2025 (11) TMI 1839 - AT - Income Tax

No s.40A(3) disallowance where cash payments are reimbursable and not claimed as assessee's own expenditure

ITAT Mumbai deleted the disallowance made u/s 40A(3) on cash payments treated as expenditure of the assessee-company engaged in agro-based products. The ... Disallowance of expenditure made u/s 40A(3) - Cash Expenditure incurred on behalf of another company (Reimbursable expenditure) - assessee is a company engaged in the business of manufacturing, trading, and deemed manufacturing, including processing of agro-based products, including packing or non-packing - HELD THAT:- Merely on the basis that the assessee could not furnish any evidence that expenses were incurred on behalf of SVC Industries Ltd. and the same were reimbursed by M/s. SVC Industries Ltd., we find that the CIT(A) upheld the addition made under section 40A(3) of the Act. In the present case, it is pertinent to note that the AO made the entire addition on the basis of the ledger account of the assessee in the books of M/s. SVC Industries Ltd. No material has been brought on record contrary to the claim of the assessee that the payment in cash was made on behalf of M/s. SVC Industries Ltd. It is also evident from the record that the said payment was also not claimed as an expenditure by the assessee in its books of account. Thus, such being the facts, we are of the considered view that no addition u/s 40A(3) can be made in the hands of the assessee as the expenditure, if any, is in the hands of M/s. SVC Industries Ltd. and not the assessee. Therefore, the addition made u/s 40A(3) of the Act is deleted, and the grounds raised by the assessee are allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether disallowance under section 40A(3) of the Income-tax Act, 1961 could be made in the hands of the assessee in respect of cash payments which were stated to have been made on behalf of another company and which were not debited as expenditure in the assessee's own books of account. 1.2 Whether, in absence of contrary material, the Assessing Officer and the first appellate authority were justified in upholding the disallowance under section 40A(3) merely on the basis of ledger entries appearing in the books of the other company. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Disallowance under section 40A(3) where cash payments are made on behalf of another entity and not claimed as expenditure by the assessee a) Legal framework (as discussed) 2.1 The disallowance in dispute was made under section 40A(3) of the Act, which restricts allowance of expenditure where payments exceeding the prescribed monetary limit are made otherwise than by prescribed banking modes. b) Interpretation and reasoning 2.2 The Assessing Officer made an addition of Rs. 5,43,926/- under section 40A(3) based on the assessee's ledger account as appearing in the books of another company, wherein various cash payments exceeding Rs. 10,000 per day were reflected. 2.3 Before the appellate authority, the assessee contended that all such cash payments were made on behalf of the other company and that none of the impugned amounts had been debited as expenditure in its own books of account. The expenditure, if any, pertained to the other company. 2.4 The details reproduced in the appellate order showed that all payments were characterised as relating to salaries, travel, operational work, and other expenses of the other company, and the narration in each case specifically indicated that the expenditure was 'for' or 'of' that company. 2.5 The first appellate authority sustained the disallowance only on the ground that the assessee did not furnish supporting evidence to show that the expenses were incurred on behalf of the other company and that such amounts were reimbursed. 2.6 The Tribunal noted that the foundation of the addition itself was the ledger account of the assessee in the books of the other company, and that no material had been brought on record to contradict the assessee's specific claim that the payments were made on behalf of the other company. 2.7 It was further noted that it was undisputed on record that the impugned payments had not been claimed as expenditure by the assessee in its own books of account; hence, there was no deduction in respect of such payments in the assessee's computation of income. 2.8 On these facts, the Tribunal reasoned that section 40A(3) operates to disallow expenditure claimed by an assessee where the payment conditions under that section are violated. If the expenditure is not that of the assessee and is not claimed as a deduction by the assessee, the precondition for invoking section 40A(3) in that assessee's hands is not satisfied. 2.9 The Tribunal held that any disallowance, if at all warranted, would lie in the hands of the entity to whom such expenditure actually pertains and by whom it is claimed, i.e., the other company, and not in the hands of the present assessee. c) Conclusions 2.10 On the facts that (i) the payments were shown as having been made on behalf of the other company; (ii) the addition was based solely on the ledger in the books of that company; (iii) there was no contrary material on record; and (iv) the impugned amounts were not debited or claimed as expenditure by the assessee, the Tribunal concluded that section 40A(3) could not be invoked in the assessee's case. 2.11 The disallowance of Rs. 5,43,926/- under section 40A(3) was therefore deleted, and the assessee's grounds of appeal were allowed.