Income Tax Query

Cash Payments above Rs.10,000 (Section 40A(3))  

Splitting up of Cash payments to result in disallowance: 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, or use of electronic clearing system through a bank account or other electronic mode, exceeds Rs.10,000/- (ten thousand rupees), no deductions shall be allowed in respect of such expenditure. This limit is subject to exceptions contained under the Rule 6DD. Summing up, the modes of payment allowed are: 

a.     Account Payee Cheque 

b.     Account Payee Bank Draft 

c.     Electronic Clearing System 

d.     Credit Card 

e.     Debit Card 

f.       Net Banking 

g.     IMPS 

h.     UPI 

i.       RTGS 

j.       NEFT 

k.     BHIM Aadhar Pay 


Exceptions: If the mode of payment is not covered in any of the above modes and the payment exceeds Rs.10,000/-, the same is disallowed. However, there are certain exceptions provided in Rule 6DD which are given below: 


a.     Payment is made to the Reserve Bank of India 

b.     Payment is made to any bank including co-operative bank/land mortgage bank. 

c.     Payments to Life Insurance Corporation of India 

d.     Payments made to Government if the same is required in legal tender. 

e.     Payment by way of letter of credit through any bank. 

f.       By mail or telegraphic transfer. 

g.     Book adjustment in an account with any bank to another account in that or any other bank. 

h.     Bill of Exchange made and payable only to a bank. 

i.       Supply of goods or services by the assessee to a person to whom prior liability already incurred by the assessee. 

j.       Purchase of Agriculture produce, animal husbandry produce (livestock, meat, hides and skin, dairy or poultry), fish or fish products (include other marine products like shrimp, prawn, cuttlefish, squid, crab, lobster etc) 

k.     Purchase of horticulture or apiculture products. 

l.       Payment is for products manufactured or processed without the aid of power in a cottage industry, to the producer. 

m.   Payment is made in a village or town to a resident of, or person carrying on business or profession in that village which is not served by any bank. 

n.     Payments made less than Rs.50,000/- to an employee or his legal heir on the occasion of retirement, retrenchment, resignation, discharge or death of such employee, towards gratuity, retrenchment compensation or similar terminal benefit. 

o.     Payment after TDS as salaries to employee who was 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. 

p.     Payment is made to the agent of the assessee who is required to make payment in cash for goods or services on behalf of the assessee. 

q.     Payment made in the normal course of business by an Authorised Dealer or Money Changer against purchase of foreign currency or travellers’ cheques. 


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, or use of electronic clearing system through a bank account, or other electronic mode, 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 ten thousand rupees. 


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 ten thousand rupees specified in subsections (3) and (3A) shall be enhanced to thirty five thousand rupees (Rs.35,000). 

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 ten thousand rupees. 


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. 


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. 


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’.