Analysis of Cash Payments under section 40A(3) and 43(1)

Implication of Cash Cash payments exceeding Rs.10,000 under the provisions of Section 40A(3) & Section 43(1) of Income Tax Act, 1961. 

This article mainly focuses on the concepts of,

i) Cash payments made for revenue expenditures, which are covered within the provisions of Sec. 40A(3)

and

ii) Cash Payments that are made for acquisition of fixed assets, which are covered within the provision of Sec. 43(1)

We all know, that cash payments above Rs. 10,000 made to a person in a day, either

a) attract a disallowance [in concept (i) mentioned above]

(or)

b) do not form part of the actual cost of the asset [in concept of (ii) mentioned above]

But this interpretation does not get restricted to,

a) ‘per person per day’ basis [in concept (i) mentioned above], as this has to be analyzed by giving reference to ‘per expenditure’ basis (i.e. per invoice or per bill), to put it collectively, it would be ‘per person per day per expenditure’ basis.

b) ‘per person per day’ [in concept (ii) mentioned above], as this has to be analyzed by giving reference to ‘per asset or per part of an asset’ basis, to put it collectively, it would be ‘per person per day per asset (or) per part of an asset’ basis.

This has been explained in this article with examples. Example (1) below is used for interpreting Sec. 40A(3) and Example (2) below is used for interpreting 2^nd Proviso to Sec. 43(1).

1) Mr. A has made a cash payment of Rs. 50,000 on 31.03.2021 in respect of following bills to Mr. B,

Invoice Date (Case – A)	Invoice Date (Case – B)	Invoice No.	Invoice Amount (Rs.)
01.04.2020	01.04.2020	1	9,000
01.06.2020	01.04.2020	11	8,000
01.08.2020	01.04.2020	21	7,000
01.10.2020	01.04.2020	31	6,000
01.12.2020	01.04.2020	41	5,000
01.02.2021	01.04.2020	51	15,000

Whether provisions of Sec. 40A (3) is attracted here and whether the payment of Rs. 50,000 is to be disallowed ?

• No
• Only Rs. 15,000 is to be disallowed (in both the cases)
• In these cases, Mr. A makes aggregate cash payment of more than Rs. 10,000 to a single person in a day, but still the provisions of Sec. 40A(3) is not fully attracted here and hence the entire payment of Rs. 50,000 is not disallowed here, but only to the extent of Rs. 15,000 is to be disallowed.

This is due to the below mentioned facts.

• Sec. 40A(3) says that :

“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 by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds Rs. 10,000, no deduction shall be allowed in respect of such expenditure.”

• In this, how to interpret the words “Any Expenditure” ?

“Any Expenditure” can be interpreted as for single expenditure [i.e. for single bill (or) for single invoice]

• How to interpret the phrase “Payment (or) Aggregate of Payments” ?

Payment (or) Aggregate of Payments can be interpreted as “Payment (or) Aggregate of Payments” for one single

expenditure [i.e. for single bill (or) for single invoice] made in a day.

• With this we can come to a conclusion that the Rs. 10,000 limit is in respect of each and every single invoice (or) bill (or) transaction [either happened on a same day (i.e. Case – B) (or) different days (i.e. Case – A)]
• 40A(3) attracts only when a single bill is of more than Rs. 10,000 and for which a cash payment of more than Rs. 10,000 is made in a single day to a single person.
• To put it simple, this Rs. 10,000 limit in cash payments u/s 40A(3) is based on,

– “per person”

–  “per day”

–  “per expenditure” (i.e. per bill (or) per invoice)

• But this is subject to provisions of Sec. 269ST (where receiver cannot receive Rs. 2,00,000 or more from a person in a day (or) in respect of one transaction).
• Note :

The provision of 40A(3) is based on each expenditure and not based on collective of expenditures, because the word used in the Sec. 40A(3) is “expenditure” and not “expenditures”.

2) Mr. A has acquired following assets for his business use, in a single invoice (Invoice No. 01 ; Invoice Date : 14.07.2022) from XYZ Electronics, by paying cash of Rs. 70,000 on 15.07.2022 in the following manner :

Assets	Brand	Qty	Total Cost (Rs.)	Payment made in Cash (Rs.)	Payment made in Bank (Rs.)
TV	Samsung	1	56,000	6,000	50,000
CCTV Cameras	Godrej	5	20,000	20,000	–
AC (New)	Voltas	1	32,000	10,000	22,000
Air Compressor for an Old AC	Blue Star	1	20,000	10,000	10,000
Refrigerator	LG	1	40,000	15,000	25,000
Water Purifier	Havells	1	16,000	9,000	7,000
Total		10	1,84,000	70,000	1,14,000

Analyze Provisions of Sec. 43(1) in respect of Cash Payments made above Rs. 10,000 to a single person in a day.

• 2^nd Proviso to Sec. 43(1) says that :

“Provided further that where the assessee incurs any expenditure for acquisition of any asset or part thereof 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 a bank or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds Rs. 10,000, such expenditure shall be ignored for the purposes of determination of actual cost.”

