ARJUN KESHAVA MURTHY PERIKAL,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(3)(1), BENGALURU

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After careful consideration of the facts mentioned in the assessment order as well as in the replies filed by the appellant, it is observed that the appellant has failed to prove beyond doubt that the foreign travel was related to its business activity and how it helped him in earning income during the year or in subsequent year. The appellant has not explained the purpose of visit and how was it necessitated keeping in view the business activity of the appellant during the year under consideration. In view of these facts the disallowance of Rs. 2,33,946/- made by the assessing officer is upheld.

was issued on 06-12-2018 and was duly replied to on 12-12-2018, which was enclosed as Annexure-8. The brochure of the programme organised by J. Sagar & Associates was also uploaded on 19-12-2018 at 11.45 AM, just before the passing of the order, and the same was enclosed as Annexure-9 along with the acknowledgement as Annexure-10. However, these materials were not properly considered by the Assessing Officer.

9.1 The learned AR argued that the purpose of foreign travel had clearly been conveyed through the submission dated 12-12-2018. In respect of travel to Italy, it was explained that further proof could not be furnished due to client confidentiality constraints, but the assessee had complied with the requirements of the notice issued by the AO. Therefore, according to the learned AR, the expenditure of Rs. 2,33,946.00 ought to have been allowed. It was also contended that the AO ignored the conference brochure supporting the expenditure of Rs. 58,375/- incurred in October 2015 for attending the business development conference at Bangkok, which was directly connected with the appellant’s profession.

9.2 The learned AR strongly objected to the reasoning adopted by the AO that the expenditure should necessarily result in benefit to the appellant in the current or subsequent years. It was submitted that for an expenditure to be allowable, it is sufficient if it is incurred with the expectation of benefit to the business or profession, even if such benefit does not immediately materialise. Reliance was placed on the judgment of the Hon’ble Calcutta High Court in Royal Calcutta Turf Club v. Commissioner of Income-tax, West Bengal, reported in 33 ITR 616 wherein it was held that failure of expected results does not change the . character of the expenditure, so long as it was incurred for business purposes and with that expectation.

9.3 The learned AR concluded that the assessee was wrongly required to prove beyond doubt that the foreign travel helped him to earn income in the same year or in subsequent years. It was submitted that an advocate is often required to travel in the course of his profession and that attending a conference on business development organised by J. Sagar & Associates at Bangkok was clearly connected with professional development. As regards the Italy trip, the assessee had filed a sworn affidavit affirming that the travel was for business purposes, enclosed as Annexure-AE-1.

9.4 Lastly, the learned AR submitted that travel undertaken for professional purposes, such as meeting clients or attending training programmes, is a normal business expenditure. It is neither possible nor necessary to demonstrate that every instance of travel must lead to a direct or immediate benefit. The ld. AR argued that the appellant had made significant progress in his professional field and that part of such progress could reasonably be attributed to his willingness to travel abroad at his own cost for professional reasons. The affidavit filed as Annexure-AE-1 was again relied upon to support the contention that the foreign travel expenditure had helped the appellant in his professional career and therefore deserved to be allowed.

purposes of business or profession squarely lies upon the assessee under section 37(1) of the Act. According to the learned DR, the assessee had failed to discharge this burden with credible and cogent evidence.

10.1 The learned DR contended that merely furnishing details of air tickets and expenditure statements does not ipso facto establish the nexus of such travel with professional activities. In respect of the Italy trip, it was argued that no documentary evidence such as invitations, correspondence with clients, details of meetings, conference registrations, or any material demonstrating business engagement was furnished. The plea of client confidentiality, according to the learned DR, cannot absolve the assessee from substantiating the claim with at least basic corroborative material. A self-serving affidavit, it was submitted, cannot substitute for independent documentary evidence.

10.2 With regard to the Bangkok trip, the learned DR submitted that although a brochure of the conference organised by J. Sagar & Associates was filed, no evidence was produced to show the assessee’s actual participation, such as registration confirmation, attendance certificate, itinerary linking the travel dates with the programme schedule, or proof of professional assignments arising therefrom. It was further argued that the brochure was uploaded on the very date of passing of the assessment order, leaving no effective opportunity for verification by the Assessing Officer.

admitted position that the assessee is an advocate and is also engaged in real-estate development. The foreign travel comprised two trips, namely, to Bangkok in October 2015 involving expenditure of Rs. 58,375 and to Italy in August 2015 involving expenditure of Rs. 1,75,751. So far as the Bangkok visit is concerned, we note that the assessee produced contemporaneous material in the form of a brochure of the programme organised by J. Sagar & Associates, acknowledgements of online filing, and explanatory submissions during assessment proceedings, as noted in the record. These documents clearly indicate that the assessee attended a business-development seminar associated with the law firm. In our view, participation in such a professional conference by an advocate has a direct nexus with his legal profession and cannot be regarded as a personal trip. The lower authorities have not pointed out any defect in these documents nor disputed their genuineness. We therefore hold that the expenditure incurred on the Bangkok trip is supported by material evidence and is allowable as having been incurred wholly and exclusively for professional purposes.

