Income Tax Query



Basic Provisions for disallowance of expenditure above Rs.20000 paid by Cash

       Cash Payment under the Income Tax Act 1961:

       The Finance Act, 2008 has substituted sub section 3 of Section 40A and has inserted a new

       sub section (3A) also in Section 40A effective from the assessment year 2009-10.

i.               Provisions contained in substituted sub section (3) of Section 40A:

Section 40A(3) provides 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, exceeds twenty thousand rupees, no deductions shall be allowed in respect of such expenditure. This limit is subject to exceptions contained under the Rule 6DD.  


ii. Subsequent Disallowance due to violation of section 40A(3) in a year other than the year of allowance of deduction of expense:

Sub Section (3A) provides that where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any financial year the assessee makes payment in respect thereof, otherwise than by an account payee cheque or an account payee bank draft, 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 during a day, exceeds twenty thousand rupees.

iii.              Hike in limit for cash payment under section 40A(3) where payment is made for plying, hiring or leasing of goods carriage:

In case of payment made for plying, hiring or leasing goods carriages, the ceiling of twenty thousand rupees specified in subsections (3) and (3A) shall be enhanced to thirty five thousand rupees.

The limit has been raised in case of transporters due to their special circumstances for incurring expenditure on long haul journeys. It is to be noted that for other categories of payees, the limit will remain twenty thousand rupees.

iv.               Cash deposited directly into the bank account of the supplier by assessee whether hit by section 40A(3):

In Sri Ranukeswara Rice Mills v ITO (2005) 278 ITR 77 (Bang-Trib) the assessee rice mill purchased rice from regional market yard and deposited the payment in cash to agent’s bank account under a challan to ensure that payee alone receives payment. The revenue authorities disallowed the said payments on the ground that they were cash payments violating the provisions of Section 40A(3). It was held that payment made by depositing cash to payee’s bank account fulfils the object of section 40A(3) and therefore, no disallowance could be made for the same.

v.                 Disallowance only for expenditure claimed as deduction in books of account:

To be hit by section 40A(3) and consequent disallowance, the amount for which the payment is made should have been claimed by the assessee in the books of account as expenditure.

vi.                Application of provisions of Section 40A(3) to the computation of income under the head “income from other sources”:

Section 58(2) provides that the provisions contained in section 40A(3) shall apply in computing the income chargeable under the head ‘income from other sources’ in the same way as they apply in computing the income chargeable under the head ‘profits and gains of business or profession’.



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