Situations under Section 40A (3)
Several payments to the same person against different bills
aggregating to more than Rs.10,000 in a day by way of cash: In case an assessee pays amount in violation of Section 40A
(3) in excess of Rs.10,000 to a single person during a day but against different expenditure/different bills. It
has to be examined whether the disallowance will trigger for the entire amount or for each payment
bill-wise/expenditure-wise for each payment exceeding Rs.10,000 by way of cash in a day.
The words used in Section 40A (3) are that “where the
assessee incurs any expenditure” in respect of which a payment or aggregate of payments made to a person in
a day. Hence, in our opinion, disqualification is limited to each expenditure separately and limit has to be
applied separately to each expenditure.
Cross cheque versus account payee cheque:
Drawing two parallel transverse lines shall be
deemed to be crossing.
Crossing is of two types, general crossing or special
crossing. General crossing can be done by drawing two parallel transverse lines across its face, or in between
two parallel transverse lines “and company” or any other abbreviation thereof is written, with or without the
words “not negotiable”, it is general crossing, as per Section 123 of the Negotiable Instruments Act, 1881. A
cheque crossed generally can be paid to anybody through banking channels.
As per Section 124 of the Negotiable Instruments Act, where a
cheque bears across its face an addition of the name of a banker, either with or without the words “not
negotiable”, that addition shall be deemed a crossing and it is deemed to be crossed specially. In normal
parlance, drawing two parallel transverse lines and writing in between “account payee” or “a/c payee” is
considered a special crossing. An account payee cheque can be paid only through the account to whom it is
Hence, the cheque generally crossed will not satisfy the
condition specified in Section 40A(3) that payments be made in account payee cheque. Hence, payments made by
cheques crossed generally are subject to disallowance under section 40A (3).
Mode of payment under contract versus Section
40A(3): In case any assessee made
payment in line with Section 40A(3), no person shall be allowed to
raise, in any suit or legal proceeding, a plea based on the ground that the payment was not made or tendered in
cash or any other manner. Please refer to Section 40A (4).
What is included in account payee bank draft:
Payment made through Bankers’ Cheque, Pay Order
and call deposit receipt are not hit by Section 40A (3).
Interest and Remuneration Payable to Partners:
It is always better to avoid the violation of
Section 40A (3) by paying remuneration to partners or interest by way of specified methods.
It is also argued by some persons that remuneration can be
debited to salary or remuneration account and credited to partners’ capital account. Interest anyway, is
credited to capital account. Any subsequent withdrawal thereof, will become partners’ drawings and will not be
considered as cash payment of any expenditure.