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Facts
The assessee, a chemical manufacturing company, had cash payments totaling ₹7,32,005/- disallowed under Section 40A(3) by the AO for sales promotion, tea/tiffin expenses, and professional service charges. The CIT(A) upheld this disallowance. The assessee contended that while the total reimbursement to employees exceeded ₹20,000, individual underlying expenses were below this limit.
Held
The Tribunal, relying on precedent, ruled that since the individual expenditures for which employees were reimbursed were each below ₹20,000, the provisions of Section 40A(3) were not applicable. Consequently, the disallowance related to these expenses was set aside. A separate ground concerning professional service charges was dismissed as not pressed.
Key Issues
Whether Section 40A(3) of the Income Tax Act applies to cash reimbursements made to employees for expenses where the total reimbursement exceeds ₹20,000, but the individual expenses for which reimbursement is sought are each below the specified limit.
Sections Cited
250, 143(2), 142(1), 143(3), 40A(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: SHRI GEORGE MATHAN & SHRI RAKESH MISHRA
PER RAKESH MISHRA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of the Addl/JCIT(A)-9, Mumbai [hereinafter referred to as Ld. ‘Addl/JCIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the AY 2015-16 dated 27.02.2025. 2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:
“1. That, the Ld. AO under wrong notion had disallowed u/s 40A(3) of the Act aggregate sum of Rs.7,32,005/- of the following payments/expenditure and the Ld. CIT(A)-9, Mumbai without considering that each of the petty expenditure incurred for reimbursement of various expenses for the employees under sales promotion was below the limit of Rs.20,000/- has wrongly upheld such disallowance by suspecting genuineness of the transactions entered into without account payee cheques: (i) Rs.1,19,083/- being expenses on Founders Day Celebration. ITA No.: 929/KOL/2025 Assessment Year: 2015-16 Chandras Chemical Enterprises Private Limited. (ii) Rs.5,74,494/- being tea/tiffin expenses of the employees disbursed through nominated staff. (iii) Rs. 38,428/- being cash payments of professional service charges.
That, therefore, as the order of the Ld. CIT(A) on the above issues suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for.
That, the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.”
Brief facts of the case are that assessee is a company engaged in the business of manufacturing and marketing of adhesives and had filed the return of income showing total income of ₹6,16,71,910/-. Statutory notices u/s 143(2) and 142(1) of the Act were issued and duly served upon the assessee after the case was selected for scrutiny under Computer Assisted Scrutiny Selection (in short 'CASS'). The Assessing Officer (hereinafter referred to as Ld. 'AO') made seven disallowances under various heads and assessed the total income of the assessee at ₹6,47,59,390/- u/s 143(3) of the Act. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. Addl/JCIT(A) who partly allowed the appeal of the assessee. The ground raised by the assessee relating to the disallowance u/s 40A(3) of the Act made by the Ld. Assessing Officer was dismissed by his findings as under: “6.3 The facts leading to said disallowance made by the AO and submissions of the appellant have been considered. The above submissions of the appellant have been considered and found the same to be unacceptable. The appellant itself submitted that expenditure was incurred in cash and the confirmations were undated that bear identical language. This brought the genuineness of the transactions into serious doubt. Clearly, payments made by the assessee to the suppliers violated section 40A(3) as they were not made through an account payee cheque drawn on a bank, account payee bank draft or through the use of electronic clearing system through a bank account, and therefore, to fall within the ambit of section 40(A)(3), the assessee was required to establish the genuineness of the transactions. The assessee having failed to do so, led to the deduction being ITA No.: 929/KOL/2025 Assessment Year: 2015-16 Chandras Chemical Enterprises Private Limited. rightly disallowed for the subject payments. Accordingly, the observation of the AO that in respect of payments made by assessee otherwise than by account payee cheque is clearly violative of provisions of section 40A(3) of the I.T Act, 1961. This ground of appal is dismissed.”
Aggrieved with the order of the Ld. Addl/JCIT(A), the assessee has filed the appeal before the Tribunal.
