Section 40A(3)(a) of the Income-tax Act, 1961 provides that 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.
Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.
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.Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours of section 40A(3) will not apply.
To overcome the splitting of payments (as given above) to the same person made during a day as referred above and to increase the efficacy of the provision, an amendment was made through Finance act 2008 and after 01.04.2008, 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, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be.
EXAMPLE :To illustrate with an example, let us 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.
- Payment to Specified payee Rule 6DD(a)- Where the payment is made to
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- (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.
- 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.
- Payment by certain modesRule 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
****. Exemption from dis allowance is not available
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Clarification on the issue
- on payment for purchase of livestock, meat,hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman, by whatever name called [Circular No. 4/ 2006, dated 29-3-2006 (14 CAPJ 201)]
- Any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets is considered as producer of livestock and meat.
- Exemption is available subject to furnishing of
- (i) declaration from person receiving payment that he is a producer of meat;
- (ii) confirmation that payment, otherwise than by account payee cheque/draft, was made on his insistence; and
- (iii) a further confirmation from a veterinary doctor certifying that person specified in the certificate is a producer of meat and that slaughtering was done under his supervision [Circular No. 8/2006, dated 6-10-2006 (16 CAPJ 381)].
CLARIFICATION REGARDING THE MEANING OF THE EXPRESSION 'FISH OR FISH PRODUCTS' USED IN SUB-CLAUSE (iii) OF CLAUSE (f) OF RULE 6DD OF THE INCOME-TAX RULES, 1962
CIRCULAR NO. 10/2008, DATED 05-12-2008
Representations have been received from various quarters regarding problems being faced by the seafood exporters mainly on account of provisions of Section 40A (3) of the Income-tax Act, 1961.
2. Dis allowance of expenditure under the provisions of sub-section (3) of Section 40A of the I.T. Act, 1961 is made in the computation of income in a case where a payment or aggregate of payments exceeding twenty thousand rupees is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft. However, payment otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft exceeding twenty thousand rupees does not attract the aforesaid dis allowance in certain circumstances as prescribed under rule 6DD of the Income-tax Rules, 1962. Such exceptions, inter-alia, refer to payment made to the producer for the purchase of ‘fish or fish products' under sub-clause (iii) of clause (e) of rule 6DD. [Clause (f) of rule 6DD prior to coming into effect of the I.T. (Eighth Amendment) Rules, 2007 w.e.f. A.Y. 2008-09].
3. The following clarifications are, therefore, being issued for proper implementation of rule 6DD of the Income-tax Rules, 1962:—
(i) The expression ‘fish or fish products' used in rule 6DD(e)(iii) would include 'other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.'.
(ii) The 'producers' of ‘fish or fish products' for the purpose of rule 6DD(e) of I.T. Rules, 1962 would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc.
4. It is further clarified that the above exception will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker or any other middleman, by whatever name called.
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