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 and Section 40A(3A) 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. These relevant and important provisons and exceptions to them are provided as follows
Payments Disallowed u/s 40A(3) & 40A(3A): As per section 40A(3) w.e.f 2009-10, 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 account payee cheque or account payee bank draft, exceeds Rs 20000, no deduction shall be allowed in respect of such expenditure.
However such limit of Rs 20000 has been increased to Rs 35000 w.e.f 01-10-2009 in case the payment is made for plying, hiring or leasing of goods carriage.
Section 40A(3A) further provides (w.e.f asst. year 2009-10) that in case an allowance is made in the assessment for any year on the basis of incurred liability, but in the subsequent year or years, assessee makes a payment exceeding Rs 20000 in a day, otherwise than by an account payee cheque or account payee bank draft, in respect of such liability, then the payment so made shall be deemed to be the profit of the year in which such payment is made.[The limit of Rs 35000 in case of plying, hiring or leasing of goods carriage is also applicable to section 40A(3A)]
Thus payment in excess of Rs 20000 in a day in respect of any expenditure incurred in the current year or in the previous years otherwise than by an account payee cheque or account payee bank draft will be disallowed while calculating profits of an assessee.
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). For example if A makes three purchases of Rs 8000 each from the same person during different time of the day and obtains three different cash memos, yet the transaction will be covered by section 40A(3) and such expenditure will be disallowed.
Exceptions under Rule 6DD: Proviso to section 40A(3A) provides that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this subsection[Section 40A(3A)] 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 such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors
The cases and circumstances as mentioned in the above proviso are contained under Rule 6DD and have been added vide Notification No. S.O2431 (E), dated 10-10-2008 and are applicable w.e.f A.Y. 2009-10. These circumstances and cases as provided under Rule 6DD are as follows:
(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 (51 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 connection with the retirement rerenchment 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 continuo is 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 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.]
Earlier clause (j) to Rule 6DD provided that if the payment hit by section 40A(3) is made in exceptional and unavoidable circumstances then no disallowance would be made u/s 40A(3). But the said clause has been omitted w.e.f A.Y. 1996-97.
Some case laws:
In CIT v K.K.S. K Leather Processor P. Ltd. 2007 - TMI - 13526 - MADRAS High Court it was held that payments made on a day on which the banks are closed either on account of holiday or strike, shall not come within the ambit of disallowance u/s 40A(3).
In The Commissioner of Income-tax versus Vijay Kumar Goel 2010 -TMI - 76978 - CHHATTISGARH HIGH COURT it was held that From a reading of the definition of bill of exchange u/s 5 and cheque under section 6 of the Negotiable Instrument Act, 1881, it is clear the banker’s cheques/pay orders/ call deposit receipts are instruments which fall within the definition of bill of exchange. Hence payment made by the same could not be disallowed u/s 40A(3).
Where Books of accounts have been rejected and profit has been estimated, it is deemed that all the expenses and disallowances have been considered. Hence no further disallowance u/s 40A(3) is permissible- CIT V. Smt Santosh Jain [2006 -TMI - 13700 - PUNJAB AND HARYANA High Court]