Cash expenses in foreign currency are covered under 40A(3)

Background and Facts:

• Assessee, an Indian Partnership Firm, is engaged in the business of manufacturing and export of garments.
• Assessee had claimed deduction for foreign travel expenses of INR 6 mn in its return filed, F.Y. 2013-14.
• Out of the said amount, INR 3.15 mn was paid in foreign currency (in cash) towards exhibition charges.
• Referring to section 40A (3) of the IT Act, the Assessing Officer disallowed INR 3.15mn by observing that the taxpayer has incurred expenses in cash exceeding the amount of INR 20,000 in a day.

 Contention of the Assessee:

• Assessee contended that, provisions of section 40A(3) of the IT Act referred to expenditure incurred in ‘rupees’ only and not in foreign currency.
• He further contended, In the absence of proper banking facilities, it was impossible to incur expenditure through cheque.
• It is outside the purview of IT Act to adjudge expenditure in Foreign Countries in foreign currency.

Contention of the Department:

• Assessing officer contended, that, merely section 40A(3) of IT Act mentioned restriction in ‘rupee’ terms, did not mean that the provision would apply only in respect of cash expenditure in Indian currency only and not in any other foreign currency.
• Also, assessee could not furnish any details or evidence in support of actual expenditure except for cash memos obtained from the commission agents to whom the taxpayer had also paid commission.

Decision held By ITAT Mumbai Bench:

• Tribunal held that, ‘Rupee’ mentioned in section 40A(3) of the IT Act could not be interpreted in a narrow sense. It would not have been possible for the legislature to mention the currency of all the countries in the world in section 40A(3) of the IT Act. Therefore, the expression ‘Rupee’ meant expenditure incurred exceeding the amount equivalent to INR 20,000 (Now INR 10,000, FA 2017), whether in foreign currency or Indian.
• With respect to territorial application of the IT Act to expenditure incurred overseas, the Tax Officer has all the powers to examine the allowability of such expenditure under the provisions of the IT Act while making assessment of the taxpayer. That being the case, it cannot be said that the provisions of section 40A(3) of the IT Act would not be applicable.
• With respect to applicability of Rule 6DD of the IT Rules, there is no specific clause therein which can come to the aid of the taxpayer. Even accepting that the taxpayer could not have issued cheque, there are many other ways open for making the payment through proper banking channels.
• Accordingly, the ITAT upheld disallowance of cash expenditure incurred in foreign currency in excess of INR 20,000 in a day.

Comments:    

Thus, it can be concluded that, expenditure incurred even in foreign currency exceeding the specified amount of INR 20,000 (INR 10,000 now amended by Finance Act 2017) is disallowable. Therefore, taxpayers need to be cautious while making expenditure in cash overseas.

 Source: Ramlord Apparels v. ACIT (ITA No. 7349/Mum/2018) 

-Mayank Mittal, Associate, SW India