• In this, words “any expenditure” can be interpreted as,

–  any expenditure incurred in respect of any asset (and not assets) (or) any part of an asset (and not parts) made to one person in a day

• Phrase “for acquisition of” can be interpreted as,

–  Payment made for purchasing any asset (and not assets) (or) any part of an asset (and not parts)

• Phrase “any asset or part thereof” can be interpreted as,

– Payment made for any one asset (and not assets) (or) any one part of an asset (and not parts).

– Here, individual asset wise segregation (or) individual part of an asset (i.e. part wise segregation) is to be made.

• With this we can conclude that,

Limit of cash payment made in excess of Rs. 10,000 is to be seen as,

– per asset basis

(or)

– per part of an asset basis

• Only for purchase of every single asset (or) every part of an asset, we are concerned about the cash payment which are made in excess of Rs. 10,000 to a single person in a day.
• In this, we are not concerned about invoice (or) bill wise cash payments, which are made in excess of Rs. 10,000 to a person in a day.
• On a simple note, this is interpreted on the basis of payment made

–  “per asset (or) per part of an asset”

– “per day”

–  “per person”

So, in this case,

• Only the cash payment of Rs. 15,000 made for refrigerator is to be reduced from the actual cost of the refrigerator and hence depreciation on refrigerator can be claimed only on cost of Rs. 25,000 which is paid through bank.
• Also, cash payment made for CCTV cameras are in excess of Rs. 10,000, but still these are not to be reduced from the actual cost, this is because, the cash payment made in respect of each CCTV camera is only Rs. 4,000 (i.e. Rs. 20,000 / 5 CCTVs)
• Cash Payments made in respect of all other assets are not considered for reduction from the actual cost, even though the total cash payments made in a day to a person exceeds Rs. 10,000, as these are related to various assets and not just for one single asset.

• But this entire transaction is subject to provisions of Sec. 269ST (where receiver cannot receive Rs. 2,00,000 or more from a person in a day (or) in respect of one transaction).
• Actual cost of Assets purchased through one invoice (Actual Scenario as given is Question 2) :

Assets	Brand	Qty	Total Cost (Rs.)	Payment made in Cash (Rs.)	Payment made in Bank (Rs.)	Actual Cost (Rs.)
						(for the purpose of Income Tax Purposes)
TV	Samsung	1	56,000	6,000	50,000	56,000
CCTV Cameras	Godrej	5	20,000	20,000	–	20,000
AC (New)	Voltas	1	32,000	10,000	22,000	32,000
Air Compressor for an Old AC	Blue Star	1	20,000	10,000	10,000	20,000
Refrigerator	LG	1	40,000	15,000	25,000	25,000
Water Purifier	Havells	1	16,000	9,000	7,000	16,000
Total		10	1,84,000	70,000	1,14,000	1,69,000

Alternative Scenario :

• Alternatively, instead of paying Rs. 15,000 for the refrigerator in cash on 15.07.2022, had this Rs. 15,000* been paid in 2 different days, where cash payment pertaining to each day does not exceed Rs. 10,000 [i.e. for eg: Rs. 5,000 on 15.07.2022 & Rs. 10,000 on 16.07.2022], then even for refrigerator such reduction from the actual cost would not have been made.
• Actual Cost of Assets purchased through one invoice (Alternative Scenario – Rs. 15,000* paid in 2 different days)

Assets	Brand	Qty	Total Cost (Rs.)	Payment made in Cash (Rs.)	Payment made in Bank (Rs.)	Actual Cost (Rs.)
						(for the purpose of Income Tax Purposes)
TV	Samsung	1	56,000	6,000	50,000	56,000
CCTV Cameras	Godrej	5	20,000	20,000	–	20,000
AC (New)	Voltas	1	32,000	10,000	22,000	32,000
Air Compressor for an Old AC	Blue Star	1	20,000	10,000	10,000	20,000
Refrigerator	LG	1	40,000	15,000*	25,000	40,000
Water Purifier	Havells	1	16,000	9,000	7,000	16,000
Total		10	1,84,000	70,000	1,14,000	1,84,000

Note :

• The 2^nd proviso to Sec. 43(1) is based on each asset (or) each part of an asset acquired either through single invoice (or) through multiple invoices. Number of invoices does not matter when it comes to cash payments exceeding Rs. 10,000 in case of an asset.
• This Rs. 10,000 limit of cash payment made to a person in a day is for an asset (or) for a part of an asset, irrespective of number of invoices through which such asset (or) such part of an asset is acquired.

Disclaimer :

This article is only for educative purposes and to gain knowledge about a subject through interpretation from author’s point of view [ or understanding of the subject ] and this article is not to influence anyone in their decisions related either to their profession or their practice or their education. Matters contained in this article are only author’s view or opinion regarding the subject and not to force anyone to follow as per this article while anyone refer this article.