Sum paid in cash of smaller denomination in lieu of currency of higher denomination is out of ambit of sec. 40A(3)

No element of expenditure was involved when sums were paid by assessee-company to its managing director for conversion of currency in small denomination into currency of higher denomination, and, thus, provisions of section 40A(3) were not applicable.

Facts:

a)  The assessee-company paid sums to its Managing Director (‘MD’) for conversion of currency in smaller denomination to currency of higher denomination and certain sum was advanced to him for incurring of expenditure on behalf of assessee-company.

b)  The Assessing Officer was of the view that the provisions of section 40A(3) were attracted as the sums paid were in cash, and, accordingly, disallowed the same. On appeal, the CIT (A) deleted the disallowance.

c)  The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

On sums paid for conversion of money:

1)    It could not be disputed that there was no element of expenditure involved and there was no outgo of funds of the assessee-company, inasmuch as whatever amount was paid to the MD, was returned by him; only difference being in the size of denomination of the currency given and returned.

2)    Thus, the provisions of section 40A(3) were not attracted to this amount.

On sums paid as advances:

3)    At the point of time, when advance was given for incurring the expenditure, there was no outgo of funds of the assessee-company, and the actual outgo took place only when expenditure was actually incurred by MD or such other person to whom he passed on such sums for incurring expenditure on behalf of the assessee-company;

4)    In the instant case, the process prior to actual incurring of expenditure was also recorded in the form of advances given, etc. The money did not go out of the coffers of the assessee-company unless and until the amount of such advance was spent towards any expenditure on behalf of the assessee-company;

5)    It was 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 would attracted the provisions of section 40A(3). Thus, the CIT (A) was justified in deleting the disallowance under section 40A(3).- ACIT v. Dodla Dairy Ltd [2014] 42 taxmann.com 407 (Hyderabad - Trib.)