Cash expenses for Income tax purpose: Limit

Last Updated On: May 27, 2020, 11:06 p.m.
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Disallowance under section 40A(3)

Section 40A(3): Expenses or payments not deductible in certain circumstances:

When the taxpayer incurs any expenditure exceeding Rs. 10,000/- (or Rs. 35,000/- in case of payment made for plying, hiring, or leasing goods carriage)

And where payments or aggregates of payments made to a person in a day, Otherwise than by-

  1. Account Payee Cheque is drawn on a Bank
  2. Account Payee Bank Draft
  3. Electronic Clearing System through a Bank Account

No Deduction shall be allowed on such expenditure

Further as per Section 40A(3A); 

Where any allowance has been claimed in Current Financial Year

AND

Payment is being made in subsequent Financial Year Otherwise than by-

  1. Account Payee Cheque is drawn on a Bank
  2. Account Payee Bank Draft
  3. Electronic Clearing System through a Bank Account

Payment made shall be deemed to be the profits and gains of business or profession and

Shall be Chargeable to Tax as income of the Subsequent year (i.e. the year in which payment is made) If Exceeds Rs. 10,000/- (or Rs. 35,000/- in case of payment made for plying, hiring, or leasing goods carriage)

Provided that No Disallowance shall be made under such circumstances as may be prescribed,

  • having regard to nature and extent of banking facilities available
  • considerations of business expediency
  • other relevant factors

Rule 6DD: Exception to Above Provision

No disallowance u/s 40A(3) or 40A(3A) shall be made where 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, exceeds Rs 10,000/- :

1.Where the payment is made to-

  • RBI or any Banking company as defined u/s 5(c) of the Banking Regulation Act, 1949 (10 of 1949)
  • SBI or any subsidiary Bank as defined u/s 2 of SBI (Subsidiary Banks) Act, 1959 (38 of 1959)
  • Any co-operative Bank or land mortgage bank
  • Any primary agricultural credit society or primary credit society as defined u/s 56 of the Banking Regulation Act, 1949 (10 of 1949)
  • LIC of India established u/s 3 of LIC Act, 1956 (31 of 1956)

2.Where the payment is made to the Government (whether State or Central Government)

3.Where the payment is made by a-

  • letter of credit arrangements through a bank
  • mail or telegraphic transfer through a bank
  • book adjustment from any account in a bank to any other account in that or any other bank
  • bill of exchange made payable only to a bank

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 being made for the purpose of-

  • Agriculture or forest produce
  • The produce of animal husbandry or dairy or poultry farming
  • Fish or fish products
  • Products of horticulture or apiculture
  • to the cultivator, grower or producer of such articles, produce or products

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 not 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 payment in cash for goods or services on behalf of such person

11.Where the payment is made by an authorized dealer or a money changer against the purchase of foreign currency or traveler's cheques in the normal course of his business

Further, provided that authorized dealer or a money changer means a person authorized as an authorized dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.

 

Certain Examples to Make you understand the above Provision:

 

SL.NO. Nature of Transaction Disallowance Amount
01. AB Ltd. purchases goods on credit from BC Ltd. on May 10, 2019, for Rs. 6,000 and on May 30, 2019 for Rs. 5,000. The total payment of Rs. 11,000 is made by a crossed cheque on June 1, 2019. Though the amount of payment exceeds Rs. 10,000, nothing shall be disallowed. To attract disallowance, the amount of bill, as well as the amount of payment, should be more than Rs. 10,000.
02. AB pays salary to his employees by account payee cheques. Salary of December 2019 is, however, paid to three employees A, B, and C by bearer cheques, payment being Rs. 6,000, Rs. 10,000 and Rs. 10,500, respectively. Rs. 10,500, being 100% of the salary paid by bearer cheque to C, will be disallowed. As it is clearly specified in a provision that payment should be made through account payee cheque only and not bearer cheque.
03.

AB Ltd. purchases goods on credit from BC Ltd. on May 6, 2019 for Rs. 80,000 which is paid as follows—

  • Rs. 9,000 in cash on May 11, 2019
  • Rs. 40,000 by a bearer cheque on May 31, 2019
  • Rs. 31,000 by an account payee cheque on May 16, 2019;
  • Nothing will be disallowed out of the payment of Rs. 9,000 in cash on May 11, 2019, as the payment, does not exceed Rs. 10,000.
  • 100% of Rs. 40,000 will be disallowed.
  • Nothing will be disallowed out of Rs. 31,000.
04. AB Ltd. purchases goods on credit from BC Ltd. on May 10, 2018, for Rs. 16,000 and payment have been made in next year by cash of Rs. 16,000 on Jan 1, 2020. The full amount of Rs. 16,000 will be considered as income u/h PGBP and will be taxable in the year (i.e. F.Y. 2019-2020) in which payment is being made.

 

 

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