 of the Securities and Exchange Board of India Act, 1992 in accordance with the provisions of the Securities Contracts (Regulation) Act, 1996 or the Depositories Act, 1996 and the rules, regulations or bye laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange and (B) which is supported by a time stamped contract note issued by such stock broker or sub broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub clause (A) and permanent account number allotted under this Act;
(ii) 'recognised stock exchange' means a recognized stock exchange as referred to in clause (f) of sec 2 of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose .... ' At the time of appeal hearing, the learned AR of the appellant has filed copy of contract note issued by registered share broker who is affiliated with Stock Exchange Board of India (SEBI), which was already filed before the AO at the time of assessment. Not satisfied with the above, the AO insisted for filing of D-mat account. For failure thereof, the AO disallowed the amount. As per Explanation (i)(B), the contract note issued by stock broker indicating the unique client identity number allotted is sufficient to it as eligible transaction as per sec 43(5) of the Act. The AR has now again produced these contract notes, account statement, form 10DB before me and these clearly states that, the shares are on delivery basis only and hence I hold the view that, this is not a speculative transaction and the AO is directed to allow the loss."
:- 6 -: I.T.A.No.1144 & 1147/10 6. The CIT/DR supported the order of the Assessing Officer
whereas the A.R of the assessee supported the order of the CIT(A).
7. We have heard the rival submissions, perused the orders of the lower authorities and materials available on record. In the instant case, it is not in dispute that the assessee has suffered loss of ` 40,99,350/- from dealing in shares during the year under consideration. According to the Assessing Officer, the assessee could not furnish copy of demat account statement and therefore, he held that the assessee could not prove that the shares were delivered to it. Consequently, he treated the entire loss of ` 40,99,350/- as speculation business loss u/s 43(5) of the Act. The Assessing Officer, accordingly, did not allow set off of this loss and carry forward the same for being set off against future speculative income.
8. On appeal, the CIT(A) observed that "as per Explanation
(i)(B) the contract note issued by stock broker indicating unique client identity number allotted is sufficient to it as eligible transaction as per section 43(5) of the Act. The A.R has now again produced these contract notes, account statement, form 10DB before me and these clearly states that the shares are on delivery basis only and hence, I :- 7 -: I.T.A.No.1144 & 1147/10 hold the view that, this is not a speculative transaction ad the Assessing Officer is directed to allow the loss."
9. Before us, the CIT/DR relied upon the order of the Assessing Officer and submitted that as the assessee had not produced copy of demat statement, it cannot be proved that the share transactions were delivery based transactions and therefore, the CIT(A) was not justified in treating the same as delivery based transactions merely on the basis of contract notes, account statements and Form 10DB.
10. On the other hand, the A.R of the assessee relied upon the order of the CIT(A) and submitted that it is not necessary that the shares should be entered into the demat account statement. He explained that share broker is the agent and the delivery from the stock exchange is received by the broker on his behalf and at many a time shares remained in the demat account of the share broker. He filed before us copy of IL&FS Depository Services Bill cum Transaction Statement alogwith annexures to it and copy of Form 10DB during the course of his argument.
11. We find that it is not in dispute that the share broker through whom the assessee purchases and/or sells shares is the agent of the :- 8 -: I.T.A.No.1144 & 1147/10 assessee. Therefore, the delivery received by the agent of the assessee is a constructive delivery of shares to the assessee. Consequently, it cannot be held that merely because certain shares purchased and resold by the assessee having not been entered into the demat account of the assessee means the transactions were made otherwise than by actual delivery. In these circumstances, in our considered view, the Assessing Officer was not justified in concluding that the share transactions were without actual delivery only because it was not entered into the demant account of the assessee. No material was brought on record by the Assessing Officer to show that the transactions were completed without receipt of delivery by the share broker of the assessee who is an agent of the assessee.
