Section 40A (3): Amount not deductible in respect of expenditure exceeding 10,000 rupees if made in cash.
If a person incurs any expenditure (which is deductible under other provisions of Income Tax Act,1962 for computing business/profession income) in respect of which payment/aggregate of payments in excess of 10,000 rupee is made, otherwise than by account payee cheque/bank draft or electronic clearing system through bank account or through other electronic mode, to a person in a day, then 100% of such expenditure will not be allowed as deduction.
Rule 6DD: Exception to above provision
1. Where the payment is made to:
the Reserve Bank of India.
any commercial bank in public/private sector.
any co-operative bank or land mortgage bank.
any agricultural credit society or any primary credit society.
the Life Insurance Corporation of India.
2. 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.
3. Where the payment is made by—
Any letter of credit arrangements through a bank.
A mail or telegraphic transfer through a bank.
A book adjustment from any account in a bank to any other account in that or any other bank.
A bill of exchange made payable only to a bank.
The use of electronic clearing system through a bank account.
Credit card/ debit card.
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 made for the purchase of—
Agricultural or forest produce; or
The produce of animal husbandry (including livestock, meat, hides and skin or dairy or poultry farming; or
Fish or fish products; or
The 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 sum’s payable to the employee or his heir does not exceed fifty thousand rupees.
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 fifteen 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 was required to be made on a day on which the banks were closed either on account of holiday or strike.
11. 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.
12. Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travelers’ cheque in the normal course of his business.
Introduction of commercial expediency
Expression “commercial expediency” has been explained by the Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) as: “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business.
Various High Courts in the following cases have also taken the view that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in Section 40A (3):
Girdharilal Goenka vs. CIT.
CIT vs. Chaudhary and Co.
Shri Mahabir Industries vs. CIT.
CIT vs. Chrome Leather Co. P. Ltd.
Payment made to directors in cash is contrary to Section 40A (3)?
If cash payments are made to directors, it may be considered as a bona fide transaction as the director to whom the payment was made is clearly identifiable. The same was held in the case of SHREENATH COMMERCIAL & FINANCIAL PVT LTD VS. ITO
