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Cash payment

sivakumar (Accountant) (58 Points)

23 May 2014

Hi,

Anybody clarify my doubts cash payment limit for expenditure.

Regards,

A.Sivakumar.

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JIBIN THOMAS BABU (CA FINAL STUDENT) (147 Points)
Replied 24 May 2014

CASH PAYMENT EXCEEDING Rs. 20,000

Sec 40A(3) of Income tax Act, 1961

Section 40A(3)(a) of the Income-tax Act, 1961 provides the at any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction.

if payment is being made for plying, hiring or leasing goods carriages then Limit for these section is Rs. 35000/-,instead Of 20,000/-

Section 40A (3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.

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 20,000 in a single day even though on separate cash memos, such aggregate payment will be disallowed u/s 40A(3)

Eg: (i) Assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-, Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.

EXCEPTION TO ABOVE PROVISION:

The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.

Rule 6DD

1. Payment to Specified payee Rule 6DD(a)-

Where the payment is made to

(i) Reserve Bank of India or any banking company as defined in section 5(c) of Banking Regulation Act, 1949;
(ii) State Bank of India or any subsidiary bank as defined in section 2 of SBI (Subsidiary Banks) Act, 1959;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949;
(v) Life Insurance Corporation of India.

2. Payment to Government Rule 6DD(b)-

Where payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender.

3. Payment by certain modes Rule 6DD(c) -

Where the payment is made by

(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account;
(vi) a credit card;
(vii) a debit card.

Note: “Bank” means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.

4. Adjustment in books Rule 6DD(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.

5. Purchase of certain products Rule 6DD(e):

Where the payment is made for the purchase of -

(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins)***** or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products.

6. Cottage industry Rule 6DD(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.

7. No bank service Rule 6DD(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.

Note: “Bank” means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.

8. Terminal benefit to employee - Rule 6DD(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 Rs. 50,000.

9. Temporary posting of employee - Rule 6DD(i)

Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary as per section 192, and when such employee

(i) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and
(ii) does not maintain any account in any bank at such place or ship.

10. Bank closed - Rule 6DD(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.

11. Payment to agent Rule 6DD(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.

12. Foreign currency Rule 6DD(l)-

Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.

Note: “Authorised dealer” or “money changer” means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force