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40a(3)

Swami Ayyappa Nuli (TAX ADVISOR & CONSULTANT AT G.S.T SUVIDHA CENTER) (1372 Points)

25 June 2013

My client is paying frieght of rs48000 in differnt bills for rs 16000

eg.,bill no.1:16000

bill no:2:16000

bill no:3:16000

on same day(1/5/12) to a single person:x transport and comission agents

will it be disallowed under section 40A(3)

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13 Replies

Member (Management) (325 Points)
Replied 25 June 2013

Possible. Why go through so much trouble? Either pay in cheque of stagger the payment over different dates.

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Pakshal Shah (Practicing Chartered Accountant) (271 Points)
Replied 26 June 2013

It will be disallowed

CA Momin Owais Ahmed (Audit Manager) (154 Points)
Replied 26 June 2013

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)

(Guest)

No it will not be disallowed.

The Income Tax Act simply states that the amount shall be disallowed only if both the amount of one bill and payment exceeds Rs. 35000 in case of transporter.

In your case the amount exceeds Rs. 35000, paid to the same person on the same day but the bills are different. Therefore, it will no be disallowed.

1 Like

Ishan kewlani (Article) (172 Points)
Replied 26 June 2013

Not disallowed as different bills & pymt is not exceeding 35000/- per bill in cash.

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arihanth (to become reputed CA) (43 Points)
Replied 27 June 2013

Hi sir how disallwance expenses of inadmissible expenses of personal use some percentage against vehicle maintenance, depreciation ll occur and in which secs also tell me pls help me sir I am bit confused

virender (CMA) (31 Points)
Replied 27 June 2013

87[Expenses or payments not deductible in certain circumstances. 8840A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". 89(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person90 referred to in clause (b) of this sub-section, and the 91[Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : 92[Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F.] (b) The persons referred to in clause (a) are the following, namely :— (i) where the assessee is an individual any relative of the assessee; (ii) where the assessee is a company, firm, association of persons or Hindu un-divided family any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member 93[or any other company carrying on business or profession in which the first mentioned company has substantial interest]; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,— (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. Explanation.—For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,— (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession. 94[95(3) 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.96 (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees: Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where 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, in such cases and under such circumstances as may be prescribed97, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :] 98[Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words "twenty thousand rupees", the words "thirty-five thousand rupees" had been substituted.] 99[(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by 1[an account payee cheque drawn on a bank or account payee bank draft] in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.] (5) 2[Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (5) was inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.] (6) 3[Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (6) was inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.] 4[5(7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision6 (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year7. Explanation.—For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.] (8) 8[* * *] 9[(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) 10[or clause (iva)] or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force. (10) Notwithstanding anything contained in sub-section (9), where the 11[Assessing] Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the 1st day of March, 1984, bona fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.] 12[(11) Where the assessee has, before the 1st day of March, 1984, paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub-section (9), then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled— (i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him; (ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him.] (12) 13[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

virender (CMA) (31 Points)
Replied 27 June 2013

AS PER ABOVE SECTION OF INCOME TAX THIS EXPENSE IS DIALLOWED IF ARE OF SAME DATE TO THE SAME PERSON..........

CA V.V.SUBRAMANYAM (CA Practice ) (21 Points)
Replied 27 June 2013

Payment to same person by seperate vouchwers in cash, is not allowable expense as per sec40A(3), SINCE THE AGGREGATE PAYNENT IN A DAY EXCEEDS THE LIMIT OF Rs. 20000/-

Anuj jain (CA Final Student) (163 Points)
Replied 27 June 2013

yes, as per sec 40a(3), it will be disallowed under the said section. Because as per this section if a person made payment exceeding Rs. 20,000 through cash to a single party in a single day then it will be disallowed.

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CA Deepak Rathore (EXPERT) (281 Points)
Replied 27 June 2013

Fully allowed..

As it is Against different bill

Kindly Read Green Highlighted Lines

Interpretation of Section 40A(3)

Section 40A(3) of Income Tax Act 1961 provides that 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 cheques drawn or account payee bank draft exceeds Rs. 20,000/-, no deduction shall be allowed in respect of such expenditure.
However with effect from 01.09.2009, in the case of payments made for plying, hiring or leasing goods carriage, the amount shall not exceed Rs. 35,000/-.
Any payment made during the previous year, for which deduction is allowed on accrual basis in any preceding previous year, otherwise than by way of account payee cheque or account payee demand draft, then the payment so made shall be deemed to be the business income in the previous year in which such payment is made.
However, no disallowance shall be made u/s 40A(3) in case such payments have been made under any specific circumstances as may be prescribed, having regard to:
- The nature and extent of banking facilities available;
- Business expediency considerations, and;
- Other relevant factors.
This provision shall not apply in respect of expenditure for which no deduction is claimed. For example, if land is purchased by remitting cash, no disallowance ca be made u/s 40A(3). Similarly, if machinery is purchased by remitting cash in excess of the prescribed limit, no disallowance can be made as the assessee does not claim any deduction for the machinery but only avails depreciation allowance at the prescribed percentage. On the other hand, if equipment is purchased for scientific research and deduction is claimed under section 35, then the provision of section 40A(3) shall apply if payment is made in cash.

Rule 6DD Exceptions

No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding[twenty thousand] rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified here under, namely:

(a) where the payment is made to

the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
any co-operative bank or land mortgage bank;
any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949);
the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956):

(b) 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;

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;
a credit card;
a debit card.

Explanation: For the purposes of this clause and clause (g), the term “bank” means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)], whether incorporated or not, which is established outside India;

(d) 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;

(e) where the payment is made for the purchase of

agricultural or forest produce; or
the produce of animal husbandry (including livestock, meat, hides and skins) 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;

(f) 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;

(g) 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;

(h) 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 sums payable to the employee or his heir does not exceed fifty thousand rupees;

(i) 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;

(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;

(k) 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;

(l) where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business

Additional Points:

Section 40A(3) provides for disallowance of entire expenditure where the payment for the same is made otherwise than by account payee cheque drawn on a bank or account payee bank draft. Where the payment made is less than Rs.20,000 in respect of an invoice which is more than Rs. 20,000, disallowance u/s 40A(3) shall not be made.
In a case where books of account produced by the assessee is not reliable or satisfactory to the assessing officer and estimates the income applying gross profit rate, the AO shall not disallow some expenditure based on the entries appearing in the books of account, so rejected. The Allahabad High Court in CIT Vs. Banwari Lal Banshidhar (1998) 229 ITR 229; CIT Vs. Smt. Santosh Jain (2008) 296 ITR 324 (P&H) while endorsing this view held that once the books are rejected and income is estimated, it is implied that no expenditure is specifically allowed. Therefore, applying specific provisions of this statue in order to make disallowance is not warranted.
Authorized dealer or money changer means a person authorized as an authorized dealer or money changer to deal in foreign currency or foreign exchange under any law for the time being in force.

Anuj jain (CA Final Student) (163 Points)
Replied 28 June 2013

Section 40A(3) provides for disallowance of entire expenditure where the payment for the same is made otherwise than by account payee cheque drawn on a bank or account payee bank draft. Where the payment made is less than Rs.20,000 in respect of an invoice which is more than Rs. 20,000, disallowance u/s 40A(3) shall not be made.

The words written above in bold type are wrong. Because section 40a(3) clearly states that where the payment or aggregate of payment exceeds Rs. 20,000 then the entire amount shall be disallowed.