22 July 2011
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.
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