Applicability of section 40a

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

25 February 2013 I received advance of Rs.60000 from customer for purchase of materials. But latter on, the transaction was cancelled so now can I refund Rs.60000 in cash to him? Is there applicability of Sec. 40A of income tax?

CA Kartik Pandya

CA Kartik Pandya (Expert)
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25 February 2013 It is advisable not to pay this amt in cash.

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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25 February 2013 Section 40A(3) would not be applicable in this case. However it would be under the purview of section 269SS and 269T.

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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25 February 2013 forget taxation, you would in reality converting white money into black by refunding in cash.

And yes, 40A shall apply.

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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25 February 2013 @ Nikhil,
40A would not be applicable as it is not a item of expenditure.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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25 February 2013 Suraj,

lets explore 40a(3)

the language is:

"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."

If you see the focus is on the word payment. Now you can argue that the payment should be in respect of the an expenditure but that would be too narrow a construct of the intention of the legislature ie to reduce the operations through cash which is difficult to monitor.

Booking sales via cheque receipts and refunding the same in cash is one of the oldest trick to manage taxes.

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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25 February 2013 Nikhil, Section 40A specifically deals with Expenses not deductible in certain circumstances which includes Cash payment u/s 40A(3).

Refund of Advance is not an expenditure and the operation of Section 40A(3) does not arise.

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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25 February 2013 Further just refunding advance in cash does not always mean that white money is converted to black.

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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25 February 2013 you are right that it doesnt always...but the whole idea of 40a(3) is to curb cash transactions wherever possible to reduce such leakages..

CA Ayush Agarwal

CA Ayush Agarwal (Expert)
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26 February 2013 Section 40(A)(3) Applies Only in case of Expenditure.

No Where Section 40(a)3 Comes in Picture in This Case.

Yes, But Section 269SS & T May Come in Picture.
Still It is a debatable Issue.

CA Ayush Agarwal

CA Ayush Agarwal (Expert)
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26 February 2013 We Can Say "Its not Advisable to pay in cash".

But No Where in Income Tax Act, This Situation is Covered.