CASH PAYMENT TO SPECIFIED PERSON U/S 40A(2)..

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

03 November 2009 IF AN ASSESSEE MADE PAYMENT IN CASH MORE THAN RS 20,000. SAY RS 30,000 TO SPECIFIED PERSON U/S 40A(2).
AND SUPPOSE THE FAIR VALUE IS RS.19000

NOW MY QUESTION IS THAT WHICH SECTION WILL APPLICABLE FIRST SECTION 40A(2) OR SECTION 40A(3).

BECASUE IS WE APPLY FIRST ONLY RS11000 WILL DISALLOWED IF APPLY SECOND ALL RS 30,000. WILL BE DISALLOWED

Shailesh Prajapati

Shailesh Prajapati (Expert)
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03 November 2009 They will trigger both. It depends on the Assessee also. They will see the revenue and the 40 (A) (3) is more beneficial. In my opinion they will take under 40 (A) (3)

Satpal Singh

Satpal Singh (Expert)
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03 November 2009 According to me Rs.30000 will be disallowed and section 40A(3) is applicable first because it is more beneficial to revenue.

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Querist : Anonymous

Querist : Anonymous (Querist)

03 November 2009 BUT SECTION 40A(3) IS GENERAL SECTION THAT WILL APPLIED IN ALL CASE,

AND SECTION 40A(2) IS SPECIFIC SECTION,
IN MY OPINION SPECIFIC SECTION PREVAIL OVER GENERAL SECTION,
WHY NOT 40A(2) WOULD BE APPLICABLE

Querist : Anonymous

Querist : Anonymous (Querist)

19 December 2009 Is there is solution of this query

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 Your question relates to the applicability and precedence of Sections 40A(2) and 40A(3) of the Income Tax Act, 1961, in a scenario where a cash payment exceeding Rs. 20,000 is made to a specified person and the fair value of the transaction is lower than the amount paid.

### Understanding Sections 40A(2) and 40A(3):

1. **Section 40A(2):**
- This section deals with disallowance of certain expenses or payments made in cash exceeding Rs. 20,000 in a single day to a single person (or a sum of payments to a person for a single transaction). The purpose is to discourage cash transactions and promote transparency.
- If a payment exceeds Rs. 20,000 in cash, the excess amount over Rs. 20,000 is disallowed as a deduction while computing income under the head "Profits and gains of business or profession".

2. **Section 40A(3):**
- This section deals with payments made to a related party where the consideration exceeds the fair market value of goods, services, or facilities provided by such related party.
- If the Assessing Officer finds that the payment exceeds the fair market value, the excess amount can be disallowed as a deduction. This ensures that transactions with related parties are conducted at arm's length and prevents manipulation of taxable income.

### Application in Your Case:

- **Scenario:**
- Payment made: Rs. 30,000
- Fair value: Rs. 19,000

- **Section 40A(3) Analysis:**
- Section 40A(3) applies because it specifically deals with situations where the payment exceeds the fair market value. In your case, the payment of Rs. 30,000 exceeds the fair value of Rs. 19,000 by Rs. 11,000.
- Therefore, under Section 40A(3), the entire payment of Rs. 30,000 would be disallowed as a deduction for income tax purposes because it exceeds the fair market value.

- **Section 40A(2) Consideration:**
- Section 40A(2) would also apply since the payment of Rs. 30,000 exceeds Rs. 20,000 in cash. However, the disallowance under Section 40A(2) would only be Rs. 10,000 (Rs. 30,000 - Rs. 20,000).
- Section 40A(2) is a specific provision regarding cash payments and is applied to discourage cash transactions. It does not specifically address the issue of payments exceeding fair market value like Section 40A(3) does.

### Conclusion:

In your scenario, Section 40A(3) would take precedence over Section 40A(2) because it deals directly with payments exceeding fair market value to related parties. The Assessing Officer would disallow the entire payment of Rs. 30,000 under Section 40A(3) because it exceeds the fair market value, even though Section 40A(2) would also apply.

While Section 40A(2) is specific to cash payments, Section 40A(3) is specific to payments exceeding fair market value, and in tax law, specific provisions often prevail over general provisions. Therefore, in this case, Section 40A(3) would be the applicable provision, resulting in the disallowance of the entire Rs. 30,000 payment as a deduction for income tax purposes.