12. The CIT/DR contended that from the contract note it cannot be concluded whether the purchases and sales of shares were completed by actual delivery of shares or without delivery of shares. In our considered opinion, it is a matter of common knowledge that in respect of non intra day transactions delivery has to be taken by purchaser from the stock exchange and conversely delivery has to be given by the seller to the stock exchange. Only in a case of a transaction of shares where purchases and sales are done on the same :- 9 -: I.T.A.No.1144 & 1147/10 day then such transaction is settled otherwise than by actual delivery of shares. Thus, from verification of contract note, one can find which purchase and sale of the shares were done on the same day or not and thereby can ascertain the transaction was delivery based or non- delivery based.
13. Further we find that Explanation (i)(B) to section 43(5) is in respect of an eligible transaction in respect of trading in derivatives and not in trading in shares and therefore, in our considered opinion, the CIT(A) erred in concluding that the transactions of the assessee in shares were eligible transaction within the meaning of Explanation(i)(B) to section 43(5) of the Act. However, we find from the copy of Form 10DB filed before us that the same shows the client code number, code of transaction, value of transactions entered into during the financial year with the corresponding security transactions amount paid on value of shares, etc. From the above it is observed that securities transaction tax in respect of value of transactions of ` 3,22,78,607/- is ` 32,396/- and in respect of value of transactions entered into of ` 4,12,56,756/- is ` 43,851/- and the same works out to 0.10% of the value of transactions. But in respect of value of transaction of ` 60,88,268/-, the securities transactions tax is shown :- 10 -: I.T.A.No.1144 & 1147/10 as ` 1230/- which works out to 0.02%. Thus, the above difference in the rate of security transactions tax was not examined by the lower authorities nor could be explained by either of the parties before us. In the above circumstances, in our considered opinion, it shall be fair and in the interest of justice to restore the issue back to the file of the Assessing Officer for adjudication afresh as per low after verification in line of the discussions made herein above. Needless to mention that proper opportunity of hearing shall be granted to the assessee by the Assessing Officer before adjudicating the issue afresh. Thus, the ground of appeal of the Revenue is allowed for statistical purposes.
14. Ground No.3 of the appeal for assessment year 2007-08 and Ground No.2 of the appeal for assessment year 2006-07 are directed against the order of the CIT(A) in deleting the disallowance made by the Assessing Officer on account of interest on borrowed capital under house property amounting to ` 22,61,357 in assessment year 2007-08 and ` 10,00,353/- in assessment year 2006-07.
15. The brief facts of the case are that the Assessing Officer has observed in his order that TDS certificates issued by HCL Peripherals, Bharti Televentures, HCL Technologies and Eleder Pharmacetuicals were filed in original on 1.12.2009 which showed a gross receipt of ` :- 11 -: I.T.A.No.1144 & 1147/10 82,41,627/- as rent. By notice issued u/s 142(1) dated 20.11.2009 certificates of HDFC and SBI Banks certifying repayment of home loans was called for, to allow deduction u/s 24(b) of ` 22,61,357/- claimed in the return. The HDFC loans were not 'home loans' rather 'term loans' and there were no evidence that the loan amounts were utilized for purchase, construction or repair of house property. No certificate from SBI could be produced. Therefore, he disallowed the claim of deduction u/s 24(b) for ` 22,61,357/- in assessment year 2007-08.
16. Similarly, in assessment year 2006-07, the Assessing Officer observed that TDS certificates filed in original with the return shows gross receipt of ` 1,11,92,418/- as rent. The Assessing Officer observed that the statement of SBI account No.10397660812 was not a 'home loan account' and no certificate from the bank was filed certifying interest and principal repayment made by the assessee in respect of any of his house properties. He, therefore, disallowed the claim of deduction u/s 24(b) of ` 10,00,353/-.
17. Before the CIT(A), the assessee submitted that the assessee firm had availed a loan from State Bank of India by mortgaging its property during the financial year 2005-06 and invested the same in its real estate business, likewise during the financial year :- 12 -: I.T.A.No.1144 & 1147/10 2006-07 the assessee had availed a fresh loan from HDFC by mortgaging its property, interest was paid on loan borrowed and used for the purpose of business of the assessee firm. The assessee firm while filing its return of income had inadvertently claimed the same as deduction from under the head 'house property' which the Assessing Officer has not allowed, the assessee requested the CIT to allow the same as deduction under the head 'income from business' as the assessee firm had utilized the funds for its business and hence the same may be allowed as business expenditure in assessment year 2007-08. Similar request was made in assessment year 2006-07 also.
