Disallowance under Section 40A(3) of Income Tax Act and exception of the same as per Rule 6DD of Income Tax Rules
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 deduction shall be allowed in respect of such expenditure.
[Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words "twenty thousand rupees", the words "thirty-five thousand rupees" had been substituted.]
Interpretation of Section 40A(3)
· Section 40A(3) of Income Tax Act 1961 provides for disallowance of expenses 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 bank or account payee bank draft, exceeds Rs 20000.
· Section 40A(3A) further provides for the payment in excess of Rs 20000 in a day made otherwise than account payee cheque or account payee bank draft, for an allowance made in the assessment for any year on the basis of incurred liability, to be treated as income of the year in which such payment is made.
· Aggregate Payment has to be seen: After the amendment w.e.f 2009-10 if a person makes more than one different purchases for cash from same person in excess of Rs 20000 in a single day even though on separate cash memos, such aggregate payment will be disallowed u/s 40A(3)
· Payment made for Plying, Hiring or Leasing goods carriages: In the case of payment made for plying, hiring or leasing of goods carriages the limit for disallowance under this section is Rs.35,000 instead of Rs. 20,000.
No disallowance under sub-section (3) of section 40A shall be made where any paymentin a sum exceeding[twenty thousand] rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely:
(a) where the payment is made to
(i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949);
(v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956):
(b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;
(c) where the payment is made by
(i) any letter of credit arrangements through a bank,
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account;
(vi) a credit card;
(vii) a debit card.
Explanation. For the purposes of this clause and clause (g), the term "bank" means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)], whether incorporated or not, which is established outside India;
(d) 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;
(e) where the payment is made for the purchase of
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;
(f) 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;
(g) 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;
(h) 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 fifty thousand rupees;
(i) 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
(i) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;
(k) 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;
(l) where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business