Section 40A(3) Applies Only to Revenue Expenditure, Not Capital Investments: Delhi High Court
Case Title: PCIT vs. Sanskar Homes Pvt. Ltd.
Court: Delhi High Court
Appeal No.: ITA 50/2023
Date of Judgment: 17/03/2025
In a significant ruling, the Delhi High Court clarified that Section 40A(3) of the Income Tax Act, 1961, which disallows certain cash payments exceeding prescribed limits, applies only to revenue expenditure and not to capital investments. The judgment came in response to a departmental appeal against the Income Tax Appellate Tribunal (ITAT) and CIT(A) decisions favoring M/s Sanskar Homes Pvt. Ltd.
The Assessee had entered into a collaboration agreement (18.03.2008) and a subsequent purchase agreement (14.02.2009) for acquiring the first and second floors of a residential property. Payments totaling ₹7.43 crore were made, partly in cash. The Assessing Officer (AO) disallowed these payments under Section 40A(3), treating them as revenue expenditure. However, the Assessee argued that:
The Revenue contended that the properties were in fact stock-in-trade and that the disallowed amount was wrongly omitted from the profit and loss records. However, no documentary evidence was provided to support this claim.
Section 40A(3) applies strictly to revenue expenditure. Where payments are made for acquiring capital assets and not claimed as deductible expenses, the provision does not apply.
This judgment provides strong clarity on the scope of Section 40A(3), protecting taxpayers from unwarranted disallowances in capital transactions. It emphasizes the need for Revenue authorities to distinguish between capital and revenue transactions before invoking disallowance provisions.
Prepared by: Dr. Muhammed Mustafa C T
BRQ Associates - Tax & Legal Research Team
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