Rival contentions were heard and the submissions made have been examined. The issue relates to the disallowance of ₹7,32,005/- u/s 40A(3) of the Act as the Ld. AO had observed that the assessee had made cash payments exceeding ₹20,000/- on sales promotion for ₹1,19,083/-, Tea and Tiffin expenses for ₹ 5,74,094 and advance to staff for ₹ 38,428/-. It was submitted before the the Ld. CIT(Appeals) that the amount of ₹ 73,277/- was paid to a staff member for reimbursement of various expenses on the Founder’s Day celebration of the company. Further, cash sums of ₹ 20,286/- and ₹ 25,520/- were given to 2 other staffs for distribution of payments for the employees in relation to the company’s work and for Mistry met. The payments for each end recipients through the staff were below the limit of ₹20,000/-. The month-wise tea and tiffin expenses were also incurred in cash for the employees, aggregating to ₹ 5,74,494/- which were incurred through staff who were given charge of the disbursement of expenses to the employees as per the list provided. It was explained that the assessee company entrusted its staff with the job of managing the work and distribution of expenses to various individual employees for such work and after completion of the entrusted job, the staff submitted bills/vouchers, etc. in support of the payments made by them as directed by the company. Therefore, the cash given to the staff for the said work was not payment to them but for payments through them, each below ₹ 20,000/-, to other employees for entrusted job. The ITA No.: 929/KOL/2025 Assessment Year: 2015-16 Chandras Chemical Enterprises Private Limited. relevant statements, bills/vouchers showing quantum of expenditure were not disputed by the Ld. AO. However, the Ld. AO alleged that payments of similar nature were also made by cheque and hence it could not be claimed that such payments could not have been made by cheque. Therefore, such expenses were disallowed. Before the Ld. CIT(Appeals) the assessee got relief on other issues, but as regards the disallowance under section 40A(3), the same was confirmed. It was submitted by the Ld. AR before us as per Paper Book page 22 to 28 that there were 59 employees and an amount of ₹1,02,250/- was paid for August, September, October, 2014 February and March 2015, and the total amount which comes to ₹5,74,494/- as per the written submission filed. The assessee has a policy of paying tea and tiffin expenses to its employees at the rate of ₹ 75 per day per employee on the basis of attendance at the end of the month, the maximum amount payable to employees works out to ₹ 1,950/- i.e. ₹ 75x26. Sample copies of the vouchers along with the list of employees for such allowance has been enclosed in the paper book. The assessee only passed a single monthly entry for payment of Tiffin expenses to all its employees put together instead of making individual entry for each employee. Therefore, no payment to each person ever exceeded ₹ 20,000/-. Thus, the provision of section 40A(3) of the Act are not applicable. Similarly, sales promotion expenses of ₹ 1,19,083/- included a sum of ₹ 72,277/- for Founder’s Day expenses for the stay of Shri Hari Prasad Chaurasia, a renowned flautist and his wife who were the guest, which expenses were reimbursed to Mr. Amit Das Gupta, an employee, who had incurred these expenses through Master Card for ₹ 56,467.68 to ITC and ₹16,809/- in cash. Another sum of ₹ 45,806/- was incurred for Mistry Meet and other company work which were reimbursed to Mr Kamal ITA No.: 929/KOL/2025 Assessment Year: 2015-16 Chandras Chemical Enterprises Private Limited. Paul, an employee. He was given an advance of ₹ 25,000/- and had incurred expenses of ₹ 25,520/-. The vouchers were enclosed with the paper book filed at page 56-59. Another sum of ₹ 38,428/- paid as professional service charges was not pressed during the course of the appeal.
The Ld. DR brought to our notice that the same employee had signed on more than one occasion for tea and tiffin expense to which the Ld. AR countered that the employee had signed on behalf of the other employees and the payment was not made to a single person but to more than one person. The Ld. AR relied upon the decision in the case of Dharampal Satyapal Ltd. vs. Deputy Commissioner of Income-tax [2019] 107 taxmann.com 522 (Delhi - Trib.)[18-04-2019] in support of the claim that reimbursement of expenses to the employees cannot be disallowed in which it is held as under:
“13. With respect to amount reimbursed to various employees, it was stated that this is reimbursement of tour bill of employees however, none of amount of bill is in excess of INR 20,000. It was stated that payment is made to various employees on that particular date which is in excess of INR 20,000/-, however, none of bills which has been supported for expenditure exceeds INR 20,000. For purpose of disallowance u/s 40 A (3) of The Act both expenditure and payment should exceed INR 20,000/-. As in case of reimbursement of tour bills to various staff each expenditure does not exceed INR 20,000/-, disallowance of INR 966500/- under section 40A (3) is unwarranted. Revenue has not pointed out that any of such expenditure and payment both exceeds specified limit. In view of this, ground number 2 of appeal of assessee is partly allowed.”
We have considered the submissions made. Since the amounts were either reimbursed to the employees who had incurred the expenses or the amount for tea and tiffin expenses to each employee did not exceed ₹ 20,000/- in a day, there was no justification for any disallowance u/s 40A(3) of the Act in view of the decision in the case of ITA No.: 929/KOL/2025 Assessment Year: 2015-16 Chandras Chemical Enterprises Private Limited. Dharampal Satyapal Ltd. (supra) and, therefore, this ground of appeal is allowed.
Another ground relating to the addition of ₹38,428/- being cash payments of professional service charges was not pressed. Hence, this ground of appeal is dismissed as not pressed.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open Court on 8th December, 2025. [George Mathan] [Rakesh Mishra] Judicial Member Accountant Member Dated: 08.12.2025 Bidhan (Sr. P.S.) ITA No.: 929/KOL/2025 Assessment Year: 2015-16 Chandras Chemical Enterprises Private Limited. Copy of the order forwarded to:
Chandras Chemical Enterprises Private Limited, P-35, Chakda House, C.I.T. Road, Moulali,, Kolkata, West Bengal, 700014. 2. DCIT, Circle-10(1), Kolkata.
Addl/JCIT(A)-9, Mumbai.
CIT-
CIT(DR), Kolkata Benches, Kolkata.
Guard File. //// By order