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Section 40A(3) and Section 40A(3A) deals with Disallowance of 100% of expenditure if payment is made by any mode other than account-payee cheque or draft  in the year of expense or in the subsequent year / Years. Article explains provision of Section 40A(3) and Section 40A(3A) of Income Tax Act, 1961.

Section 40A(3) of Income Tax Act 1961 provides for disallowance of expenses in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs 20000 (wef A.Y. 2018-19 Rs 10000/-) and Section 40A(3A) provides for the payment in excess of Rs 20000 (wef A.Y. 2018-19 Rs 10000/-) in a day made otherwise than account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, for an allowance made in the assessment for any year on the basis of incurred liability, to be treated as income under the head  ”profits and gains of business or profession” of the year in which such payment is made. These relevant and important provisions and exceptions to them are provided as follows.

Expenses Disallowe under section 40A(3) and 40A(3A)

Payments Disallowed u/s 40A(3) & 40A(3A): As per section 40A(3), where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs 20000 (wef A.Y. 2018-19 Rs 10000/-), no deduction shall be allowed in respect of such expenditure.

However such limit of Rs 20000 has been increased to Rs 35000 w.e.f 01-10-2009 in case the payment is made for plying, hiring or leasing of goods carriage.

Section 40A(3A) further provides (that in case an allowance is made in the assessment for any year on the basis of incurred liability, but in the subsequent year or years, assessee makes a payment exceeding Rs 20000 (wef A.Y. 2018-19 Rs 10000/-)in a day, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, in respect of such liability, then the payment so made shall be deemed to be the profit of the year in which such payment is made.

The limit of Rs 35000 in case of plying, hiring or leasing of goods carriage is also applicable to section 40A(3A).

Thus payment in excess of Rs 20000 (wef A.Y. 2018-19 Rs 10000/-) in a day in respect of any expenditure incurred in the current year or in the previous years otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account will be disallowed while calculating profits of an assessee.

Aggregate Payment has to be seen: After the amendment  if a person makes more than one different purchases for cash from same person in excess of Rs 20000 (wef A.Y. 2018-19 Rs 10000/-) in a single day even though on separate cash memos, such aggregate payment will be disallowed u/s 40A(3). For example if A makes three purchases of Rs 8000 each from the same person during different time of the day and obtains three different cash memos, yet the transaction will be covered by section 40A(3) and such expenditure will be disallowed.

Exceptions under Rule 6DD: Proviso to section 40A(3A) provides that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this subsection[Section 40A(3A)] where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds twenty thousand rupees (wef A.Y. 2018-19 Rs 10000/-), in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.

The cases and circumstances as mentioned in the above proviso are contained under Rule 6DD and have been added vide Notification No. S.O2431(E), dated 10-10-2008 and are applicable w.e.f A.Y. 2009-10. These circumstances and cases as provided under Rule 6DD are as follows:

(a) where the payment is made to—

(i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of  the Banking Regulation Act, 1949 (10 of 1949):

(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);

(iii) any co-operative bank or land mortgage bank:

(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949(10 of 1949);

(v) the Life insurance Corporation of’ India established under section.3 of the Life Insurance Corporation Act, 1956 (51 of 1956);

(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) any letter of credit arrangements through a bank;

(ii) a mail or telegraphic transfer through a bank;

(iii) a book adjustment from any account in a bank to any other account in that or any other bank;

(iv) a bill of exchange made payable only to a bank;

(v) the use of electronic clearing system through a bank account

(vi) a credit card;

(vii) a debit card.

Explanation.— For the purposes of this clause and clause (g), the term “bank means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 ( 10 of 1949) whether incorporated or not, which is established outside India;

(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 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-

(i) 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

(ii) 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 travelers 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.]

Earlier clause (j) to Rule 6DD provided that if the payment hit by section 40A(3) is made in exceptional and unavoidable circumstances then no disallowance would be made u/s 40A(3). But the said clause has been omitted w.e.f A.Y. 1996-97.

Exceptions:- The provisions of the Section do not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for re-sale.

Some case laws:

In CIT v K.K.S. K Leather Processor P. Ltd.[2007] 292 ITR 669(Mad.) it was held that payments made on a day on which the banks are closed either on account of holiday or strike, shall not come within the ambit of disallowance u/s 40A(3).

In The Commissioner of Income-tax versus Vijay Kumar Goel [2010] 324 ITR 376 (Chattisgarh) it was held that From a reading of the definition of bill of exchange u/s 5 and cheque under section 6 of the Negotiable Instrument Act, 1881, it is clear the banker’s cheques/pay orders/ call deposit receipts are instruments which fall within the definition of bill of exchange. Hence payment made by the same could not be disallowed u/s 40A(3).

Where Books of accounts have been rejected and profit has been estimated, it is deemed that all the expenses and disallowances have been considered. Hence no further disallowance u/s 40A(3) is permissible- CIT V. Smt Santosh Jain[2008] 296 ITR 324(P&H).

Note: The limit of Rs 20,000 has been reduced to Rs 10,000 from A.y 2018-19. So in the above case laws Rs 20,000 should be read as Rs 10,000

(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

Also Read: All About Disallowance under Section 40(a)(3)

Read Other Articles from Advocate Amit Bajaj

(Republished with Amendments)

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33 Comments

  1. BRATATI says:

    IF CASH PAYMENT MADE TO PURCHASE THE STAMP PAPER BY A LAW FIRM, OVER AND ABOVE 10K IN A PARTICULAR DAY WHAT WILL THE IMPACT ASS PER SECTION
    40A(3)?

