PER : Saktijit Dey :- This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals) V, Hyderabad, dated 21.2.2013 for the assessment year 2008-09.
2. The only grievance of the Revenue in this appeal relates to the action of the CIT(A) in deleting the addition by way of disallowance made by the Assessing Officer in terms of S.40(3) of the Act, in respect of payments made to the Managing Director, Shri D. Sunil Reddy.
3. Facts of the case in brief leading to the filing of the present appeal before us are that assessee is engaged in the business of processing and sale of milk and milk products. For the assessment year 2008-09, assessee filed return on 28.9.2008, admitting an income of Rs. 6,25,70,736. As against this, the Assessing Officer completed the assessment under S.143(3) of the Act on 31.1.22009, determining the total income at Rs. 8,45,83,198, after making various additions and disallowances. One such item of disallowance made by the Assessing Officer, which is the subject matter of present appeal before us, is of an amount of Rs. 79,67,910, representing the payments made to Shri D. Sunil Reddy, M.D. of the assessee company. Factual background relating to disallowance is that the assessee made payments aggregating to Rs. 79,67,910 to Shri D. Sunil Reddy, which comprised of Rs. 57,91,111 being amounts paid to him for conversion of currency in smaller denominations to currency of higher denominations; and Rs. 21,76,799, representing advance paid for incurring expenses for the purpose of the assessee. The Assessing Officer was of the view that these amounts paid to Shri Sunil Reddy were in cash and as such the provisions of S.40(A)(3) are attracted, and accordingly disallowed the same.
4. On appeal before the CIT(A), it was submitted that the amounts paid to Sunil Reddy represented either advances paid for the currency of smaller denominations paid to him for conversion into currency of higher denominations. In support of this contention, a consolidated account of Sunil Reddy and separate account for the amounts paid for the purpose of conversion of the currency of small denominations and advances against expenses were submitted. With regard to currency of smaller denominations given to him for conversion into higher denominations, it was submitted before the CIT(A) that most of the amounts collected by it from the customers would be in the smaller denominations. When such currency of denominations are presented to the bank for deposit, they are not inclined to accept such smaller denominations, due to huge quantity and time-consuming process. Therefore, currency with smaller denominations is collected by Shri Sunil Reddy for converting and returning the same in currency of higher denominations. This amount paid to Sunil Reddy, according to the assessee, did not represent the expenditure, and the same should not have been considered by the Assessing Officer for disallowance under S. 40A(3) of the Act. As for the balance amount paid to Sunil Reddy, it was submitted that the same represented advance for expenses, which he must have spent either for incurring expenditure on behalf of the assessee company. He either incurred the expenditure on his own or incurred such expenditure through others. Balance of unspent amounts have been deposited with the bank. Furnishing account copy of such amounts, it was submitted the expenditure incurred by him was credited to his account and the amount received was debited. Out of the amounts paid by the company towards advances, various amounts aggregating to Rs. 11,90,000 were returned by him on various dates through cheques. Hence, it was pleaded that the amount of Rs. 11,90,000 cannot be considered as hit by the provisions of S. 40A(3) of the Act. Even with regard to the other amounts, it was submitted that the amounts spent were smaller sums. It was further submitted that the activity of the assessee company is scattered to various places across the state of Andhra Pradesh and even outside the State. When the Managing Director proceeds on tour to various places of its business activity, in connection with the business of the assessee, a certain amount is carried in cash, as it would be convenient to meet the expenditure or disburse the amount to the local in charge for incurring the expenditure. This is also necessitated as at some of the places, banking facilities were not available for the assessee. It is, therefore, submitted that the expenditure was incurred by the MD on behalf of the assessee company, and the unspent amount not required at the unit would be returned to the company by him, and sometimes, he passes on such unspent amount of advance to persons in charge of the respective places, who would ultimately return the amount, after incurring the expenses of the unit if any, till the time of such return. The amounts so returned, are mentioned as returned in cash. As such, large amounts of advances given by the assessee, themselves, do not represent the expenditure incurred by the assessee, but they represent only the aggregate of expenses incurred by them and the balances returned by them. The balance amounts in the process were all incurred by various persons in charge of the units, to whom it was passed on by Sunil Reddy, and are debited to the respective accounts. Thus, the provisions of S. 40A(3) are to be considered at the time of incurring the expenditure. In so far as payments are concerned, they are less than 20,000 and therefore, provisions of S.40A(3) were not applied to any of the expenditure incurred by the assessee and consequently the Assessing Officer was not justified in applying the provisions of S. 40A(3) of the Act, to the amounts paid to Sunil Reddy.
5. The CIT(A), convinced with the arguments of the assessee deleted the addition of Rs. 79,67,910 made by the Assessing Officer in terms of S. 40A(3) of the Act, insofar as both the types of payments made to Sunil Reddy, viz. amounts paid for conversion of currency in smaller denominations into currency of higher denominations and advances given for incurring various expenses either by himself or through others in charge of units, etc. , are concerned.
6. Aggrieved by the order of the CIT(A) in relation to the above issue of disallowance under S. 40A(3) in respect of payments made to Sunil Reddy, Revenue is in appeal before us.
7. We heard both sides and perused the orders of the lower authorities and other material available on record. The issue to be considered is whether the provisions of S. 40A(3) are attracted in respect of payment of Rs. 78,67,910 made by the assessee to its Managing Director, Sunil Reddy, which comprises of Rs. 57,91,111 being the amount paid to him for conversion from currency of small denomination into currency of higher denominations, and the balance amount representing the advance given to him for incurring expenditure on behalf of the company. As for the first component of conversion of the monies given to him in smaller denomination into monies of higher denomination, it cannot be disputed that there is no element of expenditure involved and there is no outgo of funds of the assessee, inasmuch as whatever amount is paid to the MD, Sunil Reddy, is returned by him, with the only difference being in the size of denomination of the currency given and returned. The payment made was for a definite purpose, viz. return after due conversion into currency of higher denomination, so as to facilitate depositing of the same into bank account. That being so, the provisions of S. 40A(3) are not attracted to this amount of Rs. 57,91,111.
8. As for the second component of balance amount of Rs. 20,70140 is concerned, it is, again, in the form of an advance to facilitate the expenditure to be incurred on behalf of the assessee company either by Sunil Reddy himself or through others. At the point of making the advance, advance account is debited and cash account is credited, and whenever expenditure is incurred, advance account is credited by such amount of expenditure. That being so, 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. Considering the nature of the advance and the purpose for which it is given, and the accounting treatment given by the assessee in the books of account, we find that 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.
9. Further, a company being an artificial person, it cannot incur expenditure or do anything on its own, and any expenditure has to be incurred or any act or transaction has to be done only through its directors or employees. In the instant case, 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 such 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. It is not disputed that the amount in question has not been debited to the Profit & Loss Account. That being so, we are of the view that the CIT(A) is justified in deleting the disallowance made by the Assessing Officer in terms of S. 40A(3) of the Act. We accordingly uphold the order of the CIT(A), and reject the grounds of the Revenue in this appeal.
10. In the result, Revenue's appeal is dismissed.