18. The CIT(A), after considering the above submission of the assessee, allowed the claim of the assessee in assessment year 2007- 08 by observing as under:
"4. 1 I have considered the submissions. It is evident from the return of income and the assessment order that the appellant has been claiming the interest paid to various banks under the head income from house property. It is claimed by the appellant that the loan availed and the interest paid is not disputed by the department. The only dispute is the head under which it is claimed. The AR further stated that it was possible to rectify the defect during the course of the assessment proceedings itself, which the AO failed to do. Hence he pleads again that this technical defect may kindly be cleared at least now. After going through all the material facts before me, I am of the opinion that when the loans are not disputed the technical defect can always be corrected at the assessment stage itself, however when this is not done, the same is considered now, accordingly the appellant's claim of interest paid is considered as business expense, the assessing officer is directed to treat this interest expense under the head business income and the same should be allowed. The appellant gains on this ground.
:- 13 -: I.T.A.No.1144 & 1147/10
19. On the very same reason, the CIT(A) has allowed deduction un 24(b) of ` 10,00,353/- in assessment year 2006-07.
20. The CIT/DR supported the order of the Assessing Officer whereas the A.R of the assessee supported the order of the CIT(A).
21. We have considered the rival submissions, perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that in return of income filed for assessment year 2007-08 the assessee claimed deduction of interest u/s 24(b) from house property income of ` 22,61,357/- and in the assessment year 2006-07 the assessee claimed deduction of interest from house property income of ` 10,00,353/-. The Assessing Officer, on verification of th certificates issued by HDFC and SBI found that the interest payments pertained to term loans taken from the bank and not in respect of home loans taken from the bank. From this, he concluded that there was no evidence that the loan amounts were used for purchase, construction or repair of house property and accordingly, disallowed the claim of deduction of interest to the assessee.
:- 14 -: I.T.A.No.1144 & 1147/10
22. On appeal, the CIT(A) vacated the disallowance on the ground that the loans are not disputed and there was a technical defect of claiming the interest as deduction from the house property income in place of deduction under the head 'business income of the assessee.
23. The A.R of the assessee submitted that the loans were taken from HDFC and SBI which were utilized by the assessee in its business of real estate which fact is not in dispute by the Revenue and therefore, the CIT(A) has rightly allowed the deduction of interest expenditure out of the business income of the assessee.
24. The CIT/DR very fairly conceded that the Assessing Officer has not disputed about the taking of the term loans by the assessee and its utilization for business purposes of the assessee. The only ground on which the disallowance was made by the Assessing Officer is that the loan amounts were not used for purchase, construction or repair of house property. Hence, he submitted that the interest was allowable to the assessee as deduction from its business income.
25. In view of the above submission of the CIT/DR, we do not find any good and justifiable reason to interfere with the order of the :- 15 -: I.T.A.No.1144 & 1147/10 CIT(A) which is confirmed and the grounds of appeal of the Revenue for both the assessment years under consideration are dismissed.
26. Ground No.4 of the appeal for assessment year 2007-08 is directed against the order of the CIT(A) in deleting the disallowance of ` 15,20,000/- u/s 40A(3) of the Act.
27. The brief facts of the case are that the Assessing Officer observed that while examining the cash book, the following cash payments were noted for carrying on the real estate business of the assessee:
20.9.06 Advance for property at Singaperumal ` 20,00,000 22.09.06 Amount paid for property at Thirukhazhukundram ` 8,00,000 13.11.06 Advance for property at Singaperumal ` 13,00,000 12.12.06 Advance for property at Singaperumal ` 15,00,000 29.12.06 Amount paid for property at Thirukhazhukundram ` 20,00,000 ` 76,00,000
28. These cash payments were made during the course of business which was in violation of section 40A(3) and therefore, 20% of ` 76,00,000/- being ` 15,20,000/- was added bak to the income of the assessee.