11.1 Coming to the Italy visit, however, the position is materially different. Except for a general statement that the travel was undertaken for “business development” asserting that it is related to professional activities, no supporting documentary evidence such as details of meetings, conferences, invitations, correspondence with clients, or any other contemporaneous material was produced. The assessee merely pleaded that further evidence could not be furnished owing to client confidentiality. While we appreciate that an advocate may be constrained from disclosing sensitive client information, this by itself cannot dispense with the statutory requirement of establishing a prima . facie nexus between the expenditure and the profession. Judicial opinion is well settled that the test is not whether the expenditure ultimately yielded income, but whether it was incurred with the object of furthering the business or profession. At the same time, such intention must be demonstrated by some credible material. A bald assertion, unsupported by any documentary evidence, is not sufficient to discharge the burden cast upon the assessee under the Act.

11.2 The reliance placed by the learned AR on the decision in Royal Calcutta Turf Club (supra) is well founded for the proposition that failure of expected results does not change the character of an expenditure, provided it was incurred for business purposes. However, that principle presupposes that the assessee is first able to show that the expenditure was in fact incurred for such purposes. In the present case, while that requirement stands satisfied in respect of the Bangkok trip, it has not been met for the Italy visit, where no contemporaneous supporting evidence has been produced.

11.3 In view of the above discussion, we hold that the disallowance in so far as it relates to expenditure of Rs. 58,375/- incurred on the Bangkok trip is unsustainable and the same is directed to be deleted. However, the assessee has failed to substantiate, with cogent material, that the expenditure of Rs. 1,75,751 incurred on travel to Italy was wholly and exclusively for the purposes of his profession or business. To that extent, the action of the authorities below in sustaining the disallowance is upheld. The ground raised by the assessee is thus partly allowed in the above terms.

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17.1 The learned AR further submitted that the Balance Sheet as on 31-03-2016 and the schedules thereto, enclosed as Annexure-14, clearly showed deduction of TDS, and copies of TDS accounts for earlier years filed as Annexures AE-2 and AE-3 proving that the tax was paid on 30- 04-2016. It was also contended that in faceless appeal proceedings, the learned CIT(A) ought to have sought further clarification or granted a hearing before rejecting the claim, especially when the appellant was under a bona fide belief that the documents furnished were sufficient. The ld. AR therefore prayed that the disallowance of Rs. 72,000 be deleted.

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Mere filing of challans without proper reconciliation was not sufficient. He also stated that enough opportunities were given during faceless proceedings. Since the assessee did not properly substantiate the claim, the disallowance of Rs. 72,000 was rightly made.

19.1 The learned CIT(A) confirmed the action mainly on the ground that the documents filed did not establish “beyond doubt” that TDS of Rs. 24,000/- had been deducted and paid.

19.2 However, from the submissions and evidence produced before us, it is clear that the assessee had in fact deducted TDS of Rs. 24,000/- and remitted the same to the Government on 02-05-2016. Though an incorrect statement was initially made in the submission dated 30-11- 2018, the same was rectified in the subsequent reply dated 13-12-2018 along with challans and supporting documents, which were placed in Annexures 11 to 13 in the materials placed on record before us.

19.3 Further, the Balance Sheet for the year ending 31-03-2016 and the schedules thereto showed TDS payable, and copies of the TDS ledger accounts for earlier years, placed in Annexures AE-2 and AE-3, . demonstrated that the amount deducted from Ms. Jyothi D T was duly deposited on 30-04-2016.

19.4 We also find force in the contention of the learned AR that in the faceless appellate proceedings, if the learned CIT(A) was not satisfied with the documents already filed, he ought to have called for further clarification or granted an opportunity to the assessee before confirming the disallowance. The material on record sufficiently establishes that tax was in fact was deducted and paid before the due date, and therefore the very foundation for invoking section 40(a)(ia) of the Act does not survive.

19.5 In view of the above facts and evidence, we hold that the authorities below were not justified in sustaining the disallowance of Rs. 72,000/- under section 40(a)(ia) of the Act. Accordingly, the addition is deleted and the ground raised by the assessee is allowed.

