CA Aashish Ramchand

In this article I shall be discussing the treatment of expenditures incurred by an assessee in excess of Rs. 20000/- in cash or bearer cheque.

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/- other than by account payee cheque or draft shall not be allowed as a deduction. Simply put, this section covers those payments over Rs. 20000/- 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.

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. 

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)

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

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28 responses to “All About Disallowance under Section 40(a)(3)”

  1. 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

  2. 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

  3. 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.

  4. 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

  5. kalki Vital Narayanam says:

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

  6. jijesh says:

    cash price given to staff Rs, 30000/- does it attract sec 40 A3 ?

  7. alok gupta says:

    sir, cash salary paid to employees is allowanle or not more than 20000/- in a year., if dis allowance in which section pl.explain me.,

    • Vishal Goel says:

      Rule 6DD: Exceptions to provisions of Section 40A(3)
      No disallowance of expenses exceeding Rs. 20,000 in a day made otherwise than by an account payee cheque or account payee bank draft should be made in case of the following expenses:-

      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 the Income Tax Act , and when such employee:-

      1) Is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and
      2) Does not maintain any account in any bank at such place or ship

  8. Shankar Sharma says:

    As per section 40a(3) of Income tax act, 1961 cash paid to someone one a single day more than rs 20000 will be disallowed.

  9. shubham gupta says:

    sir if 3 different bill made from a single shop in a single day for a single person then a tax consequence under sec 40A3

  10. Ravi Shankar Kumar says:

    Sir, my company is working in microfinance industry, providing loan of Rs. 15000/- each in cash to the poorest people for its livelihood survival under joint liability group under the priority sector as specified by RBI. The group covers 5 peoples.

    My question is whether the amount given individually would be clubbed under section 40 of income tax act and it would be covered under disallowed exps. under Income Tax.

  11. T.Mallikarjuna says:

    one of my client make payment to AP electricity department of Rs 25,26,500/-by way cash towards his business electricity bill. is it attract section 40 A (3), please guide us in this regard.

  12. PAWAN KUMAR says:

    SIR

    WE HAVE A QUESTON ABOUT THAT A FIRM CAN PAY BEARER CHEQUE ON EXPENDITURE INCURRED MORE THAN 20000/=

  13. ankit choudhary says:

    How to escape from 40A(3) if land had been purchased forcash at 25000000e

  14. ankit choudhary says:

    How to escape from 40A(3) if land had been purchased forcash at 25000000

  15. CA. Shasank, Tadepalligudem says:

    Sir

    Kindly advise us, if Sec 40A(3) is attracted if Cash is directly deposited in the Creditor’s Bank Account by the Assessee.

  16. Pradeep says:

    Sir, I have purchase agriculture land out of municipal corporation limit a sum of Rs.3600000/- & all payment made through cash. what is effect under sec. 40A or other IT sec. ( I have only agriculture income no any other business income)

  17. SANJAY KAMDE (CA) says:

    Assessee made cash payment FDCM, State Government undertaking as an earnest money against purchase of forest produced whether disallowence U/S 40 A(3) of Income Tax Act is justified.

  18. D B Khan says:

    R/Sir,
    My Client purchases Land in cash Rs.355500/- and Land gos to Closing Stock, Department send us Notice about disallowance u/s.40A(3)
    Please replay me.
    Yours
    D.B.Khan
    ITP

  19. Bhushan Patil says:

    If payment to the employee via ac payee chq in his account , but expenses made by employee for copmany in cash purchases over Rs. 20,000/- from one party in a day. Is it dsallowed or not? if yes suggest any case law.

  20. naveen chaubey says:

    Payment to labour for its labour services above Rs.20000/- is allowable or not???
    Plz give me explanation????

  21. muneer says:

    sir, if i bought a i pod worth Rs.60000 from retail shop they do not accept cheque then whats the treatment above 20000/- have any relaxation on purchase of fixed asset?

  22. Mohammed Mandlaywala says:

    Will the disallowance exist if the payment in excess of 20000 is made in kind. For example bullion or jewels.

    • kARTHIKEYA says:

      THE SECTION 40 A(3)IT SELF DEALS WITH REVENUE NATURE PAYMENTS HENCE PURCHASE OF JEWELRY/BULLION COMES UNDER CAPITAL CATEGORY. SO THIS SECTION NOT APPLICABLE FOR CAPITAL ITEMS.

  23. PS B says:

    Whether section 40A(3) is applicable in case of an AOP(Society) registered u/s 12 claiming exemption u/s 11 in respect of purchases made by it.

  24. Nitin Singhal says:

    @ Hiren Bhandari:

    Fixed Assets purchased is not a revenue expenditure and we do not claim it in return except by way of depreciation or terminal charge and therefore as such not disallowable u/s 40(a)(3)

  25. Hiren Bhandari says:

    Sir I have dought regarding payment made for purchase of fixed assets in cash for more than 20,000/-

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