Company being an artificial person cannot incur any expenditure on its own, the expenditure is incurred through the employees or the management. Hence, amount transferred in cash to MD or other employees for incurring expenditure on behalf of the company does not attract disallowance under section 40A(3). The ITAT bench of Hyderabad affirmed the above and ruled in favor of the assessee. 

Assessing Officer made disallowance under section 40A(3) in respect of payments made by assesses-company to its Managing Director (MD), which comprised of amounts paid to him for conversion of currency from small denomination into currency of higher denominations; and advance for incurring expenditure on behalf of company either by himself or through others. Whether so far as conversion of money was concerned, it could not be disputed that there was no element of expenditure and there was no outgo of funds, as amount paid to MD was returned by him. Held, yes.

Whether at the point of time, when an advance was given for incurring expenditure, there was no outgo of funds of company, and 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 assessee-company. Held, yes therefore, disallowance in terms of section 40A(3) was to be deleted. In favor of the assessee.

Facts of the Case:

• The assessee was engaged in the business of processing and sale of milk and milk products.
• The Assessing Officer completed the assessment after making disallowances which comprised of amounts paid to Managing Director (MD) of assessee-company for conversion of currency in smaller denominations to currency of higher denominations; and advance for incurring expenses for the purpose of the assessee-company. The Assessing Officer was of the view that amounts paid were in cash and as such the provisions of section 40A(3) were attracted.
• The Commissioner (Appeals) deleted the disallowance made by the Assessing Officer.

Held for the Case:

In this case two sums of money exclusive of each other was paid to the Managing Director-

Conversion of money-

• 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, 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 section 40A(3) are not attracted to this amount.

Advance to facilitate expenditure–

• 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 outgo of funds of the company, and the actual outgo takes place only when expenditure is actually incurred by MD 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, it is found that the provisions of section 40A(3) are not applicable even to the amounts of advance given by the assessee to MD or by MD to other employees for incurring expenditure on behalf of the assessee company.
• 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 result, the revenue’s appeal is dismissed.

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