15 April 2009
According to section 40A(3), where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs.20,000 otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. For example, if an assessee incurs an expenditure of Rs.1,00,000 and pays the same in cash, then,Rs.1,00,000 will not be allowed The operation of this provision can be relaxed at places where it could not be complied with due to the absence of banking facilities or under such circumstances as may be prescribed. The provision applies to all categories of expenditure involving payments for goods or services which are deductible in computing the taxable income. It does not apply to loan transactions because advancing of loans or repayments of the principal amount of loan does not constitute an expenditure deductible in computing the taxable income. However, interest payments of amounts exceeding Rs.20,000 at a time are required to be made by crossed bank cheques or drafts as interest is a deductible expenditure. This requirement does not apply to payment made by commission agents for goods received by them for sale on commission or consignment basis because such a payment is not an expenditure deductible in computing the taxable income of the commission agent. For the same reason, this requirement does not apply to advance payment made by the commission agent to the party concerned against supply of goods. However, where commission agent purchases goods on his own account but not on commission basis, the requirement will apply. The provisions regarding payments by crossed cheque or draft apply equally to payments made for goods purchased on credit provided that the payment is made of an amount exceeding Rs.20,000 at a time. Rule 6DD of the Income-tax Rules permits certain categories of payments under certain circumstances otherwise than by crossed cheque or draft. Accordingly, the provision of section 40A(3) do not apply to the cases and circumstances which are specified.
15 April 2009
Dear Sirisha, Manmohan has already explained in detail. I have nothing to say extra except that expenditure as well as payment both should exceed Rs. 20000 for application of this section.
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