Disallowance u/s 40A(3) for cash expenditure incurred in Foreign Country upheld

Disallowance u/s 40A(3) for cash expenditure incurred in Foreign Country upheld. The Expression “rupee” in section 40A(3) means expenditure incurred in rupee terms

ABCAUS Case Law Citation
ABCAUS 3389 (2020) (09) ITAT

Important case law relied upon by the parties:
Vodafone India Services Pvt. Ltd. v/s Union of India & Anr.,
Union of India v/s Azadi Bachao Andolan, 263 ITR 706 (SC)

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the disallowance u/s 40A(3) of the Income Tax Act, 1961 (the Act) made by the Assessing Officer (AO)with respect to expenditure incurred in cash.

cash expenditure foreign currency

Disallowance u/s 40A(3) for cash expenditure foreign currency

The assessee was a partnership firm engaged in the business of manufacturing and export of garments.

During the assessment proceedings, the Assessing Officer   while verifying the details found that the assessee had claimed foreign travel expenses including exhibition charge.

After calling for the details of expenditure incurred and   verifying them, the AO found that the exhibition charges were incurred in cash in foreign currency abroad.

Referring to the provisions of section 40A(3) of the Act, the  Assessing  Officer  observed, since the assessee  had incurred  expenses in cash exceeding the amount of Rs. 20,000 in a day, such expense has to be disallowed.

After considering the submissions of the assessee on the propsed disallowance, the AO ultimately disallowed the said expenditure u/s 40A(3) of the Act.

The assessee contested the aforesaid disallowance before   the first appellate authority, however, the disallowance made by the Assessing Officer was confirmed.

Disallowance u/s 40A(3) for cash expenditure incurred in Foreign Country upheld

Before the Tribunal, the case of the assessee was that the provisions of section 40A(3) of the Act would not be applicable to the expenditure incurred in cash in foreign currency as it refers to expenditure incurred in rupees and not in foreign currency.

It was submitted that even otherwise also, Income Tax Act has jurisdiction over India and cannot be applied outside territory of India. 

It was contended that since the assessee had incurred the expenditure in foreign currency and that too in foreign country, it will not come within the purview of section 40A(3) of the Act.

It was further submitted that even if the provisions of section 40A(3) of the Act would be applicable, the expenditure incurred would come within the exceptions provided  under  rule  6DD.  It was submitted that since the expenditure was incurred in foreign currency, the assessee could not have issued cheque to the concerned parties, as, for issuance of cheque the assessee must have bank accounts in the respective countries. 

Thus, it was submitted that in the absence of proper banking facilities, it would have been an impossible act on the part of the assessee to incur the expenditure through cheque, hence, the assessee would be covered under rule 6DD.

On the contrary the Department contended that merely because in section 40A(3) of the Act, restriction regarding cash expenditure is  mentioned in rupee term it cannot be construed that the provisions would apply only in respect of cash expenditure  incurred in Indian currency and not in any other foreign  currency. 

He submitted, what is meant by not exceeding an amount of Rs. 20,000 is cash expenditure equivalent to Rs. 20,000.  If the assessee’s contention is accepted, then it would have been impossible to mention the currencies of all the countries in the provision.

The Revenue submitted though it may not have been possible for the assessee to issue cheque, however, the assessee could have paid the money in various other modes through banking channel instead of paying in cash.

The Tribunal stated that the mention of the word “rupee” in section 40A(3) cannot be interpreted in a limited or narrow  sense to mean only cash expenditure incurred in rupee.

The Tribunal said that what the expression means is expenditure incurred exceeding the particular amount in rupee terms. Therefore, even if the expenditure is incurred in cash and in foreign currency, still the provision of section 40A(3)  would  be  applicable  if  it  exceeds  the  specified  quantum  in rupee term. 

Therefore, merely because the expression “rupee” has been mentioned in section 40A(3) of the Act, it would not  debar applicability of the provision to the expenditure incurred in cash  in foreign currency, said the Tribunal.

The Tribunal further stated that it would be fallacious to say that in case the legislature wanted to tax expenditure incurred in foreign currency, they would have drafted the provision in a different way mentioning foreign currencies also. 

The Tribunal opined that a reading of the provision of section 40A(3) of Act makes the intention of the legislature quite clear  to disallow any expenditure incurred in cash whether in Indian  currency or in foreign currency, if it exceeds the threshold in rupee term.

The Tribunal stated that if the aforesaid contention of the assessee is accepted, it will create an anomalous situation, as, an assessee incurring cash expenditure in India exceeding Rs. 20,000 will face the rigors of section 40A(3), whereas,   another assessee incurring unlimited cash expenditure abroad in foreign currency would go scot free, this could not be the intention of the legislature while enacting  section 40A(3) of the  Act, as, the provision would otherwise suffer from the vice of discrimination.

The Tribunal rejected the contention of the assessee that the provisions of section 40A(3) the Act would be applicable only to the territory of India and not to the expenditure incurred abroad. Undisputedly, the expenditure incurred in cash had been booked in India by debiting to the profit and loss account, that too, in rupee terms. Therefore, the Assessing Officer has all the powers to examine the allowability of such expenditure under the provisions of the Act while making assessment of the assessee. Therefore, it cannot be said that the provisions of section 40A(3) would not be applicable.

Regarding the contention   on the applicability of rule 6DD,  the Tribunal rejected it also and stated that a reading of rule 6DD shows no specific clause which can come to the aid of the assessee. Even, accepting that the assessee could not have issued a cheque to the payee, however, there are many other ways open to the assessee for making the payment through proper banking channel.

Accordingly, the Tribunal upheld the disallowance u/s 40A(3) for cash expenditure incurred in Foreign.  

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