:- 16 -: I.T.A.No.1144 & 1147/10 29. Before the CIT(A), the assessee submitted that the
assessee had paid sale consideration in cash for purchase of property from villagers at Singaperumal and Thirukhazhukundram and the assessee had accounted for the same in its books of account. The Assessing Officer applying the provisions of section 40A(3) has disallowed 20% of the cash payments made. It was argued that practicability for the purpose of rule 6DDj must be judged from point of view of the businessman and not of the Revenue and further business expediency was one of the relevant factor, the Assessing Officer failed to do so while making the disallowance u/s 40A(3). The Assessing Officer, while not disputing the identity of the party to whom payments were made and genuineness of the transactions, failed to consider the general trade practice in the line of the assessee's business. It was submitted that the Assessing Officer ought to have seen that the assessee has satisfied all conditions under rule 6DDj to satisfy immunity from section 40A(3), the seller is new to the purchaser or the transactions are made at a place where either the purchaser does not have bank account or the seller is refusing to accept the payment by way of crossed cheque/draft and the assessee's business interest would suffer if it does not purchase the property from the seller and that specific discount was given by the :- 17 -: I.T.A.No.1144 & 1147/10 seller for payment to be made by way of cash. It was submitted that the Assessing Officer ought to have seen the nature of the business before making the disallowance under section 40A(3). The assessee was a trader in real estate. The seller was in a village, the persons from whom the assessee purchased property were mostly farmers.
The assessee was a real estate dealer and he has to deal with various persons for purchase of land who are strangers to the assessee. The transactions with the sellers were mainly one off in nature i.e sellers are different and hence they are strangers to the buyer and they insist that their dues are paid before the registration of poer is made, hence, the assessee requested the CIT that since the assessee has purchased the properties at Singaperumal and Thirukhazhukundram which are remote villages and the seller did not have any bank account and hence he had to purchase the same by giving cash in the given circumstances. The assessee relied on the following case laws:
CIT vs Chrome Leather Co. P. Ltd [1999] 235 ITR 708 (Mad) CIT vs K.K.S.K.Leather processor P. Ltd, [2007]292 ITR 669(Mad) 8 SOT 880 110 TTJ 357 :- 18 -: I.T.A.No.1144 & 1147/10
30. The assessee also submitted that the alleged purchase of property was reflected in the schedule of fixed assets and the same was not treated as a revenue expenditure. Hence, when the expense was not of revenue in nature the question of disallowance u/s 40A(3) does not arise. The Balance Sheet enclosed with the submission will explain this further. Hence, it was requested that disallowance u/s 40A(3) was not warranted and the same may also be deleted.
31. The CIT(A) deleted the disallowance made by the Assessing Officer, by observing as under:
"6 7 I have considered the submissions. It is seen in the assessment order that the assessing officer has stated few entries as advance payments made towards purchase of two properties, accordingly he has disallowed these payments u/s 40A(3) of the Income Tax Act. 68 As against this, the AR stated two things, one is that, the payment as made as advance since the sellers were small villagers and that they did not have any bank accounts and that, they wanted all the payments only in cash. He had also stated that, the appellant is covered by the rule laid down in 6DDJ of the IT Rules. The AR also stated that, the assets purchased are capitalized and not charged to the revenue, on perusal of the balance sheet and the profit and loss account, it is seen that these assets are in fact capitalized. Hence, as rightly pointed out, these payments are not reflected in the profit and loss account to attract the provisions of section 40A(3) of the IT Act. The details of fixed assets are given as under:
Details Amount (` )
Bore A/`c 11,196.00
Air conditioner 12,620.00
Building A/capital 59,54,607.00
Computer 1,960.00
Grill A/c 19,612.50
Land A/c 30,00,000.00
:- 19 -: I.T.A.No.1144 & 1147/10
Hundai Getz 3,51,499.00
Optra car 4,79,017.00
Swift Car 5,18,700.00
Real Estate business 5,97,28,263.00
9,70,78,174.50
The details of real estate business are furnished as under:
Property at Singaperumal Koil ` 2,33,24,913
Property at Singaperumal Koil 3,25,04,050
Property 9,00,000
Others 30,00,000
5,97,28,963
Accordingly, based on the above observations, I am of the considered view that the provisions of section 40A(3) of the IT Act will not be attracted here. Accordingly, the appellant also gains on this ground. "
32. The CIT/DR supported the order of the Assessing Officer whereas the A.R of the assessee supported the order of the CIT(A).
