Capital Payment for Land Purchase Cannot Be Disallowed Under Section 40A(3) When Not Claimed as Expenditure: ITAT Nagpur

Case Overview

Ganesh Builders Ltd. Vs DCIT (ITAT Nagpur)

The Income Tax Appellate Tribunal, Nagpur Bench, adjudicated a set of consolidated appeals filed by the assessee arising out of a common order dated 09/12/2024 passed by the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi, covering Assessment Years 2013–14 and 2014–15. The assessee, a public limited company engaged in construction, real estate development, and related business activities, contested several additions upheld by the CIT(A), including disallowance under Section 40A(3) of the Income Tax Act, 1961, treatment of agricultural income, and valuation-related additions.

The Tribunal took up ITA No. 625/Nag/2025 for AY 2013–14 as the lead case, with the findings applied mutatis mutandis to ITA No. 626/Nag/2024 for AY 2014–15.

Background and Facts of the Case

Assessment Year 2013–14

The assessee filed its return of income on 27.11.2013, declaring net taxable income of ₹1,07,26,804/-. The return was subsequently selected for scrutiny, and an assessment order was passed under Section 143(3) of the Income Tax Act, 1961, incorporating the following two additions:

  1. ₹21,55,000/- disallowed under Section 40A(3) on the ground that cash payments exceeding ₹20,000/- were made towards the purchase of agricultural land.
  2. ₹3,83,800/- added to income by reclassifying 50% of the declared agricultural income from an exempt category to "Income from Other Sources."

Details of the Land Transaction

During the relevant year, the assessee company purchased agricultural land bearing Khasra No. 97/2, Sheet No. 942/20, City Survey No. 8, 80, Mouza Nari, Nagpur, for a total consideration of ₹77,00,000/-, vide sale deed executed on 22/06/2012. Out of this total, a sum of ₹21,55,000/- was paid in cash at the express request of the vendors — namely Shri Ravindra Rameshwar Shirke and Shri Shankar Rameshwar Shirke — who were farmers residing in rural areas and had an immediate need for cash at the time of the transaction.

The assessee maintained that:

  • The cash payments were made purely out of business expediency, as insisting on cheque payment risked losing the land transaction altogether.
  • All payments were duly recorded in the regular books of accounts.
  • The land was initially reflected as a capital asset / advance for land purchase in the balance sheet.
  • Upon commencement of construction, the land was transferred to stock-in-trade and reflected as a purchase in the Profit & Loss account.
  • Crucially, the cash payment of ₹21,55,000/- was not claimed as a deduction in the Profit & Loss account and therefore could not be subject to disallowance under Section 40A(3).

Agricultural Income Issue

The assessee declared agricultural income of ₹7,67,600/- from approximately 51.10 acres of land spread across Mouza Sukli, Dorli, Dahegaon, Borgaon, Chikhali, Chicholi (Taluka – Kalmeshwar), and Hingna & Nagpur. Crops cultivated included Soyabean, Tur, Cotton, Brinjal, Radish, Chillies, among others. The assessee also confirmed that land revenue was paid to the government and that irrigation was available through bore wells and open wells.