Section 40A(3) of Income-tax Act 1961 :Disallowance of cash payments

By | June 5, 2016

Section 40A(3) of Income-tax Act 1961

section  40a(3) Cash Payment

Expenses or payments not deductible in certain circumstances

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.

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Rule – 6DD of Income-tax Rules : No Disallowance under Section 40A(3) of Income-tax Act 1961

Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft.

6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where 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  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 agent71 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 authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

Explanation.—For the purposes of this clause, the expressions “authorised dealer” or “money changer” means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.

CIRCULAR NO. 10/2008, DATED 5-12-2008 on Section 40A(3) of the Income-tax Act, 1961 : 

Representations have been received from various quarters regarding problems being faced by the seafood exporters mainly on account of provisions of section 40A(3) of the Income-tax Act, 1961.

  1. Disallowance of expenditure under the provisions of sub-section (3) of section 40A of the Income-tax Act, 1961 is made in the computation of income in a case where a payment or aggregate of payments exceeding twenty thousand rupees is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft. However, payment otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft exceeding twenty thousand rupees does not attract the aforesaid disallowance in certain circumstances as prescribed under rule 6DD of the Income-tax Rules, 1962, Such exceptions, inter alia,refer to payment made to the producer for the purchase of ‘fish or fish products’ under sub-clause (iii) of clause (e) of rule 6DD. [Clause (f) of rule 6DD prior to coming into effect of the Income-tax (Eighth Amendment) Rules, 2007 with effect from assessment year 2008-09].
  2. The following clarifications are, therefore, being issued for proper implementation of rule 6DD of the Income-tax Rules, 1962:—

   (i)  The expression ‘fish or fish products’ used in rule 6DD(e)(iii) would include ‘other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster, etc.’.

  (ii)  The ‘producers’ of ‘fish or fish products’ for the purpose of rule 6DD(e) of Income-tax Rules, 1962 would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea-shore itself and then sells the fish or fish products to traders, exporters, etc.

  1. It is further clarified that the above exception will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a ‘producer’ of these goods and is only a trader, broker or any other middleman, by whatever name called.

CIRCULAR NO. 4/2006, DATED 29-3-2006 on Section 40A(3) of the Income-tax Act, 1961

  1. Disallowance of twenty per cent of the expenditure under the provisions of sub-section (3) of section 40A is made in the computation of income in any case where a payment is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for a sum exceeding twenty thousand rupees. However, payment otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft does not attract, the aforesaid disallowance in certain circumstances prescribed under Rule 6DD of the Income-tax Rules, 1962. Such exceptions, inter alia, refer to payment made to the producer for the purchase of the produce of “animal husbandry (including hides and skins). . . .” under-sub clause (ii) of clause (f) of rule 6DD.
  2. Representations have been received from certain quarters that some Income-tax authorities are permitting payment of cash beyond rupees twenty thousand for the purchase of livestock and meat by considering them to be covered under the aforesaid sub-clause and at the same time some others are making disallowances. Divergent decisions are being attributed to ambiguity regarding the meaning of the expression ‘the produce of animal husbandry’ used in sub-clause (ii) of clause (f) of rule 6DD.
  3. 3. The Board after examination of the issue are of the view that the expression ‘the produce of animal husbandry’ used under rule 6DD(f)(ii) would include ‘livestock and meat’ and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted under section 40A(3), read with rule 6DD. It is further clarified that exception will not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called.

CIRCULAR NO. 8/2006, DATED 6-10-2006  on Section 40A(3) of the Income-tax Act, 1961

  1. Reference is invited to the clarification issued vide Circular No. 4/2006, dated 29th March, 2006 on the above subject. Vide this circular, it was clarified that the expression ‘the produce of animal husbandry’ used under rule 6DD(f)(ii) would include ‘livestock and meat’ and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted under section 40A(3) read with rule 6DD. It was further clarified that the above exception will not be available in respect of payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called.
  2. Representations have been received from certain quarters seeking further clarification as to who are the producers of livestock and meat and the evidence required to be furnished in this regard by the persons making the payments.
  3. The Board after examination of the issue is of the view that any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets would be considered as producer of livestock and meat.
  4. The benefit of rule 6DD of the Income-tax Rules, 1952 shall be available to the person referred to at para 3 above subject to furnishing of the following :—

   (i)  A declaration from the person receiving the payment that he is a producer of meat;

  (ii)  A confirmation that the payment, otherwise than by an account payee cheque or account payee bank draft, was made on his insistence; and

(iii)  A further confirmation from a veterinary doctor certifying that the person specified in the certificate is a producer of meat and that slaughtering was done under his supervision.

Press Note, dated 2-5-1969, issued by Ministry of Finance and Letter [F.No. 1(22)/69-TPL (Pt.)], dated 18-4-1969 [Scope of disallowance of cash payments under Section 40A(3)]

Whether the word “expenditure” in sub-section (3) covers payments made in advancing loan and returning principal amount

The word “expenditure” in section 40A(3) covers expenditure of all categories including that on purchase of goods and merchandise as also payment for services. Under the provisions of rule 6DD, notified on February 14,1969, no disallowance under section 40A(3) shall be made where any payment is made for the purchase of agricultural produce in a sum exceeding Rs. 2,500 otherwise than by a crossed bank cheque drawn on a bank or by a crossed bank draft if the payment is made to the cultivator or grower of such produce. Payments to middlemen for the purchase of agricultural produce do not as such come under the exceptions enumerated in rule 6DD. However, payments made in a town or village having no banking facilities to any person residing in or carrying on any business or profession in any such village or town, are also exempted from the purview of section 40A(3). In this connection, reference is also invited to the residuary exception in clause (j) of the new rule 6DD.

  1. The payments made in advancing loans and returning the principal amount of borrowed moneys are not covered by these provisions of section 40A(3), as these do not constitute expenditure.

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