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2014 (4) TMI 566 - AT - Income TaxDeletion of disallowance u/s 40A(3) of the Act Payments made to the MD Amount paid for conversion from currency of small denomination into currency of higher denominations balance represents the advance given for incurring expenditure on behalf of the company Held that - The payment made was for a definite purpose, i.e. return after due conversion into currency of higher denomination, so as to facilitate depositing of the same into bank account - at the point of time, when an advance is given for incurring the expenditure, there is no out go of funds of the company, and the actual outgo takes place only when expenditure is actually incurred by Sunil Reddy or such other person to whom he passes on such sums for incurring expenditure on behalf of the assessee - the provisions of S.40A(3) are not applicable even to the amounts of advance given by the assessee to Sunil Reddy or by Sunil Reddy to other employees for incurring expenditure on behalf of the assessee company. The process prior to actual incurring of expenditure or doing any act through the Managing Director or other employees is also recorded in the form of advances given, etc. - Unless and until the amount of advance is in fact spent towards any expenditure incurred on behalf of the assessee company, the money effectively do not go out of the coffers of the assessee company, and it is only the outgo of funds in the form of expenditure exceeding Rs. 20,000 in cash at a time, out of the coffers of the company, that attracts the provisions of S. 40A(3) of the Act - the amount has not been debited to the Profit & Loss Account thus, the CIT(A) is justified in deleting the disallowance made by the AO u/s 40A(3) of the Act order of the CIT(A) upheld Decided against Revenue.
Issues: Disallowance under Section 40A(3) of the Income Tax Act for payments made to Managing Director
Detailed Analysis: 1. Issue: Disallowance under Section 40A(3) for payments made to Managing Director - The Revenue appealed against the CIT(A)'s order deleting the addition made by the Assessing Officer under Section 40A(3) for payments to the Managing Director. 2. Facts and Background: - The assessee, engaged in milk processing, filed a return for the assessment year 2008-09. - The Assessing Officer disallowed an amount paid to the Managing Director, citing Section 40A(3). - The payments to the Managing Director included currency conversion fees and advances for expenses. 3. Assessee's Arguments: - The assessee contended that the payments were advances for currency conversion and expenses. - Detailed accounts were submitted to support the nature of payments. - The Managing Director incurred expenses on behalf of the company, returning unspent amounts. 4. CIT(A) Decision: - The CIT(A) deleted the disallowance, accepting the assessee's explanations for both types of payments. - The CIT(A) found no violation of Section 40A(3) in the payments made to the Managing Director. 5. Appellate Tribunal's Analysis: - The Tribunal considered the purpose of payments and the treatment in the accounts. - For currency conversion fees, where no expenditure occurred, Section 40A(3) did not apply. - Advances for expenses did not result in immediate outgo of funds, thus not falling under Section 40A(3). 6. Legal Interpretation: - The Tribunal emphasized that until actual expenditure occurred, funds did not leave the company's coffers. - Expenditure exceeding Rs. 20,000 in cash at a time triggers Section 40A(3) provisions. - The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. 7. Conclusion: - The Revenue's appeal challenging the disallowance under Section 40A(3) for payments to the Managing Director was dismissed. - The Tribunal affirmed that the payments, whether for currency conversion or as advances, did not breach Section 40A(3) provisions. This detailed analysis of the legal judgment highlights the key issues, arguments presented, decisions made by the authorities, and the Tribunal's legal interpretation leading to the dismissal of the Revenue's appeal.
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