Sec. 40A(3) disallowances couldn't be attracted if identity of sellers & source of cash payment were established

  • Income Tax
  • Section153A

A notice was issued to assess under Section 153A. In response to such a notice the assessee filed a return of income declaring nil income.  

Thereafter, a notice was issued for scrutiny assessment. During evaluation procedures, Assessing Officer (AO) observed that assessee had purchased certain pieces of land video six separate registered sale deeds and the sale consideration has been discharged partly in cash.  

AO issued a show cause notice and after considering the submission of assessee, 25% of total expenditure incurred in cash was disallowed invoking the provisions of Section 40A(3). 

On appeal, Jaipur ITAT held that the identity of the persons from whom the purchase of various land parcels were made by assessee had been established. The source of cash payments was clearly identifiable in form of the withdrawals from the assessee's bank accounts. Further, the said details were submitted before the lower authorities and same were not disputed by them. 

It was not the case of the Revenue either that unaccounted or undisclosed income of assessee had been utilised in making the cash payments. The genuineness of the transaction was evidenced by registered sale deeds wherein the payments through cheque as well as cash had been duly mentioned. 

Lastly, the test of business expediency had been met as the initial payments as insisted by the sellers, most of whom were farmers, had been made in cash to secure the transaction. Therefore, the genuineness of the transactions and it being free from vice of any device of evasion of tax was relevant consideration for which section 40A(3) had been brought on the statute books. Therefore, disallowance under section 40A(3) was unjustified and same was to be set aside.