Section 40A(3) of Income Tax Act, 1961 read with Rule 6DD

Article explains Section 40A(3) of Income Tax Act, 1961 read with Rule 6DD i.e. Cash Payment in excess of Rs. 10,000 to single person in a single day, Exception to Section 40A(3) of Income Tax Act, 1961 (Rule 6DD), Clauses omitted by the Income-tax (3rd Amendment) Rules, 2020 and Important Notes related to Section 40A(3) of Income Tax Act, 1961.

Very Simple Analysis of this Section is as under:- 

1) Section 40A(3) of Income Tax Act, 1961 (i.e. Cash Payment in excess of Rs. 10,000 to single person in a single day)

If assesses makes payment for any expenditure to any person otherwise than Account Payee Cheque or Demand Draft or use of electronic clearing system through a bank account or any other mode as may be prescribed is more than Rs. 10,000 in a single day then such expenditure shall be disallowed.

2) Exception to Section 40A(3) of Income Tax Act, 1961 (Rule 6DD)

Cases and circumstances in which a payment or aggregate of payments exceeding ten 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 or use of electronic clearing system through a bank account or through such other electronic mode as prescribed in rule 6ABBA.

No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where 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 [account payee bank  draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA, exceeds ten thousand rupees].

1. Where the Payment is made to:-

• Reserve Bank of India or any banking company
• State Bank of India or any subsidiary bank
• Any co-operative Bank or Land Mortgage Bank
• Any primary agricultural credit society or any primary credit society
• Life Insurance Corporation of India

2. Where the payment is made to the Govt and, under the rules framed by it, such payment is required to be made in legal tender.

3. Where the payment is made by:-

• Any Letter of Credit Arrangements through a Bank
• A Mail or telegraphic transfer through a Bank
• A Book adjustment from any account in a bank to any other account in that or any other bank
• A Bill of exchange made only payable to a Bank
• The use of electronic clearing system through a Bank Account

4. 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.

5. Where the payment is made to the cultivator, grower or producer for the purchase of the following

• Agricultural or Forest produce; or
• Produce of Animal Husbandry (including livestock, meat, hides and skins)
• Fish or Fish Products; or
• Products of Horticulture of Apiculture

6. Where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;

7. Where the payment is made in a village or town, which on the date of such payment is served by any bank, to any person who ordinarily resides or is carrying on any business, profession or vocation in any such village or town.

8. Where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs 50,000.

9. 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:-

• 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
• Does not maintain any account in any bank at such place or ship

10. Where the payment is made by any person to his agent who is required to make payments in cash for goods or services on behalf of such person.

11. Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheque in the normal course of business.

3) Clauses omitted by the Income-tax (3rd Amendment) Rules, 2020

Followings Clauses omitted by the Income-tax (3rd Amendment) Rules, 2020:-

• the use of electronic clearing system through a bank account
• a credit card
• a debit card
• where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike

4) Important Notes

a) Authorised Dealer : “Authorised Dealer” or “Money Changer” means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.

b) Any other mode as may be prescribed:-

• Credit Card
• Debit Card
•  Net Banking
• IMPS
• UPI
• RTGS
• NEFT
• BHIM

c) If payment made to transporter then Limit is Rs. 35,000.

d) If the expenditure is claimed as deduction in earlier year can due basis & if such expanses is subsequently paid in cash or bearer cheque then deduction allowed earlier shall be withdrawal and taxable as Profit or Gain from Business & Profession.

e) If expenditure paid by Cross Cheque then also deduction not allowed.