Summary: Section 40A(3) of the Income Tax Act, introduced by the Finance Act, 2008, restricts certain business transactions made in cash exceeding ₹10,000 in a day to a single person. Such payments must be made through account payee cheques, bank drafts, or electronic modes. If the payment is made in cash beyond this limit, the expenditure will be disallowed as a deduction, and in some cases, it will be treated as taxable income in subsequent years. There are specific exceptions to this rule, including payments made to government entities, banks, and certain agricultural producers. Other exemptions include salary payments to employees posted in remote locations, and payments made to agents for goods or services. Special provisions exist for transporters where the cash payment limit is raised to ₹35,000. Additionally, no transaction exceeding ₹2,00,000 is permissible in cash, and payments related to property transactions or specific occasions like marriages must be made via banks or electronic means. Exceptions are granted under specific circumstances, subject to the satisfaction of the assessing officer.
Under the Income Tax Act, to restrict certain transection in cash, section 40A(3) has been introduced by the Finance Act, 2008, with effect from 1st April, 2009 as under:
Section 40A(3): Where the assesse 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 other electronic mode as may be prescribed exceed ten thousand rupees, no deduction shall be allowed in respect of such “expenditure”.
According to this section, certain transactions pertaining to business are restricted. Where assesse 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 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, the whole of such expenditure shall not be allowed as deduction. Where any liability for any expenditure is allowed as a deduction on accrual basis in the relevant assessment year and subsequently during any previous year (hereinafter referred to as subsequent year), the assesse make payment in respect thereof, 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, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year, if the payment or aggregate of payments made to a person in a day, exceeds Rs.10,000.
Please remember that no disallowance shall be made and no payment shall be deemed to be the profit and gain of business, in cases and circumstances prescribed under Rule 6DD.
Where the payment is made to:
(1) the Reserve Bank of India or any banking company;
(2) the State Bank of India or any subsidiary bank;
(3) any co-operative bank or land mortgage bank;
(4) any primary agricultural credit society or any primary credit society;
(5) the Life Insurance Corporation of India established under LIC Act, 1956;
(6) 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;
(7) where the payment is made for the purchase of –
- Agricultural or forest produce; or
- The produce of animal husbandry or dairy or poultry farming; or
- Fish or fish products; or
- The products of horticulture or apiculture;
To the cultivator, grower or producer of such articles produce or products.
Where the payment is made by an assesse 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-
(a) is temporarily posted for a continues period of fifteen days or more in a place other than his normal place of duty or on a ship; and
(b) does not maintain any account in any bank at such place or ship;
Where the payment was required to be made on a day on which banks were closed either on account of holiday or strike;
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;
Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.
Exception:
Under the following circumstances there are exception.
- When a goods are sent through transport, in payment to transporter limit of Rs. 10,000 to be considered limit of Rs. 35,000.
- This rule is not applicable to the assesse who shown their income as per Sections 44AD, 44ADA, 44AE
- If assesse proves that there is no option for him to make such payment in cash, and if assessing officer satisfy then only accepted.
This section is not applicable to Business or profession, but is applicable for construction or purchase and sale of any property.
Under any circumstances no one can accept cash of Rs. 2,00,000. It is to be accepted through bank or electronic mode. That means no transection of more than Rs.1,99,999 is permissible, under following transections:
1. Amount accepted in a day from one person
2. Amount accepted for on transection, payment may be accepted on different days.
3. Amount accepted for any occasions like marriage etc.
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