Page 13 of 21 in violation of section 40A(3) of the Act. Hence the AO disallowed sum of Rs. 12,73,300/- claimed towards building materials and labour charges.

but it is not so in the case on hand, therefore, no disallowance could be made in such situations.

24.1 The learned AR further argued that even in the books of the father, the payments reflected were no single payments exceeding Rs. 20,000/- but consisted of several smaller payments below that limit. The assessee was willing to produce vouchers before the Verifying Unit, but the learned CIT(A) did not take any steps to get them examined before sustaining the disallowance. It was therefore contended that the authorities acted without proper verification.

24.2 It was also submitted that the assessee had never instructed his father to incur the expenditure in cash. Even if the father was to be treated as an agent of the assessee, the transactions were protected by Rule 6DD(k) of the Income Tax Rule 1962, and hence the rigour of section 40A(3) of the Act would not apply. The ld. AR also pointed out that the AO had made the disallowance without issuing any specific notice proposing such action. The notice under section 142(1) of the Act only sought details of construction expenses and bank accounts, which were duly furnished, but thereafter no further opportunity was given before making the disallowance.

24.3 The learned AR relied on judicial precedents to submit that section 40A(3) of the Act should not be applied mechanically and that business expediency and genuineness of transactions must be examined. Reference was made to the decision of the Hon’ble Supreme Court in Attar Singh Gurmukh Singh reported in [1999] 59 Taxman 11, which held that section 40A(3) of the Act has to be read along with Rule 6DD . and that genuine transactions made for business reasons should not be disallowed merely because payment was made in cash. Reliance was also placed on a Bangalore Tribunal decision in T.C. Srinivasa, reported in [2022] 139 taxmann.com 120 where the matter was restored for fresh enquiry in similar circumstances. 24.4 The learned AR further contended that in the present case there was no enquiry by the AO or the learned CIT(A) on crucial aspects such as whether section 40A(3) of the Act could apply to a mere journal entry, whether the individual cash entries actually exceeded Rs. 20,000, whether the father’s cash payments could be treated as those of the assessee, and whether Rule 6DD(k) would protect the transaction. It was also pointed out that the appellate order did not discuss these specific grounds raised by the assessee.

24.5 Lastly, the learned AR submitted that the expenditure in question had only gone to increase the value of closing stock of buildings under construction and had not been claimed as a deduction in the computation of income. Reliance was placed on a Delhi Tribunal decision in Green Valley Tower (P.) Ltd., reported in 125 taxmann.com 429 where it was held that when the expenditure is capitalised in closing stock and not claimed in the Profit and Loss Account, disallowance under section 40A(3) of the Act does not arise. In the appellant’s case also, though the amount was debited to the Profit and Loss Account, it ultimately increased the closing stock and therefore no effective deduction was claimed. On all these grounds, the learned AR prayed that the disallowance of Rs. 12,73,300 be deleted.

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26.1 The learned CIT(A) confirmed the action mainly on the ground that cash payments were made by the father and that the assessee had not produced payment-wise details to rebut the findings of the AO.

26.2 The assessee consistently explained that the construction was carried out under the supervision of his father, who initially met certain expenses from his own funds, and that at the year-end these amounts were merely brought into the assessee’s books through journal entries by debiting the “Building under Construction” account and crediting the father’s account, as narrated in the record. Copies of the father’s ledger account were stated to have been filed. Accordingly, the assessee is claiming that in such a situation, where no cash was actually paid by the . assessee and the transaction was recorded only through book adjustment, the very basic condition for invoking section 40A(3), namely payment in cash by the assessee, is not satisfied.

26.3 We considered the argument of the assessee facts and circumstances involved and we are unable to accept the contention that section 40A(3) of the Act is not attracted merely because the cash payments were made by the father of the assessee and not by the assessee himself. It is an admitted position that the expenditure towards labour charges and building materials related to the assessee’s construction activity and was ultimately recorded in the assessee’s books as his own cost, with the corresponding credit shown as a loan from his father. Once the assessee has treated the amount as his liability and claimed the expenditure in his business accounts, the mode by which the liability was discharged cannot be ignored. Payment made by a third person on behalf of the assessee to meet his business expenditure partakes the character of payment by the assessee himself in substance, though routed through another person. The mere fact that the father initially paid the amounts in cash and the assessee later reflected the same as a loan by making journal entries does not take the transaction outside the ambit of section 40A(3) of the Act, which applies to any expenditure in respect of which payment is made in cash beyond the prescribed limit. Therefore, the argument of the learned AR that section 40A(3) of the Act is inapplicable solely on the ground that the assessee did not personally hand over the cash is rejected.

