Section 40A (3) of Income Tax Act – Disallowances of Expenditure made in Cash

Section 40A (3) is an important section of the Income Tax Act that ensures that there is proof of payment made which helps to reduce tax evasion and increases accountability.

Disallowances of Expenses :

Section 40A (3) disallows certain expenses if they are not in compliance with the guidelines of the Income Tax Act, 1961. This section is an over-riding section and if any expenditure or allowance comes under the purview of any other section, its treatment should be done as per provisions laid down in this section.

Section 40A (3)(a) states that :

any expenditure incurred in respect of which the payment is made

in a sum exceeding Rs. 10,000/- in a single day 

to a single person

otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft or through use of electronic clearing system,

shall not be allowed as a deduction.

This means it will not be considered as a business expense and will be added back to the income. Further, it will result in a higher payment of taxes.

It is pertinent to be noted that Section 40A(3) only disallows for any expenditure incurred. Therefore, purchase of capital assets is not covered under the purview of this Section

Note : In the case of a transporter (i.e. if the payments are made for hiring or leasing carriages for goods such as lorries, trucks etc), the limit has been fixed to Rs. 35,000 instead of Rs. 10,000/-.

Also, Section 40A (3)(b) states the provisions for deeming a payment as profits and gains of a business if the expenditure was incurred in a specific assessment year and payment was received in the subsequent year exceeding ₹10,000.

However, Rule 6DD prescribes certain cases and circumstances where the above mentioned expenditures will be allowed as deduction even if payment is made in Cash.

Rule 6DD: Exceptions to provisions of Section 40A(3) :

(a) where the payment is made to—
(i) the Reserve Bank of India or any banking company
(ii) the State Bank of India or any subsidiary bank
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society
(v) the Life Insurance Corporation of India (LIC)
(b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;
(c) where the payment is made by—
        (i) Letter of Credit Arrangements through Bank
       (ii)  Mail or Telegraphic transfer
      (iii) Book Adjustment in the same bank or between one bank to another
      (iv) Bill of Exchange made payable only to a Bank
      (v) Credit or Debit Crad
      (vi) ECS (Electronics Clearing system)
(d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;
(e) where the payment is made for the purchase of—
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;
(f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;
(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;
(h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees;
(i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee—
 > is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and
> does not maintain any account in any bank at such place or ship;
(j) Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.
(k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;
(l) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.
Explanation.—For the purposes of this clause, the expressions “authorised dealer” or “money changer” means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.]

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One Comment on “Section 40A (3) of Income Tax Act – Disallowances of Expenditure made in Cash”

  1. Mr. Ratan ji can you please have a paid service for GST / IT / Service tax compliance, appeal / assessment working etc. it shall be beneficial .
    thanking you,

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