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Disallowance u/s 40a(3)

THATAVARTHI SAI BALAJI VENKATE (Articleship) (21 Points)

14 June 2016

A company has given a sum exceeding twenty thousand Rupees to a person on a day in cash as advance to meet the Company Expenses Ex: X ltd had given an advance of five Lakhs to Mr.Y to buy some goods for the Company. Mr. Y bought goods for the Company and handovered the same. Is this expense disallowable u/s 40a(3)?

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9 Replies

C A Bharat Halan (Practicsing CA) (37 Points)
Replied 14 June 2016

Yes it is Disallowed under Sec 40(a)(3) but there is a loophole that breakup the cash advance in less than 20 k per day Voucher.

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Sai Ganesh (Article Assisstant ) (254 Points)
Replied 14 June 2016

Dear sir,

The provision under section 40A(3) is laid down below :

"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 "

As if see in the above provision it talks about the nature of payment towards which we are cosindering as expenditure. So though it is a advance or not. Numenclature is not important.

Thanks

THATAVARTHI SAI BALAJI VENKATE (Articleship) (21 Points)
Replied 14 June 2016

Here the company has given the Advance to Mr.Y an employee as advance for expenditure and accounted as

Advance for Expenses Mr Y a/c Dr.

To Cash A/c

Please Clarify?

Sai Ganesh (Article Assisstant ) (254 Points)
Replied 14 June 2016

is we are giving to employee amount ofRs.5,00,000 as advance for making different purchases or for making payment to that particular vendor. And how the employee is making payments for the purchase of goods.

THATAVARTHI SAI BALAJI VENKATE (Articleship) (21 Points)
Replied 14 June 2016

We are giving advance for each purchase seperately on same day to Mr.Y suppose to be 15,000 for one purchase, one lakh for other purchase, and so on.

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Sai Ganesh (Article Assisstant ) (254 Points)
Replied 14 June 2016

if the same amount the employee is paying in cash it to the creditor for purchase of goods then it will be disallowed.

(Guest)

it is allowed...u can pay ur employee cash more than Rs 20,000...but the final use or payment made by the employee should not exceed 20000..or it is disallowed

Ajit Hegde (CA - Final) (1367 Points)
Replied 15 June 2016

It depends on how the employee settles the advance. If the employee gives bill for more than 20000, it is disallowed. That is to say payment to a single bill number / same person / same day for more than 20,000 is disallowed.

CA Jitender Yadav (Sr. Finance Executive) (261 Points)
Replied 16 June 2016

it does not matter what amount of advance have been given but how it is settled matters if employee settled advance by giving single bill of rs.20000 or more then it is disallowed otherwise it is allowed