2022 (8) TMI 435 - AT - Income Tax

Disallowance u/s.40A(3) - expenses towards air ticket and hotel expenses in cash in excess of prescribed limit u/s.40A(3) - arguments of the assessee before the Assessing Officer as well as learned CIT(A) that its case comes under exception as provided under clause (k) of Rule 6DD of I.T Rules, 1962, and as per said Rule, where payment is made by any person to his agent, who is required to make any payment in cash for goods or services on behalf of such person, then cash payments in excess of prescribed limit cannot be disallowed u/s.40A(3) - HELD THAT - In this case, if you examine facts of the assessee s case in light of clause (k) of Rule 6DD we find that the assessee has not made cash payment to his agent, who is required to make payment in cash for goods or services on behalf of the assessee, but the assessee has made direct cash payment to airlines for booking air ticket. Therefore, the assessee s case does not cover under Clause (k) of Rule 6DD. However, there is merit in arguments of the assessee that it has acted only as agent for his customers and has booked air ticket on behalf of its customers, because it is general practice in this kind of industry that tour operators will collect money from its customers and in turn, make cash payments for booking air ticket, because airlines generally does not accept cheque payments, other than cash payment or on line payment. Therefore, this fact needs to be verified from the Assessing Officer to ascertain fact with regard to arguments of the assessee that it has made cash payment to airlines on behalf of its customers as their agent and thus, same needs to be outside scope of section 40A(3). Cash payments made for hotel expenses - As observed that the assessee has paid cash for hotel expenses, whereas the assessee claims that it has paid cash for purchase of foreign currency and expenditure has been incurred in foreign currency by its customers. If at all, claim of the assessee is correct, then case of the assessee comes under clause (l) of Rule 6DD of I.T.Rules, 1962, which says where payment is made by authorized dealer or money changer against purchase of foreign currency or traveler cheque in the normal course of business, then cash payment cannot be disallowed u/s.40A(3). This fact needs verification from the Assessing Officer. If the Assessing Officer finds that the assessee being a forex dealer paid cash for purchase of foreign currency, then its case comes under exception as provided under clause (l) of 6DD of I.T. Rules, 1962, and thus, the Assessing Officer shall delete additions made towards disallowance of cash payment u/s.40A(3) of the Act. Hence, we set aside the issue to the file of the Assessing Officer and direct the A.O to reconsider the issue in light of our findings given hereinabove and decide the issue in accordance with law, after giving an opportunity of hearing to the assessee. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of expenses under section 40A(3) of the Income Tax Act, 1961.
2. Interpretation of Rule 6DD of the Income Tax Rules, 1962 regarding cash payments.
3. Classification of the assessee as an agent or principal in relation to tour operations.
4. Treatment of cash expenses for hotel bills and air tickets in foreign currency.

Analysis:
1. The appeal challenged the disallowance of expenses under section 40A(3) of the Income Tax Act, 1961, by the Assessing Officer and upheld by the CIT(A). The assessee argued that as a tour operator, cash payments for air tickets and hotel expenses were justified under Rule 6DD of the Income Tax Rules, specifically under clause (k), as the assessee acted as an agent between customers and airlines. However, the Tribunal found that the assessee directly paid cash to airlines for ticket bookings, not to an agent, thus not falling under the exception. The Tribunal directed verification by the Assessing Officer to determine if the cash payments were made as an agent on behalf of customers, requiring a reevaluation of the disallowance under section 40A(3).

2. Regarding the interpretation of Rule 6DD, the Tribunal analyzed the applicability of clause (l) in relation to cash payments for hotel expenses in foreign currency. The assessee contended that as an authorized forex dealer, cash payments were made for purchasing foreign currency to settle hotel bills for customers traveling abroad. The Tribunal noted conflicting claims between the Assessing Officer and the assessee, directing verification to establish if cash payments were indeed for foreign currency purchases. If proven, the Tribunal ruled that the exception under clause (l) of Rule 6DD would apply, preventing disallowance under section 40A(3).

3. The classification of the assessee as an agent or principal in tour operations was crucial. The assessee argued that as a tour operator, they acted as an agent for customers, receiving commissions for services rendered. The Tribunal acknowledged the nature of the tour operator business, where customers paid commissions for services, thus considering customers as principals. The Tribunal found the assessing officer's interpretation erroneous, emphasizing the role of the assessee as an agent and customers as principals, leading to a recommendation to set aside the assessment order.

4. Lastly, the treatment of cash expenses for hotel bills and air tickets in foreign currency was examined. The Tribunal highlighted the need for the Assessing Officer to verify if the cash payments were indeed for purchasing foreign currency, as claimed by the assessee. If confirmed, the Tribunal directed the Assessing Officer to reconsider the disallowance under section 40A(3) in line with the exception provided under clause (l) of Rule 6DD. The appeal was allowed for statistical purposes, with directions for a reassessment by the Assessing Officer based on the Tribunal's findings.