33. We have considered the rival submissions, perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer observed that the assessee has made cash payments of ` 76 lakhs in violation of provisions of section 40A(3) to the following persons:
20.9.06 Advance for property at Singaperumal ` 20,00,000 22.09.06 Amount paid for property at Thirukhazhukundram ` 8,00,000 13.11.06 Advance for property at Singaperumal ` 13,00,000 12.12.06 Advance for property at Singaperumal ` 15,00,000 29.12.06 Amount paid for property at Thirukhazhukundram ` 20,00,000 ` 76,00,000 :- 20 -: I.T.A.No.1144 & 1147/10 He, therefore, by following the provisions of section 40A(3), disallowed 20% of cash payments of ` 76 lakhs which worked out to ` 15,20,000/- and added the same to the income of the assessee.
34. On appeal, filed by the assessee, the CIT(A) deleted the disallowance by observing that the payments were made as advance for purchase of land and since the sellers were small villagers and did not have any bank account they wanted all the payments only in cash and hence, the payments are covered by Rule 6DD(j) of the Income Tax Rules. The other ground for vacating the disallowance by the CIT(A) was that the assessee has filed the details of fixed assets and also copy of Profit & Loss Account and a perusal of the same shows that the assets purchased are capitalized and not charged to the Profit & Loss Account, therefore, the provisions of section 40A(3) are not applicable.
35. The CIT/DR submitted that the provisions of Rule 6DD(j) were amended from this year which is assessment year 2007-08 whereby it was provided that Rule 6DD(j) will be applicable in a case where payment was required to be made on a day on which the banks were closed either on account of holiday or strike. He submitted that the provisions of section 40A(3) provide that in case assessee is not :- 21 -: I.T.A.No.1144 & 1147/10 covered by the amended Rule 6DD(j) then 20% of the expenditure paid in cash has to be disallowed in computing the income of the assessee. Hence, the CIT(A) was not justified in deleting the disallowance by relying on the old provisions of Rule 6DD(j). He further submitted that the assessee was in the real estate business. The land purchased by the assessee though capitalized by it was the stock-in-trade of the assessee and on any cash payment made for the purchase of stock-in-trade, 20% of such cash payment has to be disallowed. For this, he relied on the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh singh vs ITO, 191 ITR 667 wherein it was held that the word 'expenditure' is of wide import and all outgoings are brought under this word including payments made for purchase of stock-in-trade and raw materials. He submitted that therefore, the CIT(A) was not justified in vacating the disallowance on this ground also.
36. We find that the CIT(A) has reproduced the details of fixed assets in his order in para 6.8. It is also not in dispute that the assessee is in the business of real estate. Still further, the assessee has made cash payments as advance towards acquisition of property at Singaperumal and other properties. In our considered opinion, if :- 22 -: I.T.A.No.1144 & 1147/10 the cash payments were made for acquisition of fixed assets then no disallowance u/s 40A(3) can be made as no deduction on account of the said expenditure will be made in the Profit & Loss Account of the assessee. However, when the assessee purchases land for its development and construction of house property and thereafter sells it to generate income then such purchases will form part of the purchases of the assessee which will be debited to the Profit & Loss Account of the assessee and the land and building constructed and completed if not sold during the year will form part of its closing stock. Thus, in such circumstances, if the assessee by circumventing the debit to the Profit & Loss Account, debits the entire amount in its Balance Sheet then also the nature of transaction will not change and the same will be covered by the provisions of section 40A(3) of the Act. Thus, it has to be examined which of-course has not been done by any of the lower authorities whether the cash payments relate to acquisition of fixed assets or the stock-in-trade of the assessee. If the cash payments are towards the stock-in-trade of the assessee then the disallowance of 20% of such cash payments has to be made by invoking the provisions of section 40A(3) of the Act and if the cash payments are towards acquisition of fixed assets of the assessee then no disallowance u/s 40A(3) can be made. Therefore, we set aside the :- 23 -: I.T.A.No.1144 & 1147/10 orders of the lower authorities and remand the matter back to the file of the Assessing Officer for complete verification in the light of the discussion made herein above and thereafter readjudicate the issue afresh as per law. Needless to mention that he shall allow reasonable and proper opportunity of hearing to the assessee before adjudicating the issue afresh. Thus, the ground of appeal of the Revenue is allowed for statistical purposes.