26.4 However, we are also conscious to the facts that section 40A(3) is not automatic, even where cash is paid in respect of any liability incurred .

Page 18 of 21 by the assessee for any expenditure. Before invoking the provision of section 40A(3) of the Act and making disallowances the AO must examine certain other facts such as: - Whether payments exceeded the daily limit per person - Whether Rule 6DD applies (business necessity, agent, impracticability of banking channel, etc.) - Whether the payments were genuine - Whether proper enquiry was done - Whether the amount was actually claimed as deduction or only capitalised 26.5 The assessee consistently pleaded that the Assessing Officer had invoked section 40A(3) of the Act mechanically without carrying out proper verification of the facts. We note that neither the AO nor the learned CIT(A) examined the payment-wise details to ascertain whether the individual cash payments made for labour and building material actually exceeded the statutory limit of Rs. 20,000/- per day to a single person. The assessee had specifically contended that the entries in the father’s books comprised several smaller payments and had expressed willingness to produce vouchers for verification. However, no attempt was made by the authorities below to get such details examined through the Verifying Unit or otherwise. In the absence of such factual enquiry, the blanket disallowance of Rs. 12,73,300 cannot be sustained.

26.6 We further find substance in the grievance of the assessee that the disallowance was made without issuing any specific show-cause notice proposing action under section 40A(3) of the Act. The notice issued under section 142(1) merely called for details of construction expenses and bank statements, which were duly furnished by the . assessee. Thereafter, without confronting the assessee with a clear proposal to invoke section 40A(3) of the Act and without affording an opportunity to explain the applicability of Rule 6DD or the nature of individual payments, the AO proceeded to make the disallowance. Such action is contrary to the principles of natural justice, especially when the assessee had raised detailed objections before the learned CIT(A), which also remained unaddressed in the appellate order. Judicial precedents relied upon by the assessee clearly lay down that section 40A(3) of the Act cannot be applied in isolation and must be read together with Rule 6DD, and that genuine business transactions supported by surrounding circumstances require proper examination before any disallowance is made. 26.7 We further note that the appellate order does not contain any discussion on these specific pleas raised by the assessee, namely the absence of enquiry into individual payments, the applicability of Rule 6DD, and the failure to issue a proper proposal notice. These omissions go to the root of the matter and render the confirmation of disallowance unsustainable.

26.8 We have also considered the alternative plea of the assessee that the impugned cash expenditure was included in the value of construction or closing stock and therefore no real deduction was claimed. On examination of the accounts, we note that the total construction expenses of Rs. 14,91,349 were first debited to the Profit and Loss Account, and out of this amount the Assessing Officer identified Rs. 12,73,300 as having been paid in cash in alleged violation of section 40A(3) of the Act. Once an expenditure is debited to the Profit and Loss .

Account, it directly enters into the computation of business income for the year and reduces the profits, unless specifically disallowed.

26.9 The valuation of construction or closing stock is only a method of determining the correct trading results at the end of the year. Such valuation may partly offset the debit in the Profit and Loss Account, but that does not change the basic character of the payment or the manner in which it was made. Section 40A(3) of the Act focuses on the mode of payment of an expenditure and provides that where such expenditure is incurred and paid in cash beyond the prescribed limit, the deduction otherwise allowable shall not be permitted. Therefore, even if the expenditure is ultimately reflected in the cost of construction or closing stock, the statutory bar under section 40A(3) continues to operate so long as the amount has been claimed as part of the business expenditure for computing income.

26.10 In the present case, the assessee has not demonstrated that the sum of Rs. 12,73,300 was fully neutralised or excluded while arriving at the taxable income for the year. In absence of such proof, the mere fact that the construction expenses formed part of the valuation of closing stock cannot, by itself, take the case outside the ambit of section 40A(3) of the Act. Accordingly, this argument of the assessee is rejected.

26.11 In view of the above facts and circumstances, we hold that, except for the argument relating cash payment made by the assessee’s father not by the assessee himself and except for the argument relating to capitalisation in work-in-progress and, the assessee has succeeded on the other grounds. The disallowance under section 40A(3) having been . made without proper verification, without granting adequate opportunity, and without examining the statutory exceptions contained in Rule 6DD, cannot be upheld. Accordingly, on these grounds, the addition is deleted and the assessee’s ground of appeal is allowed.

Order pronounced in court on 13th day of February, 2026