  2. SANTOSH KUMAR MISHRA says:

    XYZ is a legal entity, being registered under Societies Registration Act 1860 and under sec 12A
    Of in-Come Tax Act 1961.

    The present concern is to identify to determine whether Sec 40A (3) regarding limitation for
    Cash payment is applicable to M/S XYZ or not.

    Sec 40A (3) links with the term “Expenditure” so cash payment limitation
    Is applicable only for the cash payment transactions, booked under the head of any
    Expenditure
    Let us take a situation as under

    1) M/S XYZ pays INR 15000 as ADVANCE to an employee (Mr. RAHUL)
    For running the Canteen.

    2) Out of the above paid amount, Rahul pays INR 7000 to grocery supplier,5000 to
    Vegetable vendor, and INR 3000 to milk supplier

    Then Rahul submits the above payment voucher to Accounts Dept. for adjustment
    and settlement of his advance account

    Here question arises, whether the above payment in cash as per Sl No 01
    Is permissible as per 40A (3).

  3. Dipesh Karnawat says:

    Yes, depreciation will be allowed by the virtue of Section 31, since section 40A(3) disallows only expenditure incurred by the assessee during the Previous Year where as the depreciation is an allowance not an Expenditure.

  4. Dipesh Karnawat says:

    Yes, Section 40A(3) disallows only expenditure incured by the assessee during the Previous Year where as the depreciation is an allowance not an Expenditure.

  5. Chaithanya says:

    40A(3) payment to Transport Agency

    In Agro Mills ,when purchase is made.Freight Inward by lorries . Lorry services are taken from a transport agency.Purchased stock comes in different lorries, payments are made to such lorry drivers less than Rs.20,000/- .In a day almost 5 or 6 transactions take place like that.

    Question : Does each payment made to each driver has to be treated as payment made to different persons ?

    OR

    Does the payments made are treated as payments made to Transport agency and is disallowed u/s 40A(3).

  6. Chaithanya says:

    Even if bill amt. Rs.40,000 , when actual cash payment is made below Rs.20,000 in different dates .40A (3) doesn’t attract.

  7. Amirthavalli Ramanujam says:

    An assessee pays to DHL a sum of Rs.21000-00 towards duty payment for clearing goods and this amount was paid as Cash to DHL. Please reply whether this is qualified for disallowance u/s 40 A (3)

  8. Neha says:

    Mr.Manas Ranjan Panda,

    Payment made to Government will not be disallowed,if the electricity bill payment is made to other than the government bodies ,it will be disallowed under sec40(A)3,Pls make sure that the payment is not made to private sector companies

  9. Manas Ranjan Panda says:

    A corporate assessee taken 3 houses on lease from 3 different persons. As per the agreement the rent to be paid to the owner and the electricty payment to be made to the electricity supply company. In all cases the Electicity Bill comes in the name of the Owner and payment has to be made by the assessee.
    The bill amount for house 1 – 14000
    The bill amount for house 2 – 5000
    The bill amount for house 3 – 8000

    Total amount – 27 000/-

    As the last due date for payment of all the bills are same, the assesse paid all the bill on the last due date in cash. The electricity company issued 3 receipts in the respective owners’ name.

    Please let us know if it will be disallowed u/s 40A(3) as it exceeds Rs. 20000/- payment is cash on a single day to same person?

    Please give opinion.

  10. B R TANEJA says:

    Please intimate whether the purchases of sugar by a dealer from the co op sugar mills on cash payment on 31st day of march are covered by the exceptions when the bank gives a certificate regarding interruption on connectivity of the system during the year Case laws on the issue if any applicable for cases after 1.4.2009 may please be intimated. Thanks, regards.

  11. CA Neha Garg says:

    If I pay Rs.14,000 and Rs. 14,000 in cash to a party for two different invoices in a day. Whether this payment will be disallowed or not as per sec. 40A(3)

  12. BATRA GOYAL AND CO says:

    whether depriciation on computer which was purchased on 3.10.2011 and amt paid by cash will be admissible or disallow u/s 40a(3) of the income tax acts and if yes, how much it will be charged ?

  13. SWATI CHHAPARIYA says:

    Respected Sir,
    If i pay an amount exceeding Rs.20000 in cash in a single day to a single person on account of purchase of property for e.g.land,residential flat etc. will such payment be considered as violation of provisions of section 40A(3) read with rule 6DD of the Income-Tax Act,1961

  14. Parth Trivedi says:

    Respected sir,
                               If i pay Rs.35000/- to my site supervisor for site expenses would it be Disallowed???

  15. KEVIN MAKWANA, CA & CS FINAL STUDENT. says:

    Dear Sir,

    If one pays franking charges to any FI, NBFC etc. in respect of any legal doc., registration of agreement etc., whether such expenses will fall/disallowed u/s 40(A)(3) or not ? Amount involved Rs.71450/- Please reply.

  16. S.L.GOYAL says:

    As R.Sathyanarayan,FCA says, we also distribute salaries and wages to our workers in factory and project sites in cash which amount to over Rs. 20,000/- in a day. If there is a judgement in this regard, we would also like to know.

  17. CA. Sanjeev Singhal says:

    One important exception of s. 40A(3) has not been provided by you is ; provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as expenditure under section 30 to 37 of income tax act.

  18. R.Sathyanarayan,FCA says:

    When assessee engaged in the business of construction disburses wages directly to labourers in the project Site cash payments above the thereshold limit becomes inevitable. There seems to be a judgement in this regard. can Tax guru provide the details please?

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