37. Ground No.5 of the appeal is directed against deleting the disallowance of development charges of ` 12,22,600/- paid to DSR Agencies.
38. The brief facts of the case are that the Assessing Officer observed from the property account of Pudupakkam, ` 12,22,600/- was debited on 5.4.2006 as development charges payable to DSR Enterprises. The Assessing Officer observed that this was a unique entry and not seen to recur in any of the other property account through which business profit in real estate was arrived at. He observed that this was not expended during the year and DSR Enterprises did not appear as a current liability or creditor for ` 12,22,600/-. Hence, he disallowed the same as bogus expenses of real estate and added back to the income of the assessee.
:- 24 -: I.T.A.No.1144 & 1147/10
39. Before the CIT(A) the assessee submitted that the assessee was in the business of real estate and property development. The assessee incurs expenses towards land filling and development. During the current year assessee had developed 13.39 acres of land at Pudupakkam and expended a sum of ` 12,22,600/- towards land development at Pudupakkam. The Assessing Officer disallowed the land development expenses under the pretext that the amount was not expended during the year and that M/s DSR Enterprises was not shown as creditor or current liability. The assessee submitted that a perusal of the return filed by the assessee would reflect that M/s DSR Enterprises was reflected under the head sundry creditors for loan of ` 11,95,165/-. The assessee submitted that the Assessing Officer by oversight has stated that no closing balance of M/s DSR Enterprises was reflected in the Balance Sheet whereas the closing balance of M/s DSR Enterprises was reflected under the head sundry creditors for loan of ` 11,95,165/-. Ledger copy of M/s DSR Enterprises and TDS certificate on this payment was enclosed for perusal of the CIT. Hence, it was prayed that the arbitrary disallowance made by the Assessing Officer should be deleted.
:- 25 -: I.T.A.No.1144 & 1147/10
40. The CIT(A), after considering the above submissions of the assessee, deleted the disallowance.
41. The CIT/DR relied on the grounds of appeal of the Revenue.
42. On the other hand, the A.R of the assessee supported the order of the CIT(A).
43. After considering the rival submissions, we find that the CIT(A) has deleted the disallowance of ` 12,22,600/- by observing as under:
"7.2 I have considered the submissions. It is seen in the assessment order that the assessing officer did not allow this claim since there was no amount payable towards the development expense to one M/S DSR Enterprises in the Balance sheet. As against this the AR showed the balance sheet and it is seen that the amount payable to M/S DSR Enterprises is reflected in the liability side. Hence the question of this entry not appearing does not arise. Accordingly, I am inclined to allow this claim of the appellant. Appellant gains on this ground."
44. The CIT/DR could not point out any specific error in the order of the CIT(A). He also could not bring any material on record to show that the expenditure of ` 12,22,600/- claimed by the assessee towards development was bogus. Hence, we do not find any good and justifiable reason to interfere with the order of the CIT(A) on this :- 26 -: I.T.A.No.1144 & 1147/10 issue. It is confirmed and the ground of appeal of the Revenue is dismissed.
45. In the result, the appeal of the Revenue for assessment year 2007-08 is partly allowed for statistical purposes whereas that of assessment year 2006-07 is dismissed.
Order pronounced on Friday, the 01st March, 2013, at Chennai.
Sd/- Sd/-
(CHALLA NAGENDRA PRASAD) (N.S.SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 01st March, 2013
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR