CA Aashish Ramchand

Article discusses treatment of expenditures incurred by an assessee in excess of Rs. 20000/- (wef A.Y. 2018-19 Rs 10000/-) in cash or bearer cheque under section 40(A)(3) of the Income Tax Act, 1961

The income tax department in its endeavor to plug in tax evasion mechanisms has introduced section 40(A)(3). This section provides that any expenditure incurred by an assessee (whether individual, company, firm etc.) above Rs. 20000/- (wef A.y 2018-19 Rs 10000/-) other than by account payee cheque or draft or use of electronic clearing system through a bank account (wef A.y 2018-19) shall not be allowed as a deduction. Simply put, this section covers those payments over Rs. 20000/- (wef A.y 2018-19 Rs 10000/-) made by bearer cheque or cash.

However, if the payments are made for hiring or leasing carriages for goods such as lorries, trucks etc then the limit is extended to Rs 35000/-.

To further counter any tax evasion, the Income Tax department has specified that this section extends to single payments or aggregate of payments made to a single person in a day. Therefore, if X makes a payment to Y, of Rs. 10000, Rs. 15000, and Rs. 18000 in cash in one single day, then the aggregate amount of Rs. 43000 will be disallowed. Even the purchase of goods falls under the term expenditure. This section shall not apply to expenses which is not to be claimed as deduction u/s 30 to 37.

The Extract Of Section 40(A)(3) reads as:

Expenses or payments not deductible in certain circumstances

40(A)(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 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 ten thousand rupees,] no deduction shall be allowed in respect of such expenditure.

This section is not applicable in the following cases. These points are covered under Rule 6DD of the Income tax rules :-

1)  Payments made to banking and other credit institutions such as RBI, commercial banks, cooperative banks, LIC etc.

2) Payments made through the banking system i.e. Letters of credit, mail or telegraphic transfers, bills of exchange etc.

3)  Payment by adjustment of a liability for goods supplied or services rendered: – 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, no disallowance operates.

4) No disallowance is applicable where such expenses are made to growers, producers or cultivators of agriculture, horticulture, fish and animal produce.

5) Payment is made to a producer for the purchase of the products manufactured or processed without the aid of power in a cottage industry.

6)   Payment is made to a person who resides or carries on his/her business in a village not served by banks and financial institutions.

7)   Any payments made to Government (whether State or Central Government). Such payments are direct taxes, indirect taxes, duties, cess etc.

8)  No disallowance operates where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or his heirs of any such assessee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head salaries of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or in the immediately preceding financial year did not exceeds Rs. 50000.

9)  In case of a bank closure either due to a holiday or strike and payments in cash were made on such a day, then this section will not be applicable and there will be no disallowance

10) Payment made by any person to his agent who is required to make payment in cash for goods or services.

11) Authorized dealers and foreign exchange money changers as registered with RBI are required to pay cash for purchase of foreign currency. Therefore the disallowance under this section is not applicable to them. 

12) 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;

CASE STUDY

1. In the absence of unavoidable/ exceptional circumstances covered under Rule 6DD, Payment in Excess of Rs. 20,000/- not allowable

CIT v/s Tirupati Trading Co. – Kolkata High Court; AY 2000-01

The assessee-firm carried on business of manufacturing, trading and export of C.I. casting goods made of cast iron. The assessee firm made a payment for purchases of Rs. 94,506 in cash to M/s Dharam Roadways. The assessing officer had disallowed the entire amount of Rs. 94,506 taking into account the provisions of Sction 40 (a) (3). The assessee firm sought relief for the disallowance of this amount. The Kolkata Tribunal held that Tirupati Trading company was not able to explain the genuineness of payment made to Dharam Roadways and was also unable to explain whether any unavoidable/ exceptional circumstances covered under Rule 6DD of the IT rules were applicable in this case. Hence the disallowance stood at Rs. 94,506/-.

2. Section 40A(3) – Payment to milk producers in cash not disallowable

3. 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).

4. 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).

5. 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).

6. Disallowance u/s. 40A(3) for consolidated entry of cash payment in excess of Rs. 20000/- at year end?

7. Assessee need to prove that why payments could not be made by crossed cheques/demand draft or that these were made out of sheer necessity u/s. 40A(3)

8. Salary paid in cash to employees posted at Rigs for more then 15days can not be disallowed

9. Splitting of cash payment to circumvent the provisions of law attracts Section 40A(3)x

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 is CA by profession & Co-Founder of  Make My Returns (www.makemyreturns.com) & can be reached at connect@makemyreturns.com)

(Republished With Amendments)

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29 responses to “All About Disallowance under Section 40(A)(3)”

  1. Shahbaz Ansari says:

    can we pay travelling expenses in foreign currency in foreign country in the name of company which has sum exceeds the limit mentioned in sec 40a(3)

  2. Ajith A S says:

    The cash paid in excess of the prescribed limit should be only subject to disallowable amount and experts should analysis this aspect and ensure due change in the provisions suitably

  3. r narayanan says:

    it is not clear and natural justice that Under sec.40(a) (3) any sum paid in excess of rs. 10,000/–, why the entire amount should be disallowed instead of the amount in excess of Rs.10,000/–.
    Any justifiable reason?
    Any amount in excess of Rs.10,000/– shall be disallowed instead of the entire amount.
    Is it not correct and logical?
    can concerned authorities consider it?
    it is hoped some one will clarify for necessary amendment in this regard..
    Thanking you

  4. Rajesh Kalamkar says:

    I have purchased a motor cycle worth Rs.137000 and paid whole amount in cash to dealer in a single day.Because it is capital asset. I have claimed depreciation @15%. Whether depreciation will be disallow due to asset purchase in cash.

  5. Kalki Vital N says:

    Aggregate of payments made in single day to a single person should be considered for the limit of 20000/-, if it exceeds 20000/-, it should be disallowed

  6. kalki Vital Narayanam says:

    Aggregate of payments made in single day to a single person should be considered for the limit of 20000/-

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