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Clarification regarding Section 40A(3)

Suresh U (Student) (20 Points)

20 November 2018

1. Can a businesses entity pay more than Rs.10,000 in cash to a person as advance for expenses ??

2. Paid advance more than Rs.10,000 on one day and booked respective bill of expenses on next day.. Whether it is allowed or disallowed under this section..

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5 Replies

Dushyant Garg (48 Points)
Replied 20 November 2018

For point 1

if cash basis: Dedn won't be allowed even on payment or on settlement

if accrual basis: then also not allowed

( subject to limit for transporters)

Point 2

Either you can treat it as advance or normal exp
but similarly no deduction

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Puja Sharma (CA) (433 Points)
Replied 20 November 2018

Section 40A(3) reads as under:

"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, or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure"

Therefore, cash exceeding Rs. 10,000 shall not be paid in a single day for any business expenditure . No deduction will be allowed in both the cases.

rama krishnan (12234 Points)
Replied 20 November 2018

I concur with Ms. puja

Nitesh bind (Student CA Final ) (12692 Points)
Replied 21 November 2018

As per the interpretation of section 40A(3) expense would be Disallowed if there is payment or aggregate of Payments against SINGLE BILL (i.e. Any Expenditure) to to a SINGLE PERSON (i.e. to A person) and on a SINGLE DAY (i.e. in a day). Only if the above 3 things are there then there would be disallowance under Section 40A(3).

Now coming to your query:

For Point No. 1 - Expenses would be Disallowed u/s 40A(3).

For Point No. 2 - Disallowance under Section 40A(3).

Suggestion:

You could MEND ANY OF THE ABOVE 3 FACTORS to make it an Allowed expense. (e.g. make advance in 2 instalment. Rs. 5000 in one day and Rs. 5000 on next day) there would not be disallowance.