S. 40(A)(3) Need to review proposed reduction in threshold limit from Rs. 20000 to 10000

NEED FOR REVIEW FOR THE PROPOSED REDUCTION IN THRESHOLD LIMIT OF RS. 20000 TO Rs. 10000 AS MENTIONED IN SECTION 40A(3)

Section 40A of the Income Tax Act, 1961 deals with the circumstances in which expenses or payments are not deductible while computing total income of an assessee. Rule 6DD of the Income Tax Rules, 1962 incorporates cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft.

The existing provision of sub section (3) of Section 40A of the Act, provides that any expenditure in respect of which payment or aggregate of payments made to person in a day, otherwise than by an account payee cheque drawn on a bank account payee bank draft, exceeds twenty thousand rupees, shall not be allowed as a deduction (in the case of payments made for plying, hiring or leasing goods carriages limit is 35000/-). Further, subsection (3A) of Section 40A also provides for deeming a payment as profits and gains of business of profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year of a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft.

In order to disincentive cash transactions, it is proposed in the Finance Bill 2017, w.e.f. AY 2018-19(FY 2017-18) to amend the provision of Section 40A of the Act to provide the following:

i. To reduce the existing threshold of cash payment to a person from twenty thousand rupees to ten thousand rupees in a single day; i.e any payment in cash above ten thousand rupees to a person in a day, shall not be allowed as deduction in computation of income from “Profits and gains of business or profession”.

ii. Deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the cash payment is made in any subsequent year of a sum exceeding ten thousand rupees to a person in a single day; and

iii. Further expand the specified mode of payment under respective sub-section of Section 40A from an account payee cheque drawn on a bank or account payee bank draft to by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account.

There is no change proposed by the Finance Bill, 2017 in threshold limit of Rs. 20000/- in section 269SS & section 269T of the Act. However, after section 269SS of the Act, the following new section is proposed to be inserted in the Act, namely:-

‘269ST. No person shall receive an amount of three lakh rupees or more-

a. In aggregate from a person in a day; or

b. In respect of a single transaction; or

c. In respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:

Provided that the provisions of this section shall not apply to-

(i) any receipt by-

(a) Government;

(b) any banking company, post office savings bank or cooperative bank;

(ii) transactions of the nature referred to in Section 269SS;

(iii)Such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify. Explanation- For the purpose of this Section,-

(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the Explanation to Section 269SS;

(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to Section 269SS.’.

Looking to the hard realities, practical problems of traders in respect of payments for the purchases for business, there was need to increase threshold limit of Rs. 20000/- instead it is proposed to be Rs. 10000/- w.e.f. from 1.4.2017(effective date i.e. from the start of the FY 2017-18).

There may be laid down certain other checks instead of disallowance (for example deduction of tax at source, etc.) if objects of section 40A(3) is to check evasion of taxes. Restrictions may be imposed but they should not be a hurdle in the smooth running of businesses.

Section 24 of the Draft Income Tax Bill, 1997 had proposed to increase limit laid down in section 40A (3) to Rs. 50,000.